Canada: Guidance On Permitted Growth For Income Trusts

Last Updated: December 20 2006
Article by Corrado Cardarelli

The October 31, 2006 income trust taxation proposals indicated that "normal growth" of existing income trusts—but not undue expansion, such as the introduction of a disproportionately large amount of capital—would be permitted until the end of the transition period in 2011. On December 15, the Department of Finance announced the guidance that the markets have been anxiously awaiting on the meaning of "normal growth", "undue expansion" and related matters. This is a summary of, and some observations on, the December 15 announcement.

  1. Benchmark Capital as of October 31, 2006
  2. The key benchmark is the market capitalization of a Specified Investment Flow-Through (SIFT) on October 31, 2006. This will be measured by the value of a SIFT’s issued and outstanding publicly traded units, which does not include debt (even if the debt carried a conversion right or was itself publicly traded), options or other interests that are convertible into units. It appears that the value of exchangeable interests held by retained interest holders would also not be counted.1 It will be interesting to see how "value" will be determined (e.g., will the value be the trading price of a unit at the close of business on October 31, 2006?)

  3. Growth of 100% Permitted
  4. A SIFT may increase its capital by issuances of new equity over specified periods in specified amounts by reference to a safe harbour that is based on the benchmark. During the specified periods, a SIFT’s equity capital can grow by an amount that does not exceed the greater of $50 million and an objective safe harbour. For the period from November 1, 2006 to the end of 2007, the safe harbour will be 40% of the benchmark. A SIFT’s safe harbour for each calendar year from 2008 through 2010 will be 20% percent of the benchmark. Thus the announcement provides for growth of up to 100% over the four-year transition period. The fact that the test is expressed as the greater of $50 million and the safe harbour amount suggests that this is intended to assist smaller cap income funds to raise up to $50 million of new equity. Although it is not entirely clear from the announcement, it appears that the $50 million amount may be available in each specified period for a possible total of $200 million on the basis that the "greater of" test seems to be applied for each specified period.

  5. Safe Harbour Amounts Cumulative
  6. The safe harbour amounts are cumulative. The $50 million amounts described above are not cumulative. The example given is that a SIFT that issues no new equity in calendar 2007 will enjoy a greater safe harbour amount in 2008 (presumably, 60% of the benchmark).

    "New equity" will include units and debt that is convertible into units. The announcement notes that if attempts are made to develop other substitutes for equity, those may be included as well. The announcement does not specifically include as new equity, options or other interests (such as exchangeable interests) created after October 31 that are convertible into units of the SIFT (but the units issued on the exercise of these new options or other interests would presumably be counted as new equity). It will be interesting to see whether these post-October 31 options, etc., will be treated as substitutes for equity and thus be included as new equity.

  7. Replacement of Debt Outstanding as of October 31, 2006
  8. There is an exception to the meaning of "new equity": replacing debt that was outstanding on October 31, 2006 (whether through a debenture conversion or otherwise) will not be considered growth for this purpose. This should mean that units issued for this purpose will not count toward or otherwise affect the safe harbour. The exception seems to apply to any type of debt that was outstanding on October 31, 2006. We will watch with interest to see what parameters are ultimately placed on this exception.

  9. New Non-convertible Debt
  10. New non-convertible debt can be issued without affecting the safe harbour. However, the replacement of that new debt with equity will be counted as growth. For planning purposes, it may be possible for a SIFT to issue new equity in excess of the safe harbour amount (for an acquisition, for example) by issuing units having a value equal to the sum of (a) the amount permitted under the safe harbour and (b) the amount of debt that was outstanding on October 31, 2006. The SIFT would have to use the proceeds from the equity issuance described in (b) to repay the outstanding debt, but could borrow new non-convertible debt.

  11. New Equity Issued in Exchange for Exchangeable Interests
  12. The announcement also deals fairly generously with new equity issued to satisfy the exercise of rights that were in place on October 31, 2006 to exchange an interest in a partnership, or a share of a corporation, into that new equity. The new equity so issued will not be considered growth (and will presumably not affect the safe harbour). This matter was of concern to a number of income funds and holders of exchangeable interests. The announcement does not specifically provide for similar relief for new equity issued to satisfy the exercise of options that were in place on October 31, 2006.

  13. Merger of Two or More SIFTs Permitted
  14. The announcement also answered another widely asked question: Could existing income funds merge? It provides that the merger of two or more SIFTs, each of which was publicly traded on October 31, 2006, or a reorganization of such a SIFT, will not be considered growth if no net addition to equity results from the merger or reorganization. The most likely merger candidates will be income funds in the same business (most notably, income funds in the oil and gas sector), but merger candidates need not be so limited. It seems that a merger need not necessarily occur on the basis of the tax-free exchange mechanism provided in the Income Tax Act but could occur in other ways (such as a hostile takeover bid on a unit-for-unit exchange basis or other form of business combination). It is unclear what kinds of reorganizations are permitted, but perhaps this would include the transformation from a "fund-over-corporation" structure to a "fund-over-partnership" structure.

  15. Conversion of Trusts to Corporations
  16. The Department of Finance intends to allow conversions of SIFTs to corporations without any tax consequences to investors. The announcement states that the Department of Finance is considering the question and will make changes as required to facilitate tax-free conversions. It is possible for an income fund to incorporate its underlying entities on a tax-free basis (if they are not already in corporate form) and to wind itself up by redeeming its outstanding units in kind by distributing the shares of the underlying corporate vehicle to its unitholders. However, that transaction would normally be taxable to the unitholders. Similarly, it would be possible for a newly formed corporation to acquire all the units of the income fund in exchange for issuing its own shares to the unitholders on a tax-free basis (using the elective procedure for this purpose in the Income Tax Act) so that the unitholders would then be shareholders of the corporation; however, in that case, the corporation would continue to own the units of the income fund and it may not be possible to eliminate the income fund inside the corporation on a tax-free basis in the future.


1. However, as indicated in paragraphs 4, 5 and 6, new equity will not be considered to be "growth" for these purposes if it is issued to retire debt or on the conversion of convertible debt or on the exercise of rights under certain exchangeable interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.