Canada: Department of Finance Releases Conversion Rules for Income Trusts

On July 14, 2008, the Department of Finance ("Finance") released proposed amendments to the Income Tax Act (Canada) (the "Tax Act") to facilitate the conversion of existing income trusts, REITs and other public flow-through entities into corporations on a tax-deferred basis (the "Conversion Rules"). The Conversion Rules fulfil Finance's undertaking to provide existing income trusts with tax efficient structuring options to convert to corporate form in advance of their 2011 taxation year – at which time most income trusts would become subject to a new entity-level tax based on corporate income tax rates. The Conversion Rules address many of the principal substantive and administrative issues that currently arise when structuring a corporate conversion under the Tax Act; however, the Conversion Rules are complex and technical, and Finance has afforded a number of alternatives for completing a conversion. Accordingly, income trusts must carefully consider their particular circumstances, and those of their unitholders, to structure a conversion in a manner that fully benefits from the Conversion Rules.

The Conversion Rules

The Conversion Rules permit two basic tax-efficient conversion strategies. In general, income trusts may convert by either (i) having unitholders directly exchange their income trust units for shares of a public corporation (the "Exchange Method"), or (ii) redeeming the outstanding income trust units by distributing to unitholders the shares of an underlying corporation that directly or indirectly owns the business (the "Distribution Method"). We expect that the Exchange Method will typically be undertaken pursuant to a plan of arrangement, whereas the Distribution Method may be implemented either through a plan of arrangement or a special meeting of the unitholders of the income trust.

Under either approach, implementation of the conversion transaction will generally require the approval of unitholders holding 66 2/3% of the units. The conversion strategy best suited for a particular income trust will depend on its current structure, its tax attributes and other factors. These conversion strategies are discussed below in further detail.

The Exchange Method

The Conversion Rules include a new automatic rollover provision, whereby a unitholder may exchange all or a portion of its income trust units for shares of a public corporation on a taxdeferred basis, provided that the following conditions are satisfied:

  • the disposition takes place during a period of not more than 60 days, at the end of which all of the outstanding equity of the income trust was either sold to the public corporation or redeemed or cancelled by the income trust;

  • the unitholder disposes of all of their equity during this 60 day period;

  • the unitholder receives only shares of the public corporation in consideration for the income trust units that are transferred on a rollover basis, and the fair market value of such shares is equal to the fair market value of such income trust units immediately before the disposition; and

  • all of the shares issued to all unitholders on a rollover basis are of a single class.

Unitholders automatically will receive the benefit of a tax-deferred exchange in respect of those units that satisfy the foregoing conditions (i.e., there is no need to file a tax election). Unitholders will be deemed to have disposed of these units for proceeds of disposition equal to the cost amount of their units (such that no taxable gain is realized), and will be deemed to have cost in their new shares equal to the cost amount of their exchanged units. Where desired, other units may be transferred to the corporation on a taxable, or partially tax-deferred, basis.

Following the transfer of all income trust units to the public corporation (whether or not the transfer was tax-deferred in respect of some or all holders), the Conversion Rules further permit the public corporation to rationalize its corporate structure by dissolving the income trust and any subsidiary trusts on a tax-deferred basis. There are two separate provisions available to effect this rationalization. The first provision (the continuity provision) ties into the rules that permit the tax-deferred dissolution of a corporate subsidiary into its parent, and will generally allow the tax attributes of the underlying trusts to flow through to the public corporation (e.g., losses and undeducted financing expenses). In particular, this provision allows a trust to dissolve and distribute all of its property to its sole beneficiary on a tax-deferred basis if:

  • the distribution of property by the trust occurs prior to 2013, and it results in a disposition of all of the interests in the particular trust;

  • a Canadian corporation is the only beneficiary of the income trust. In relation to a wind-up of a subsidiary trust, the income trust must be the only beneficiary of the subsidiary trust. In these cases, the provisions require that a subsidiary trust must be wound up before the income trust, and do not appear to permit additional trusts (third tier or fourth tier trusts) to be wound up on a tax-deferred basis;

  • where applicable, the income trust must be wound up within 60 days after the subsidiary trust is wound up; and

  • the trust must file a written election with the Minister where the property distributed is shares of a Canadian corporation.

The second provision (the liquidation provision) that allows for a tax-free dissolution applies where the property distributed by the trust(s) is shares of a Canadian corporation, and the trust(s) does not file the election mentioned above. Although the public corporation is entitled to wind-up the underlying trusts on a taxdeferred basis pursuant to this second provision, the existing tax attributes of the trust(s) will not be available to the public corporation.

The Distribution Method

As noted above, the Distribution Method is effected by distributing to unitholders the shares of an underlying corporation in redemption of their units. In some circumstances, the Distribution Method will be the simpler of the two corporate conversion strategies to implement. For example, under a typical "first generation" corporate trust structure, the income trust would capitalize the subordinated debt of the operating subsidiary into shares and then distribute all of the shares of the corporation to its unitholders in redemption of their trust units. In the "second generation" structures that have underlying trusts and partnerships, the business (or the partnership holding the business) would be transferred to a corporation (unless it is already in corporate form), and then the shares of this corporation would be distributed to unitholders in redemption of their trust units. The Distribution Method may be effected on a tax-deferred basis where:

  • the distribution occurs prior to 2013, and it results in a disposition of all of the interests in the particular trust;

  • the property distributed to unitholders is shares of a Canadian corporation; and

  • where applicable, the subsidiary trust is wound up before the income trust and the reorganization is completed within 60 days after the subsidiary trust is wound up.

The Distribution Method is effected, using the liquidation provision, on a tax-deferred basis for both income trusts (and, where applicable, a subsidiary trust) and their unitholders without the need to file any tax elections. The income trust and unitholders are deemed to have disposed of their property for proceeds of disposition equal to their cost amount. The unitholders will be deemed to have cost in the new public corporation shares equal to the cost amount of their units. However, the Distribution Method does not allow the tax attributes of the income trust (or any subsidiary trusts) to flow through to the corporation.

Additional Planning Considerations

Under either conversion strategy, there are a number of planning considerations for an income trust to consider when contemplating a corporate conversion:

  • Capital Structure: The Conversion Rules do not require the corporation to have any particular capital structure following the transaction. However, the rollover of units under the Exchange Method requires all shares that are issued on a rollover basis to be of a single class. For example, it appears that both common and preferred shares may not be issued on a full rollover basis under the Exchange Method; however it may be possible to reorganize the share structure after conversion. In addition, it may be possible to issue debt (perhaps subordinated notes) of the public corporation in connection with a conversion. The debt of an underlying corporation may be distributed as a return of trust capital prior to the conversion, or debt of the public corporation may be issued in partial exchange for units under the Exchange Method; the units directly exchanged for debt would not be subject to a rollover (and a gain may therefore arise), but this should not taint the rollover of units that are directly exchanged for shares.

  • Unitholder Losses: Because the tax-deferred rollover under both the Exchange Method and the Distribution Method is automatic, unitholders wishing to trigger a loss on the exchange of their units should consider selling on the open market in advance of the corporate conversion. Alternatively, if a significant component of the unitholder base has an inherent loss, it may be possible to structure the corporate conversion so that these unitholders have their units redeemed by the income trust (which will trigger the loss), rather than selling their units directly to the corporation (which would be tax-deferred).

  • Public Debt: In situations where the income trust has issued debt to the public, including convertible debt, it may be necessary for this debt to be assumed by the public corporation in connection with the conversion transaction. In order to provide a full rollover of this debt from the perspective of both the public corporation and the debtholders, it may be important for the conversion to be structured using the Exchange Method so that the continuity provision will be available.

  • Administrative Requirements: The Exchange Method will require a determination that the fair market value of the outstanding trust units is equal to the fair market value of the shares received in exchange therefor (a fairness or valuation opinion may be desirable).

  • Income Trust Takeovers: The Exchange Method is not limited to conversion transactions; it may apply where an existing Canadian corporation completes an acquisition of an income trust. However, as noted above, unitholders are only entitled to tax-deferral if the acquiror corporation issues one class of shares as consideration for the trust units (although it appears that the acquiror may have other classes of shares outstanding). In addition, the rules providing for a tax-free dissolution of an income trust structure may apply where a Canadian corporation (public or private) acquires control of an income trust.

  • Acquisition of Control: The Conversion Rules provide that, in certain circumstances, a distribution of shares by a subsidiary trust to an income trust will not result in an acquisition of control of underlying corporations for purposes of the Tax Act. However, depending on whether the Exchange Method or the Distribution Method is used, certain other aspects of the corporate conversion may result in an acquisition of control of underlying corporations in an income trust structure.

  • Exchangeable Units or Shares: Although the Conversion Rules do not specifically address the treatment of exchangeable partnership units or shares, these interests may generally be exchanged for shares on a tax-deferred basis using the existing elective provisions of the Tax Act. Particular attention should be given to eliminating any special voting units in an income trust in connection with a corporate conversion since the Conversion Rules generally require a disposition of all capital interests in the trust.

  • Debt Forgiveness: Provided that the income trust files an election with the Minister, a proposed new rule provides that debt owing from a subsidiary trust to an income trust generally will be deemed to have been settled at its adjusted cost base, so that no debt forgiveness should result even where the debt is "underwater". This new provision does not apply where the issuer of the debt is an underlying corporation. Consideration may be given to whether the Exchange Method may be used to avoid the adverse consequences of debt forgiveness that may otherwise arise on the capitalization of debt of an underlying corporation.

  • Options: In general, existing employee options may be exchanged for options of the public corporation under both corporate conversion strategies without tax consequences.

  • Synthetic PUC: Under the Exchange Method, the income trust is required to calculate the "synthetic PUC" of the trust; in general terms, this is equal to the paid-in capital of the trust less any prior returns of capital. As presently drafted, a concern may arise on the subsequent dissolution of the trust using the continuity provision where the income trust units are trading below this "synthetic PUC" calculation.

Effective Date of Conversion Rules

The Conversion Rules apply to conversions that occur after July 14, 2008 and before 2013. Finance intended that these rules would only be transitory and, accordingly, the Conversion Rules are not available after January 1, 2013. In certain circumstances, tax-deferral under the Exchange Mechanism may also be available in respect of a disposition of units for shares that took place after December 20, 2007 and before July 14, 2008, provided that the corporation files the appropriate tax elections on or before its filing due-date for its taxation year that includes the date that the Conversion Rules receive Royal Assent.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific 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.