Canada: Income Trusts

Market Update

Economic Outlook for Income Trusts

Decisions with respect to any particular income trust will depend in part on the economic outlook for the economy as a whole and the relevant sector in particular. While there are always uncertainties about any forecast, it is clear that Canadian economic growth will be negative in the order of minus-three percent in 2009 and weakly positive in the order of one-and-a-half to two percent in 2010. Inflation is likely to remain below the Bank of Canada target in 2009 and 2010 and hence the policy interest rate is likely to remain extremely low at least through this period. Growth in 2011 and 2012 is likely to be stronger but excess capacity is unlikely to be eliminated much before the latter part of 2012. The best planning assumption is for the Canadian economy to be operating at capacity in 2013 and for global demand for commodities to be strong once again.

David A. Dodge, O.C., Senior Advisor at Bennett Jones LLP, Former Governor of the Bank of Canada

At the height of the income trust boom, there were more than 250 publicly-traded income trusts in Canada with a total market capitalization in excess of $200 billion. Today, just under 200 trusts remain, with a total market capitalization of less than $100 billion.

The tax changes announced in October 2006, which will prevent income trusts (other than certain qualifying REITs) from continuing to deduct income distributions for tax purposes, become effective in 2011. Since the introduction of tax legislation in July 2008 to facilitate tax-deferred conversions, approximately 15 income trusts have converted or announced their intention to do so. Though management and trustees of income trusts will, by now, have given preliminary consideration to conversion, many have deferred making a final decision until closer to the end of 2010 in the face of current economic and market conditions.

Deadline for Conversion Decision

Publicly-traded income trusts in existence on October 31, 2006 can still continue to enjoy the tax-free holiday on income distributed to unitholders until the end of 2010 provided that the "normal growth" guidelines are not exceeded. After that time, the effective rate of tax for these trusts will approximate that applicable to corporations and income will, effectively, be distributed to unitholders as dividends.

The tax conversion rules permit these trusts to convert to corporations on a tax-deferred basis at any time up to the end of 2012 and, depending upon the conversion method selected, to transfer the tax attributes of the income trust to the new corporation. Depending upon a trust's particular tax situation, it may defer a conversion decision until the end of 2012 if the impact of the tax change during the preceding two-year period is not expected to be material.

Alternatives Available

There are many considerations to be taken into account in determining whether to convert now, the most important question being whether the non-tax benefits of immediate conversion outweigh the benefit to the income trust of the remaining 18 months of tax holiday. However, depending upon the income trust's business strategy, financial and market outlook and other considerations, there may be other more attractive alternatives to conversion, such as putting the income trust up for sale, merging with another income trust, being taken private by a significant unitholder or a management led buy-out, converting to a U.S. master limited partnership if there are significant U.S. unitholders or assets, or "staying the course" and restructuring to achieve tax efficiency prior to 2010.

Convert Now

Key reasons for deciding to convert now include:

  • If the income trust wants to grow through acquisitions: the trust's tax holiday on income distributions will immediately terminate if the trust exceeds the "normal growth" guidelines; as well, if the trust wants to fund acquisitions through the issue of its own securities, shares of a corporation may be more highly valued than trust units as financial performance of shares may be more easily valued relative to corporate industry peers and selling shareholders of the acquired entity could receive tax-deferred rollover treatment if paid in shares.
  • If the income trust wants to grow organically: the "normal growth" guidelines restrict capital-raising efforts, which could be problematic for capital intensive industries.
  • If the income trust will reduce or suspend distributions: if distributions have been or will be reduced or suspended because of liquidity problems or because the trust plans to reinvest income in acquisitions or other expenditures, the loss of the tax holiday may not be a concern; reducing or suspending distributions generally significantly impacts market price of the units since income fund investors are typically yield-focused and the certainty of conversion may be attractive to new financers or investors.
  • If the income trust has an increasing number of foreign investors or needs access to foreign capital: the trust (other than certain trusts in the energy sector) will not be able to maintain its advantageous tax status as a "mutual fund trust" if it is considered to be established or maintained primarily for the benefit of non-residents; most trusts have provisions in their governing documents restricting non-residents from owning 50 percent or more of the outstanding units.
  • If conversion will have a tax neutral effect until end of 2010: if the income trust has other bases on which to reduce its taxable income (such as tax depreciation, tax pools or tax losses), then early termination of the trust's tax holiday may not be adverse.

Wait and See

Reasons an income trust may defer a conversion decision until closer to the end of 2010, apart from losing the tax holiday, include:

  • If the income trust does not want to be a take-over target: the potential for churn in an income trust's units on announcement of conversion, and the resulting market price drop, will make the trust a more attractive take-over target.
  • If sale of the income trust or merger is a more desirable alternative: deferring a conversion decision to 2010 (or even 2012) may see the benefit of increased M&A activity; a merger transaction with another trust will not normally be considered growth terminating the tax holiday.

Stay the Course

And finally, if there are no significant benefits to conversion, an income trust might stay the course and not convert, but structure its affairs to remain as tax efficient as possible. However, in making such decision the trust must consider:

  • The end of the transitional tax conversion rules on December 31, 2012: not converting to a corporation by 2012 may significantly impair the ability of the income trust to structure a future conversion on a tax neutral basis and will result in forfeiting the ability to transfer certain tax attributes to the new corporation.
  • Complexity and cost: the cost of restructuring to improve tax efficiency, as well as the administrative cost and burden of maintaining the income trust structure.   

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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions