Canada: Income Trusts - Conversion Options

Once an income trust has made the decision to convert to a corporation, there are two structural options available under the tax rules providing for tax-deferred conversions: the exchange method and the distribution (or redemption) method. The exchange method, implemented by plan of arrangement, has become the more common technique.

Income trust structures typically involve the operating business being held in a limited partnership or corporation, with the trust owning the equity in the operating entity either directly, or indirectly, through one or more flow-through entities. The objective of the conversion is to substitute shares in a listed corporation for outstanding units of the income trust on a tax-deferred basis and, typically, to also collapse the former income trust structure to simplify operations from a commercial and tax point of view.

Exchange Method

Under the exchange method, all income trust unitholders transfer their units to a Canadian corporation in exchange for a single class of shares of the corporation. As a result, the unitholders become shareholders of the corporation and the corporation becomes the sole unitholder of the income trust. The income trust is then wound up into the acquiring corporation. The following are the basic conversion steps:

  • A corporation issues a single class of shares to unitholders in exchange for their outstanding units on a tax-deferred basis without the need for unitholders to file an election (accrued losses on trust units cannot be realized).
  • The income trust and subsidiary entities may be wound up into the corporation on a tax-deferred basis (provided that the wind-up is completed by no later than December 31, 2012).
  • Where there is subordinated debt in a subsidiary entity owing to the income trust, this internal debt may remain in place and be addressed in a post-conversion reorganization.
  • Any debentures (including convertible debentures) of the income trust may be assumed by the corporation (unless not permitted by the governing trust indenture, in which case the debentures will need to be exchanged for debentures of the corporation or the governing trust indenture amended).
  • Any options held by trustees and employees of the income trust may be exchanged for options of the corporation under a new incentive plan focused on equity growth.

Typically, a court-approved plan of arrangement will be used, particularly to effect the exchange of the units for shares.

The key advantages of the exchange method are:

  • The tax attributes of the income trust and any subsidiary entities generally flow through to the corporation. Any property transferred on wind-up of the income trust or subsidiary entities should transfer at its tax cost.
  • The unitholders obtain a tax deferred exchange without the need for filing a tax election.
  • This structure can be used to achieve a take-over or merger with an income trust, and has been used in a number of cases where an income trust has effectively merged with a loss company.
  • In theory, the structure has the flexibility to permit unitholders to opt out of the "conversion" rule and do a taxable sale to the corporation or, with the corporation's participation, a partially taxable sale to limit the amount of the gain, possibly to the amount of capital losses realized elsewhere. However, accrued gains on trust units are uncommon and this option has not been offered in a conversion since a loss denial rule was added to the tax conversion rules.
  • In theory, the exchange method may permit other consideration to be issued, such as debt securities by issuing different consideration for different property, though this structure has not yet been tested.
  • Collapsing subsidiary entities can be deferred until after the conversion in order to allow time to address other structural issues, such as internal debt.

A disadvantage of the exchange method (as well as the distribution method) is the requirement that, in order to qualify, only one class of shares can be issued on exchange, which could result in significant dilution to existing unitholders if there are holders of retained interests. However, exchangeable interests may be collapsed into a single class with the unitholders to eliminate retained interests.

Distribution Method

Under the distribution method, the income trust reorganizes so that its only asset is shares of a Canadian corporation (which may be an existing corporate subsidiary of the trust). The income trust then distributes those shares to unitholders in consideration for the redemption of their units. The following are the basic conversion steps:

  • The corporation acquires all of the assets of the income trust with payment to the income trust being shares of the corporation.
  • As appropriate, the corporation implements a restructuring of the assets it has acquired, generally liquidating any subsidiary entities and consolidating all assets in the corporation.
  • The income trust is wound up and its assets (being only the shares of the corporation) are distributed to unitholders on a tax-deferred basis in payment of the redemption price.
  • Where there is subordinated debt in a subsidiary entity owing to the income trust, the subordinated debt is exchanged for shares of the corporation and these additional shares are distributed to unitholders in payment of the redemption price.
  • Any debentures (including convertible debentures) of the income trust may be assumed by the corporation (unless not permitted by the governing trust indenture, in which case a plan of arrangement using the exchange method or an amendment to the governing trust indenture will be required). The assumption by the corporation of any existing debt should generally result in automatic rollover treatment and not result in any debt forgiveness to the income trust.
  • Any options held by trustees and employees of the income trust may need to be cancelled and replaced by options issued by the corporation under a new incentive plan.

The key advantage of the distribution method is simplicity. It can be effected without a plan of arrangement, though frequently an arrangement is used. Either way, unitholder approval is required. A material disadvantage is that the tax attributes of the income trust and any subsidiary trusts do not flow through to the corporation or to the former unitholders, with the result that the benefit of those tax attributes may be lost.

The distribution method is most often used where commercial considerations prevent the use of an exchange transaction, such as where a "change of control" provision in debentures may be triggered, yet an internal reorganization leading to the distribution to unitholders may be permitted.

The results of an internal due diligence review, together with expert legal advice regarding tax considerations, internal reorganization structures, contractual terms, securityholder rights and compensation arrangements, are critical to determining the best conversion structure.

Our next Income Trust Update ... Implementing a Conversion.

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.