Income Trust

An income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. The trust can receive interest, royalty or lease payments from an operating entity carrying on a business, as well as dividends and a return of capital.

The main attraction of income trusts (in addition to certain tax preferences for some investors) is their stated goal of paying out consistent cash flows for investors, which is especially attractive when cash yields on bonds are low. They are especially useful for financial requirements of institutional investors such as pension funds. (Investment Dictionary) Many investors are attracted by the fact that income trusts are not allowed to make forays into unrelated businesses: if a trust is in the oil and gas business it cannot buy casinos or motion picture studios. The names income trust and income fund are sometimes used interchangeably, even though most trusts have a narrower scope than funds. Currently, income trusts are most commonly seen in Canada. The closest analogue in the United States to the business and royalty trusts would be the Master Limited Partnership.