Income Trust - Income Trusts By Country - Canada

Canada

The first Canadian tax ruling enabling the income trust structure, inspired by the American PTPs, was awarded in December 1985 to the Enerplus Resources Fund royalty trust. The first corporate conversion into a proper business trust, using the 1985 ruling, was Enermark Income Fund in 1995. The move attracted little attention at the time as the vast majority of trusts were still REITs and royalty trusts (the so-called "CanRoys").

A substantial historic and status report on the Canadian income trust market was published at the end of 2006 coinciding with the announcement of new taxes on income trusts proposed by the Canadian Minister of Finance (Key reference provided by author: "Breach of Trust" (PDF). Advocis Forum magazine from the Canadian Association for Professional Financial Planners and Advisors. December 2006. http://www.trustinvestor.com/resources/pdf/Advocis/Breach_of_Trust_FORUM_Magazine_December_2006.pdf.)

The trust structure was "rediscovered" after the dot-com crash of 2000, as investment banks were searching for new sources of fees after the IPO market had dried up. The first high-profile conversion was former Bell Canada Enterprises unit Yellow Pages Group becoming the Yellow Pages Income Fund and raising C$1 billion in the process. By 2002, trusts accounted for 79% of all money raised through IPOs in Canada, with only 38% in the traditional sectors of petroleum and real estate. By 2005, the income trust sector was worth C$160 billion (approximately US$135 billion at October 2005 rates). The mere announcement by a company of its intention of converting could add 10-20% to its share price.

Trusts received another boost in 2004-2005 as the provinces of Ontario, Alberta and Manitoba implemented limited liability legislation that shields trust investors from personal liability. (Such legislation existed in Quebec since 1994).

Partly as a result of this ruling, Standard & Poor's then announced plans to add the largest income trusts to the S&P/TSX Composite Index (which it eventually did on December 19), starting with a 50% weighting and gaining full representation on March 17, 2006. A new equity-only composite index would be created that will resemble the present structure without trusts. This move is seen as a strong gesture of support for the trusts, who would see increased demand from index fund managers and institutional investors replicating the index. However, the S&P, as a major bond rating agency, has expressed concerns about the sustainability and the quality of the accounting concerning many trust entities as going concerns in the future.

Business trusts have come to the attention of the government. In the March, 2004 federal budget, Finance Minister Ralph Goodale had tried to prohibit pension funds from investing more than 1% of their assets in business trusts or owning more than 5% of any one trust. Powerful funds led by the Ontario Teachers Pension Plan, which at the time had a significant stake in the Yellow Pages Income Fund, fought the proposed measure; the government backed off and suspended the restrictions.

On October 31, 2006, Canadian federal Finance Minister Jim Flaherty announced a new 34% tax on income trust distributions in a bid to stem the growing number of companies that are converting to trusts. Since January 2011, all Canadian income trusts (except REITs) are considered as Specified Investment Flow-Through (SIFT) entities that are subject to double taxation at a rate approximately equal to corporate income tax rates.