With the new tax rules, many investors are rethinking whether income trusts are a good choice. While trusts may continue to pay distributions, there is no guarantee. This, in turn, may also affect what will happen to the prices of income trusts in the future. They may not be the best choice for investors looking to make large capital gains.
How do I choose an income trust?
As with any investment that aims to provide a regular cash distributions to investors, one of the top questions you should ask before you invest in an income trust is: Will this investment be able to keep paying distributions? You don't want to buy an income trust thinking you'll get quarterly payments only to find out a year later that distributions have been cancelled and you get nothing.
To evaluate a trust's outlook, you need to do some research or get professional advice from an adviser. Be sure to read and understand:
- Its prospectus and related documents. In particular, read the section on 'Risk Factors' carefully. Also look into the quality of the underlying businesses
- The trust's cash flow statement, particularly the income statement and cash flow statement, and any recent corporate announcements.
- Information on the underlying company's history, performance and outlook as well as the industry in which the company operates. You will find some of this information on the company's website, its prospectus and in its quarterly and annual report.
- Comments from analysts who cover the income trust sector
- The trust's stability rating. In order to obtain a stability rating, a trust must submit an application and a fee, and respond to detailed inquiries from the ratings organization. Not all income trusts are rated, however. For this reason, consider the stability rating along with other pieces of information before you choose an income trust.
Also be sure that you understand the new tax rules that apply to income trusts. On October 31, 2006, the Department of Finance announced changes to the taxes rules for income trusts that are now law. Income trusts are now taxed the same as Canadian corporations. The goal: to remove the tax advantages that trusts had over corporations in the past.
The changes will apply to new income trusts that start up after October 31, 2006. For income trusts formed before that date, the changes will apply in the 2011 tax year. The one big exception: certain Real Estate Investment Trusts (REITs). REITs invest in income-producing properties such as shopping centres, office buildings and apartment buildings.
Remember: Income trusts will likely pay less distributions in the future
The new tax rules may really affect what you will make. It's up to you to choose carefully. You can also check the Internet and news services for any press releases or other public information. In addition, you may want to talk to an adviser to tap into professional research and advice before you buy.
To learn more about a specific income trust, look for its public disclosure documents on the website.
Both and publish income trust stability ratings.
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