An income trust is an investment that is designed to distribute cash to investors. It shares the features of a number of other types of investments.
How does an income trust work?
- Like a stock, you buy shares or units of income trusts on a stock exchange
- Like a mutual fund, an income trust buys and holds the stocks or assets of one or more businesses
- If those businesses make money, the trust may share some of the profit with investors through cash payments. These payments are called distributions.
How do you make money from income trusts?
- You can make money by selling units if the price goes up. Of course, you may lose money if the price drops and you have to sell
- Most income trusts try to pay the same amount of distributions quarterly. But they don't have to. They can stop making payments any time. If this happens there's no telling what will happen to the price of an income trust's units.
Important news: On October 31, 2006, the Department of Finance announced changes to the tax rules for income trusts that are now law. Income trusts are now taxed the same as Canadian corporations. The changes will apply to new income trusts that start up after October 31, 2006. The changes will also apply in the 2011 tax year to many income trusts formed before that date. The goal: to remove the tax advantages that trusts had over corporations in the past.
Remember: Income trusts were first set up to pay regular cash distributions
Under the new tax rules, many income trusts will likely pay out smaller distributions. In fact, they can stop paying distributions any time. If you?re not sure an income trust is a good choice for you, talk to a qualified adviser before you buy.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.