We tell you about Canadian income trusts

There is a host of income-producing investment options in the market, but few instruments available to the regular investor produce the sort of yields often seen in Canadian income trusts. It is not rare to see yields on these units in excess of 10%, and they typically pay distributions monthly. But they are structured differently from regular corporations (they are trusts, after all), and investors need to recognize and understand what those differences mean for their investment portfolios.

What Are Canadian Income Trusts?
This particular type of investment vehicle goes by several names: Canadian income trust, Canadian royalty trust, or the more colloquial "CanRoy." Whatever name they go by, CanRoys are all corporate trust structures set up to direct royalties or income to trust holders. By legally bypassing corporate taxation, the CanRoy structure allows for larger distributions than would be possible through a normal tax-paying corporate structure.

CanRoys have proved to be a popular corporate structure in Canada, as roughly 10% of the companies on the Toronto Stock Exchange (TSX) are CanRoys. Of that number, roughly 40% (by market capitalization) are energy-related companies, while about two-thirds (by number) operate "regular businesses," which is not energy-related or REITs (as of 2008). (Read about the tax implications of REITs in The Basics Of REIT Taxation.)

Are They Like American Trusts?
There are trusts organized under U.S. laws, but they are very different animals from their CanRoy cousins. American trusts are typically static in that they are not allowed to acquire new assets, nor are they actively managed. By contrast, CanRoys are living, changing, active businesses that are in many cases indistinguishable from regular tax-paying corporations in terms of how they run on a day-to-day basis. (Read more about the benefits of active management in Words From The Wise On Active Management.)