An overview of how income trusts work in Canada and why they’ve been used
A Canadian income trust is an investment vehicle that holds income-producing assets—such as businesses, real estate, or energy resources—and issues units to investors. Unitholders receive periodic distributions derived from the trust’s cash flow, which are taxed once at the investor level rather than being taxed first at the corporate level.
A trust entity sits between the operating company and unitholders. The trust holds the company’s equity and debt, then funnels almost all operating cash flow directly to unitholders. Day-to-day business continues under the existing management team, while the trustee ensures distributions align with the trust agreement.
Prior to 2011, income trusts bypassed the double taxation of corporations:
Starting January 1 2011, the “tax-on-income-trust” rules imposed a tax on trust distributions at rates similar to corporate tax, leading many trusts to convert back to corporations or reorganize as Real Estate Investment Trusts (REITs).
| Advantages | Disadvantages |
|---|---|
| High, stable cash distributions | Tax advantage largely eliminated after 2011 |
| Avoidance of double taxation (pre-2011) | Mandatory conversion to corporations or REITs post-2011 |
| Attractive to yield-focused investors | Complex regulatory and compliance requirements |
| Unlocks shareholder value in mature assets | Distribution levels sensitive to interest rate changes |