What are the Differences Betwee Canadian Income Trusts and Corporations
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The income trust structure means that, legally, the business is holding the income-generating assets "in trust" for its unit holders.
A corporation is a business directly owned by its stockholders.
In Canada, trusts are flow through entities which are allowed to operate without paying taxes to the federal government as long as they pay out their profits from operations to their unitholders. (The United States has no direct equivalent, though Real Estate Investment Trusts - REITs -- and master limited partnerships have some similarities.)
Corporations must pay the corporate taxes required by the national laws governing taxes.
Not All Corporations Can or Should Convert Into Income Funds
Trusts unit holders do not have intrinsic limited liability for the actions of the business, though the four main provinces of Canada have passed laws giving trust holders limited liability.
Corporate shareholders are not financially liable for the actions or debts of of the corporation except to the extent of the money they've invested.
Although other kinds of businesses, including the Canadian Yellow Pages and various food companies, have converted themselves into trusts to take advantage of the tax-free status and investor popularity of trusts, the structure works best for companies that own natural resources such as oil and natural gas that provide a lot of cash flow. That's how they have the money with which to pay out the required dividends to unitholders.
A corporation can be any kind of business, and its cash flow can vary from negative to gushing. Corporations are not required to pay dividends to the owners. The Board of Directors can choose to reinvest the cash into the business.
Now Canadian Income Trusts Have Converted Back Into Corporations
Do look for oil and gas trusts that replace wasting resources, or eventually the fund will run out of assets to sell
Canadian royalty trusts are allowed to replace wasting resources, so they can continue to operate. The U.S. does not allow royalty trusts and master limited partnerships to do this.
Corporations are expected to invest in what's necessary to keep the business running, and to expand it.
Tax treatment of company profits is the basic difference between Canadian trusts and corporations
Canadian income royalty trusts qualify for U.S. 15% dividend tax rate, but income from American trusts are fully taxable to Americans.
Corporate dividends are currently taxed at the rate of 15% in the U.S. (but this could be changed in the future according to shifts in political power.)
Unit holders of Canadian trusts are beneficiaries of the income and resources of the trust, but don't have the same statutory right (under the Canada Business Corporations Act) to bring "oppression" or "derivative" actions. The trustees of the fund have these rights, not the unitholders. Nor can unit holders elect the Board of Directors, though there are annual meetings for unitholders.
Normally, investors can't obtain unit certificates as they could for shares of stock, because the trusts are in book-based form. All trust units are registered in the name of securities depository such as the Canadian Depository for Securities (CDS). They hold all the units, represented by a single security certificate, for the benefit of its members, the dealers and brokers. They hold their interests for the benefit of their customers.
What are the kinds of Canadian income unit trusts?
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