Income trust

An income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. The trust can receive interest, royalty or lease payments from an operating entity carrying on a business, as well as dividends and a return of capital.

The main attraction of income trusts (in addition to certain tax preferences for some investors) is their stated goal of paying out consistent cash flows for investors, which is especially attractive when cash yields on bonds are low. They are especially useful for financial requirements of institutional investors such as pension funds., and for investors such as retired individuals seeking yield. Many investors are attracted by the fact that income trusts are not allowed to make forays into unrelated businesses: if a trust is in the oil and gas business it cannot buy casinos or motion picture studios.

The names income trust and income fund are sometimes used interchangeably, even though most trusts have a narrower scope than funds. Income trusts are most commonly seen in Canada. The closest analogue in the United States to the business and royalty trusts would be the master limited partnership.

Income trusts are equity investments, not fixed income securities, and they share many of the risks inherent in stock ownership, but often not the same rights and responsibilities, especially concerning corporate governance and fiduciary responsibility. Investors in Canadian income trusts cannot rely upon provisions in the Canada Business Corporations Act allowing for derivative actions and the oppression remedy, and often do not even have the right to elect a board of directors. Each trust has an operating risk based on its underlying business; the higher the yield, the higher the risk. They also have additional risk factors, including, but not limited to, poorer access to debt markets.

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