A review of income trusts: making sure they make sense

For the past several years, Canadians have enjoyed the benefits of investing into income trusts through income trust funds.

After all, they have year after year double-digit returns in up and down stock market returns with the exception of last year.

Plus, they pay income on a regular basis.

Some people look at it as a category that is about to burst, like technology stocks did in early 2000.

Article after article in the papers suggest to cash in, pay the tax and invest elsewhere. That makes sense if more than 30 per cent of your investments are in income trusts.

After all, to reduce risk we diversify. But if you are holding income trust funds as part of your overall retirement income strategy in a diversified manner, then why sell and pay the tax? If you need the money, then that is part of your plan. But to start cashing in investments and pay tax because of some article you read, think again.

Make sure your decisions are based on your own personal retirement planning and decision making process.

We cannot control stock markets, economies or even news stories, but we can control our plan.

As with all investments, income trust funds are not without risk.

Often, yields for income trusts can be much higher than for bonds or other fixed income investments.

Most income trusts are based on businesses that are stable, mature, and have a predictable cash flow. These characteristics allow much of the cash flow generated by the business to be distributed rather than reinvested.

Also attractive is the tax efficiency of income trusts.

Distributions from income trusts are taxed differently from dividends which will change in 2011.

A portion of the distribution is often treated as a return of capital, and the taxes on this portion are therefore deferred.

This deferral can reduce the unit holder’s adjusted cost base and the amount of capital gains he or she pays when selling the units.

These regular cash distributions (usually monthly or quarterly) are what make income trusts and income trust funds so attractive to investors, especially those seeking income in their portfolios.

Prepared by: Grant W. Hicks RDB, C.I.M., FCSI, Investment funds advisor with Manulife Securities Investment Services Inc. in Parksville / Qualicum Beach. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The views and opinions contained in this article are those of Grant W. Hicks and not Manulife Securities Investment Services Inc. Comments or questions Grant can be reached at 954-0247 or 1-866-954-0247. E-mail: grant@ghicks.com. Web: www.ghicks.com.

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