Should you hold on to your income trusts?

Show of hands: how many investors here fled the income trust market after Jim Flaherty’s October 31, 2006 announcement that he’d start taxing trusts? A lot of you were at least worried, and with good reason — it was unclear then what the tax would mean to your income generating holdings. Now, almost four years after that, and a few months before January 1, 2011, when the government starts taxing trusts, the picture is clearer.

I wrote a piece for Canadian Business on the trust market, so I won’t go into everything here, but it’s safe to say that the trust market will remain healthy far beyond next year. Of course, trusts won’t be called trusts, most will convert into a corporation over the next couple of years, but it’s a good bet that a majority of these companies will continue to pay a high yield for the foreseeable future. It’s expected many trusts will cut distributions (called dividends in a corporate structure) by about 30%, or the amount the corporation will be taxed. You can see in my story that it won’t make much of a difference to the investor’s bottom line.

The trusts that people should have been worried about are out of the market now. Around 2006 many corporations were converting to trusts just so they could take advantage of the tax savings. But trusts aren’t for everyone. This is a generalization, but companies focused on reinvesting profits for growth shouldn’t have become operations that flow-through profits to unit holders. Those companies converted back to a corporation early on in the game, once they knew their tax advantage would be taken away. Plus, many of the weaker trusts have merged; there were 245 trusts in the Scotia Capital Income Trust Index on October 31, 2006, now there are 140.

Some of the trusts you hold may not have announced conversion plans yet. While it’s likely that the distribution will stay the same, you won’t know for sure until the company announces what it will do. So pay attention to what you own and if the trust does slash its payout significantly, it may be time to seek income elsewhere.

Bottom line: keep those trusts around and (hopefully) see those hefty dividends add up.

Read my income trusts story here.

MoneySense columnist Suzane Abboud also wrote a good story on why you should hang on to trusts. You can read her story here.

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