Tax Policy, Capital Structure and Income Trusts

Canadian Business Law Journal, Vol. 45, No. 1, pp. 1-19, 2007

19 Pages Posted: 4 Jun 2008

See all articles by Benjamin Alarie

Benjamin Alarie

University of Toronto - Faculty of Law

Edward Iacobucci

University of Toronto - Faculty of Law

Date Written: 2007

Abstract

This article analyzes the economic benefits and costs of the income trust vehicle for entrepreneurs organizing their business affairs. In doing so it examines the precise nature of the relationships between capital structure, income taxes and income trusts, reaching the conclusion that neither tax advantages nor corporate finance efficiencies alone are able to explain the market's recent enthusiastic response to income trusts. The article proceeds as follows. Abstracting from the role of taxation, Part II outlines the economic incentives entrepreneurs have for using debt financing in their capital structures. Part III focuses on the role of taxation in motivating entrepreneurs to choose debt financing. Part IV explains why entrepreneurs are motivated to select the most efficient organizational and capital structure for their businesses. Part V applies the foregoing analysis relating to economic efficiencies and tax advantages to the income trust phenomenon, in the process showingthat the tax advantages associated with income trusts cannot be understood without understanding the underlying economic efficiencies associated with debt financing, and that other economic efficiencies cannot be fully understood without contemplating the tax considerations associated with debt financing. Part VI concludes.

Suggested Citation

Alarie, Benjamin and Iacobucci, Edward M., Tax Policy, Capital Structure and Income Trusts (2007). Canadian Business Law Journal, Vol. 45, No. 1, pp. 1-19, 2007. Available at SSRN: https://ssrn.com/abstract=1140321

Toronto Law Submitter (Contact Author)

University of Toronto - Faculty of Law ( email )

78 and 84 Queen's Park
Toronto, Ontario M5S 2C5
Canada

Benjamin Alarie

University of Toronto - Faculty of Law ( email )

Jackman Law Building
78 Queen's Park
Toronto, Ontario M5S 2C5
Canada
416-946-8205 (Phone)
416-978-7899 (Fax)

HOME PAGE: http://www.law.utoronto.ca/faculty-staff/full-time-faculty/benjamin-alarie

Edward M. Iacobucci

University of Toronto - Faculty of Law ( email )

78 and 84 Queen's Park
Toronto, Ontario M5S 2C5
Canada
416-978-2694 (Phone)
416-978-7899 (Fax)

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