Income Trusts - Understanding the Issues

Abstract

Income trusts are an investment vehicle that distributes cash generated by a set of operating assets in a tax efficient manner. The market capitalization of income trusts listed on the Toronto Stock Exchange has grown rapidly over the past two years, reaching $45 billion by year end 2002. The sharp rise of income trust valuations, the large supply of new issues and the complexity of their legal structure have generated increased scrutiny of this asset class in Canada. Given that retail investors are the principal owners of income trusts, this note explores whether the cash returns from income trusts are in line with the risks. The structure and valuation of a typical income trust are outlined. The benefits of income trusts and the issues related to investment are elaborated, focusing on legal and regulatory issues, corporate governance, operational issues and market issues.

Keywords: income trusts, valuation, equity, structure, risks, Canada

JEL Classification: G12, G3