The variety of businesses upon which income trusts have been created is broad, both in the nature of the underlying industry and assets and in geographic location. The income trust universe is, in general, comprised of the following four categories:
Income trusts, also called income funds, are trusts generally structured to own debt and equity of an underlying entity which carries on an active business, or a royalty in revenues generated by the assets thereof. The income trust structure was developed to facilitate distributions to investors on a tax-efficient basis. An income trust can generally avoid paying ordinary income tax by paying (or making payable) all of its taxable income (including net realized capital gains) to unitholders, thus avoiding a layer of taxation associated with corporate entities. The income trust structure is typically adopted by businesses that require a limited amount of capital in maintaining their property, plant and equipment and that generate stable cash flows. The projected life of distributions and the sustainability of distribution levels tend to vary with the nature of the business underlying the income trust.
Earnings from the business are distributed to investors each month or quarter, with yield ranging anything from 6 to 20 per cent a year. (The higher the yield, the riskier the trust.)
Income Deposit Securities (IDS)
An IDS consists of two securities - common shares and subordinated notes of the issuer - which are "clipped" together. Holders of IDSs receive dividends on the common shares and interest at a fixed rate on the subordinated notes to produce a blended yield. The distribution policies of IDS issuers are similar to those of REITs, master limited partnerships and income trusts, which distribute a significant portion of their free cash flow.
IDSs are listed on a stock exchange, but initially the underlying securities are not. However, in time (typically in the range of 45 to 90 days after tbe closing of the offering), holders may unclip the components of the IDS and trade the common shares and subordinated notes separately.
These securities are proving attractive to both institutional and retail investors, particularly in the current low interest rate environment. Another selling feature is the integrity of the distributable cash model, given recent corporate governance and ccounting scandals.
Closed-end Investment Trust
Closed-end Investment trusts are investing principally in other income funds or securities of a specialized nature, or with Portfolio represents a particular Industry. Closed-end Funds issue only a fixed number of shares and trade on stock exchanges.