DEFINITION of 'Canadian Income Trust'

A Canadian Income Trust is an investment fund that holds income producing assets and distributes payments to unitholders, or shareholders, on a regular periodic basis. Distributions are usually made quarterly or monthly. The Canadian Income Trust must distribute a minimum of 90% of its net cash flows. Tax advantages to investing in a Canadian Income Trust include advantages to both the investor and the entity itself. The investor receives a portion of the periodic payment as a return of capital and a portion as a taxable distribution. The trust entity distributes most of its cash to shareholders or unitholders, leaving little left retained by the entity, so there is little left to tax. The trust pays out most of the earnings to unit holders before paying taxes, and is usually traded publicly on a securities exchange.

BREAKING DOWN 'Canadian Income Trust'

Canadian income trusts are a beneficial corporate structure alternative for firms due to lower tax liabilities. Before the profit is taxed, an income trust passes a high percentage of earnings to unit holders as cash distributions. If, once expenses have been covered, all of a firm's remaining cash is paid out to unit holders, the firm is able to entirely avoid paying income tax. This was stopped by January of 2011 for income trusts with the exception of real estate investment trusts (REITs).

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