What is a Specified Investment Flow-Through Trust (SIFT)

A Specified Investment Flow-Through Trust (SIFT) is a type of income trust that holds publicly traded investments, has at least one non-portfolio property, and is resident in Canada. SIFT trusts are a common type of business structure in Canada. The trusts were intended to provide tax advantages for non-commercial investments, but became widely used by commercial businesses. The United States and Australia formerly had similar business entities.

BREAKING DOWN Specified Investment Flow-Through Trust (SIFT)

The Canadian government decided the tax advantages that businesses had by using SIFT trusts as opposed to a corporate structure were "not appropriate", and in October 2006 enacted a tax fairness plan that included a provision for taxing distributions on publicly traded income trusts. The provisions went into effect for preexisting income trusts beginning January 1, 2011, and for new income trusts (after October 2006) beginning January 1, 2007. Many preexisting SIFT trusts decided to convert to a corporate ownership structure because of these changes to the tax law.

How the Trusts Work

According to the Canadian revenue agency, a SIFT trust is generally limited "from deducting its non-portfolio earnings that it has made payable to a beneficiary. The non-deductible distributions amount is deemed to be a dividend received by the beneficiaries from a taxable Canadian corporation. The beneficiaries of a SIFT trust are deemed to have received an eligible dividend that qualifies for the enhanced dividend tax credit." The taxable SIFT trust distributions are subject to tax based on net corporate income tax rates. 

To determine the non-deductible distributions amount, this formula is used: A − (B − C), where A is the trust's amount payable to beneficiaries, B is the trust's income before any deduction under subsection 104(6) of the Act, and C is the trust's non-portfolio earnings.

Like America, Canada has a complex tax system. According to the OECD, in terms of total tax revenue as a percentage of GDP, in 2015, the U.S. collected more in taxes from its citizens ($14,700 USD per capita), versus Canada's average amount ($13,700 USD). But the picture isn't as clear when state taxes in the U.S. and provincial taxes in Canada are taken into account. In Canada, provincial income taxes (except in Quebec) are coordinated with the federal tax system and are based on a percentage of federal tax, meaning that the provinces have the same allowable deductions and income rules as the federal system. In addition, each province has extra and varying credits and tax incentives for its residents.