Income trusts and Real Estate Investment Trusts (REITs)

Every year, in addition to a share of the income earned, this type of trust distributes part of the capital to its unit holders. For this reason, the amount distributed to you is not the same as the amount on which you have to pay tax. Each capital distribution reduces the tax cost of the units, which generally results in a capital gain when the units are sold.

Example: You hold income trust units with a value of $10 each and an annual distribution of $1 per unit. This distribution is made up of taxable income of $0.20 and a non-taxable return on capital of $0.80, which reduces the tax cost of the investment. In five years of distributions, each unit will yield $1 of taxable income and $4 in non-taxable return of capital. The tax cost of the holding is now $6 ($10 – $4). If you sell your units for the purchase price of $10, you’ll have a capital gain of $4 ($10 – $6).