Canadian income trusts were a beneficial alternative corporate structure for companies due to their lower tax liabilities. They are known as “flow-through” vehicles because taxation was avoided by paying out all earnings, less expenses, as dividends directly to unitholders.
Income trusts first became popular investments in the early 2000’s when interest rates declined.
The main attraction of income trusts is the payout of consistent cash flows for investors, which is especially attractive when bond yields are low. Investors enjoyed generous yields, often in excess of 10%.
The Halloween massacre
Even though the Conservatives gave a campaign promise not to tax income trusts, in October 2006 then Finance Minister Jim Flaherty claimed that the income trust structure hurt the economy by depriving the government of tax revenue plus it restricted company growth. He announced new rules for income trusts which closed the loophole and ended the tax benefits. Immediately after the announcement share prices of the trusts dropped.
Related: How to calculate capital gains and adjusted cost base (ACB)
The deadline to change the structure of income trusts was January 1, 2011. Since they lost their special tax privileges many companies found it beneficial to convert to traditional corporate structures. The trust units were exchanged for common shares. Under the new corporate tax structure high dividend yields would not be sustainable, so most dividends were cut.
This was a big slam to retirees who had loaded up on income trusts in their RRSPs to enjoy secure retirement income. “We’ll remember this at the next election,” the betrayed seniors cried – and apparently they did.
After the conversion
Many of the former income trust companies remained solid and continue to offer above average dividend yields.
Some corporations that were once popular income trusts:
- Cineplex Inc. (CGX.T)
- Rogers Sugar (RSI.T)
- Liquor Stores (LIQ.T)
- Precision Drilling (PDS.T)
Some companies changed to quarterly distributions, but many continued to be monthly payers. The question to ask is – are they sustainable?
Pengrowth Energy (PGH) and Enerplus (ERF) at first maintained their payouts, then they were reduced, and finally dropped, and we all know what happened to Canadian Oil Sands (COS). Liquor Stores will also be reducing their distribution.
Some companies did not convert and found it more beneficial to retain their trust status.
- Royalty trusts – companies related to energy products e.g. Argent Energy Trust (AET.UN)
- Business investment trusts – have strong steady cash flow e.g. Keg Royalty Income Fund (KEG.UN)
- Utility trusts – companies in power, pipelines & telecom e.g. Brookfield Renewable Energy (BEP.UN)
REITs – the exception to the ruling
The most common forms of income trusts are Real Estate Investment Trusts (REITs) which escaped the new tax ruling. REITs own or operate income producing real estate – offices, residential, retail, industrial, hotels and healthcare.
If this type of investment is of interest to you, don’t be swayed by large dividend yields.
Choose quality properties based on current trends, e.g.
- Retail tenants may be shifting from traditional “brick-and-mortar” stores to online shopping.
- Senior residences and assisted living facilities are on an upward trend.
Rather than holding several individual REITs, you may choose to invest in a diversified REIT ETF such as:
- iShares S&P/TSX Capped REIT Index ETF (XRE) – Yield = 5.73%
- Vanguard FTSE Canadian Capped REIT Index ETF (VRE) – Yield = 5.7%
Both hold similar popular companies in their top ten, such as RioCan (REI.UN), Cominar (CUF.UN) and Boardwalk (BEI.UN) and pay monthly distributions.
The biggest risk is an increase in interest rates – higher rates will reduce the demand for REITs when investors flock to more secure bonds.
Taxes
It’s more advantageous to hold income trusts in a RRSP or other registered account.
In a non-registered account, cash distributions which are usually made up of taxable Canadian dividends – reported on T3 slips – are eligible for the dividend tax credit, and you also receive return of capital (ROC). ROC is not taxable but it reduces your adjusted cost base when you sell.
Final thoughts on Income Trusts
REITs and other income trusts can be passive income producing investments. Yields can be higher than those from dividend stocks and are often paid monthly which is desirable for retirees looking for regular income. But, they are not without risk. Do your research to find the ones most appropriate for you.
While all motorists are required by law to have car insurance, most people couldn’t be bothered to shop around and make sure they’re getting the right coverage at the best price. If you’re anything like me, you might not have even changed insurance companies since you first started driving!
How do you know when it’s time to change car insurance providers? Many people are dissatisfied with their car insurance premiums, but surprisingly few are doing anything about it.
When it’s time to shop around for car insurance
Here’s a simple test: When you receive your annual renewal notice in the mail and discover your premiums have increased by 10% (or more) – don’t just grumble and file it away – it’s time to shop around.
The average consumer can reduce the cost of their car insurance premiums just by shopping around every 1-2 years and getting new quotes. It’s easy to search car insurance quotes online through a rate comparison site.
Take some time to evaluate your own driving situation to see if anything has changed. For example, you might want to remove collision coverage on an older vehicle or increase the deductible to the max if you wouldn’t bother with a small claim. Maybe you’re a veteran and would like to use that to your advantage by getting cheaper insurance and even USAA roadside assistance, among other benefits.
How else can you save money on car insurance? Look at other discounts and see if they apply. Would you move your house insurance to take advantage of a multi-product discount? You might save 5-10% on your premiums just by bundling your home and auto insurance policies. It’s shocking how many people aren’t doing this!
Similarly, if you’ve purchased winter tires you may qualify for a discount. Or you might qualify for a group discount if you happen to work for a preferred employer group.
Instead of waiting until your renewal date comes up to check for car insurance rates, keep in mind that there are other opportunities to review your policy throughout the year.
Whether you’re getting married, buying a new car, adding a teenager to your policy, or moving, there are opportunities to examine your policy and check for discounts. Take advantage of these opportunities to make sure you are always getting the best rates and that you have appropriate coverage.
If you do decide that it’s time to move on from your current car insurance provider, make sure you have your new policy in place before cancelling your old policy – you don’t want any gaps in coverage.
Beware that most insurance companies charge penalties if you cancel your policy mid-year. Unless you’re getting a big discount to switch immediately it probably makes more sense to wait until your policy is up for renewal.
Final thoughts
Basic car insurance policies are standardized to some degree, however it’s still important to compare policies as the range of coverage may differ between providers. Some types of coverage – such as accident benefits coverage – are not mandatory in every province.
Is the coverage comparable on each quote you receive? What is the company’s procedure if you have an at-fault claim? Under what circumstances would your insurance not be renewed?
Make sure you compare apples-to-apples when it comes to different policies. Weigh the cost of premiums against the coverage provided. Your main objective should be to buy the right amount of coverage at an affordable price.
One of the founding fathers of personal finance blogging – J.D. Roth – returned to his roots this week to celebrate the 10th anniversary of Get Rich Slowly. J.D. hits the highlights in taking readers through his own journey to financial freedom, starting 10 years ago buried with $35,000 in consumer debt and living paycheque to paycheque, and quickly mastering money and the psychology behind it to reach financial independence just a few short years later.
What appealed to his readers, and ultimately led to the massive growth of Get Rich Slowly, was J.D.’s personal narrative and obsession with the behavioural aspect of money management:
“I had always stressed the importance of psychology; but as my financial philosophy matured, I became even more convinced that smart money management was all about mindset, not math.”
I have tremendous respect for J.D. and the community he built at Get Rich Slowly. We started Boomer & Echo in 2010, and I thought writing 5 days a week for two years straight was a lot of work (and there are two of us!). J.D. wrote every single day for three straight years, creating more than 1,000 articles in that time. Unreal.
Congratulations to J.D. and the Get Rich Slowly team! You can follow J.D.’s new blogging venture at Money Boss.
More on the psychology of money
The New York Times published a special section of Your Money with insights into behavioural finance and investing:
How buyers react when prices rise and fall.
Credit card encourage extra spending as the cash habit fades away.
Getting workers to save more for retirement
Does your stockbroker draw complaints? Here’s how to find out.
This week(s) recap:
Last Monday I explained why indexing doesn’t mean settling for average returns.
Last Wednesday Marie shared all the reasons why you should become a member of your local library.
And last Friday a guest post by Daniel at Urban Departures gave us a Star Wars guide to investing.
On Monday this week I argued that stagnant wages shouldn’t get in the way of your financial goals.
On Wednesday Marie took a thoughtful look at you and money: what does it mean?
Finally, on Friday I reviewed the new TD Direct Investing WebBroker platform.
Over on Rewards Cards Canada I reviewed the Capital One Aspire Travel World Elite MasterCard.
I also guest-posted on the Modern Advisor blog with a guide to choosing an online financial advisor.
Weekend reading:
The Globe and Mail’s Rob Carrick is doing his best to reach out to millennials and that means taking the time to stop by Reddit to host an AmA (Ask me Anything). Read the full transcript here.
At the other end of the spectrum, Carrick looks at wants vs. needs and how actual retirees manage their money.
Regulators are taking a closer look at how investment firms manage conflicts of interest when it comes to how financial advisors are paid for the products they recommend to their clients.
The U.S. wants to prohibit conflicts of interest in retirement planning. Here’s how Obama’s conflict-of-interest rule could rattle investment giant Edward Jones.
These new rules, plus a shift toward passively managed funds points to how the financial industry is having its Napster moment.
All of this means that most financial advisors need to find a new value proposition:
“I personally find it hard to believe that there are advisers out there who are not yet aware of the evidence for not using active funds. Nor do I understand how advisers can study the evidence with any degree of thoroughness or objectivity and still maintain that trying to pick future star managers is the best way to go.”
Is life insurance the next frontier for robo-advisors? A new report from global consultancy firm EY says yes.
A cool, interactive look at where your tax dollars were spent in 2014-15.
Big Cajun Man Alan Whitton shares his tax reflections for 2016.
Jamie Golombek explains what we mean when we talk about the “tax rate” – and how to figure out what yours is.
The Panama Papers made headlines last week. Here’s how the world’s rich and famous hide their money offshore.
The CRTC is set to weigh in on whether high speed internet is a basic human right (Finland made universal access to minimum Internet speeds a legal right in 2009).
Are smart phone protection plans worth the money? Consumer advocate Ellen Roseman says a plan can be worth buying in some cases.
Michael James on Money with an insightful look at how much you have to learn to be a successful investor.
Barry Choi lists the 8 rules of personal finance.
Here’s how a simple credit error can ruin your home-owning dream.
Million Dollar Journey breaks down his 2015 expenses – less than $4500/month for a family of 4.
Gail Johnson explains the downside of downsizing in retirement: leaving your friends and neighbourhood behind.
Here are 10 crazy things people in finance believe, according to A Wealth of Common Sense blogger Ben Carlson:
“10. People in finance believe that advice has to be complicated to be effective.”
And finally, speaking of complicated, Carlson looks at Tesla – one of the hardest stocks to value over the last five years.
Have a great weekend, everyone!