Why Create Income
Tax Benefits
One of the main incentive for businesses to create income trust is the tax benefits comes with an income trust structure.
If a business is set up as a corporation, it needs to pay
corporation taxes on any profits it makes. Then when it distributes the dividends to its shareholders, those individuals will have to pay personal income taxes on the dividends received. Thus the so called double taxation dilemma.
However, under Canadian tax law, if a trust pays out all its profits to the beneficiaries every year, it will not subject to any taxes. The bottomline, only the beneficiaries of trust have to pay taxes at their respective individual tax bracket, the trust will not be taxed.
A rental business. Mr.B owns 100% share of A company. Company A makes $800,000 profits in 2006. Company pays 36%, or $288000. Out of $512000 left, Mr.B has to pay income tax 31%, ie. 158720. Left for him 353280.
In a trust structure, still 800000. pay 46.4%, which is 371200. Left him with 428800.
2. income trust can pass through benefits such as captial gains, or CAA to investors. Captail gains are taxed at lower rate.
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Is the government making less money?
It seems reasonable to think that because people who inest in income trusts are not paying as much income tax, maybe the government is making less money.
The effect on overall governmnet tax revenues is difficult to quantity. However, provincial tax revenue may be affected. Small province may loss tax revenue if most of investors (unit holders) in other province. Tax dollar paid to the home province by the company would be replaced by tax paid by unit holders to other provinces.
Just a zero sum game, by coverting dividens into ordinary income.
Tax-emept unit holders, RRSP pension plan may deferred tax payments. Government issue to cap pension fund investment in income trust.
Disadvantage of Income Trust
Income trust is not always painted with rosy pictures. Otherwise, we would see all business rush to establish income trusts.
Liability is a big thing for business. Beneficiary has unlimited liability.
