Q. My spouse and I rely on income from our tax-exempt investments to supplement our pension and RIF income. We own a number of income trusts and we’re concerned that the proposed changes announced by the federal government will result in lower distributions. What are some alternative sources of income for investors? – Sheryl T.
A. It’s important for you to remember that the proposed changes to the taxation laws regarding income trusts will not take effect until 2011. That gives you another four years to receive monthly distributions. Also, not all income trust structures are affected by the proposed changes; for example, Real Estate Income Trusts (REITs) are excluded. Also, under the proposed new rules, the income distributed to investors of income trusts will be taxed as taxable dividends, subject to the dividend tax credit. Therefore the net after- tax effect for taxable investors is expected to be minimal.
When you’re buying trusts or deciding what to continue to hold, select the largest, most liquid and well managed trusts because they are expected to continue to do well. Select trusts with low payout distribution ratios, long reserve lives, and stable businesses with good quality underlying assets.
Yield will continue to be important your total return going forward. In addition to income trusts, you can look to dividend-paying equities, preferred shares, return of capital (ROC) structures, high yield bonds and corporate bonds for sources of investment income. As always, a diversified basket of these investments will help to protect your investment portfolio from unexpected downturns or changes in market conditions.
Bev Moir is a Senior Investment Executive and financial planner with The Moir Team at ScotiaMcLeod,Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member Canadian Investor Protection Fund (CIPF).
This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia
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