The trust can receive interest, royalty or lease payments from an operating entity carrying on a business, as well as dividends and a return of capital.
A more recent alternative called income depositary shares (IDS) has also failed to attract investor attention due to the trust activity being focused on the Canadian market.
The trust structure was "rediscovered" after the dot-com crash of 2000, as investment banks were searching for new sources of fees after the initial public offering (IPO) market had dried up.
Partly as a result of this ruling, Standard & Poor's then announced plans to add the largest income trusts to the S&P/TSX Composite Index (which it eventually did on December 19, 2005),[5] starting with a 50% weighting and gaining full representation on March 17, 2006.
One week later on September 19, the Department of Finance announced that it was suspending advance tax rulings – essential for investor confidence – on future trusts.
Studies by Leslie Hayman, publisher of the Report, indicated that the change in advance tax rulings in 2005 was the most statistically significant volatility event in the history of the trust market.
That solution would cost the government an additional Can$1 billion, which the lobbyists claim would be a small price to pay for stabilizing the market and satisfying the public investors/voters.
Since any decision was to affect the finances of an unknown proportion of the government's voting base, the trust debate turned into an important issue in the 2006 election.
If this is the case, a pre-election decision unfavorable to income trusts would have proven hazardous to Prime Minister Paul Martin's minority Liberal government.
The decision, while applauded by financial circles, was widely seen as confused and hurried (an earlier government statement on the same day had mistakenly suggested a slight tax on the trusts).
The Ontario Securities Commission has rejected the suggestion, saying it amounted to political interference; however, the Royal Canadian Mounted Police launched an inquiry on December 28, 2005.
Brent Fullard of the Canadian Association of Income Trust Investors pointed out that at the time of the announcement Telus and Bell Canada Enterprises did not pay any corporate taxes nor would they for several years.
While at the Department of Finance, Mark Carney engineered the federal Conservative government's plan to tax income trusts at source.
The Department of Finance also eliminated a 15% withholding tax on foreign leverage buyout loans, and created capital insertion rules that restrict growth on Canadian trusts.
Brent Fullard claimed that this creates conditions which favour foreign entities who purchase Canadian income trusts and are not required to comply with rules that restrict growth.
Further, he wrote that "The tax system encourages excessive distributions since trusts that retain taxable profits are subject to onerous taxation.
Its on-going in-depth analysis indicated that flow-through structures provided generally greater contractual transparency in business management and better total overall returns to investors than other equity issuers and issues in general, while providing relatively high and growing tax revenues to governments compared to other public equities and securities.
The Conservative Party won the Federal election on the basis that they and their leader, Stephen Harper promised to protect income trusts from additional taxation.
By frightening investors into professionally managed funds, their policy-driven volatility strengthened the oligopoly among Canadian banks and financial services.
Flaherty stated in his October 31, 2006, policy statement "If left unchecked, these corporate decisions would result in billions of dollars in less tax revenue for the federal government to invest in the priorities of Canadians, including more personal income tax relief"[41] but Minister Flaherty has not documented the claimed losses nor the methodology used to estimate them.
[44] Analyst Cameron Renkas examined the Department of Finance assertion that the United States and Australia have taken action to shut down flow-through structures.
In his research paper "Digging Deeper" he gives a perspective on how the United States taxes publicly traded flow-through entities and master limited partnerships, the US equivalent of Canadian income trusts.
[45] Analyst Dirk Lever wrote on January 15, 2007: "We cannot understand why any Canadians would support double taxation of retirement benefits - it affects all of us eventually."
John McCallum, the Liberal Finance critic, called on Minister Flaherty to explain the reasoning behind the change in income trust tax policy.
[47] In a February 8, 2007, news release McCallum said that "essentially they released close to a thousand pages of public documents, not one of which brings Canadians any closer to understanding what type of information or calculations led the Minister break his election promise and tax income trusts, either the Minister is in contempt of the committee's motion or he had absolutely no data from his own department before shutting down the sector and destroying tens of thousands of Canadians' life savings.
[50] Harper had promised "not to raid Senior's nest eggs" by changing taxation rules for income trusts only a few months earlier during the 2006 federal election.
On February 28, 2007, the House of Commons Standing Committee on Finance released a report "Taxing Income Trusts: Reconcilable or Irreconcilable Differences?
Others such as Cedar Fair received a special tax rate at the end of the ten years on the condition that they would not be allowed to diversify outside of their core businesses.
A handful of small IPOs have used this model since late 2003; but due to lack of investor demand, interested companies have preferred to go public directly in the hot Canadian market.
Investors in Canadian income trusts cannot rely upon provisions in the Canada Business Corporations Act allowing for derivative actions and the oppression remedy, and often do not even have the right to elect a board of directors.