Investment

What to Look Out For Investing in Canadian Income Trusts

Published

4 years ago

February 17, 2021

Canadian income trusts, also known as Canadian royalty trusts and Business trusts, are business entities that buy assets generating steady cash flows. Income trusts are attractive to investors because they pay out generous dividends. Usually, trusts are set up by corporations, because of the preferential tax treatment. Unlike corporations, which are subject to double taxation, Canadian trusts are taxed only once- on an individual level.

In most cases, well-established businesses in the oil and gas industries are converted to an income trust. At the transition point, the business is stable, generates a lot of cash, and is in the mature stage of its product life cycle. Therefore, all or most of the available cash is designed to be taken out of the company and distributed to the unitholders. There is no money left to reinvest in operating activities of a new aggressive growth infrastructure.

Being a tax-friendly means of stable income, business trusts attract many American investors, who seem to perceive potential investment opportunities paying as sky-high dividends as 21% in Canada. Investing in Canadian companies would expose the investor to a wider range of companies related to natural resources. This gives the beneficiary extra protection from the expected depreciation of the US dollar because of the United States economic swings, while the Canadian dollar value rises with the soaring economy.

Despite the investment attractiveness of the Canadian income trust, the future unit holder has to be strongly aware of many red flags before putting money in these cash-generating entities. First of all, stay away from trusts that pay unitholders more than their net income. Living in an increasingly volatile and resource-constrained world, this is not a sustainable business practice. The investor needs to do a thorough assessment of the fund’s cash flow by comparing the annual net profit per unit to the total annual dividend distribution per unit.

A blinking red light for the beneficiary could also be the unlimited liability structure of the trusts, which corporations do not have. Businesses can always run into unforeseen problems, and accidents can always happen. Therefore, most business owners would rather take the less advantageous tax situation that comes with owning that business through a corporation, and enjoy the limited liability that the corporation provides in comparison with the trust model.

Under Canadian tax law, the trust’s profit is not taxed if it is annually distributed to the shareholders. Afterward, based on their tax brackets, the beneficiaries may have to pay income taxes on the money received. Unfortunately, Canadian Finance Minister Jim Flaherty has proposed taxation of Canadian income trusts the same as ordinary corporations. If the new government policy goes through, all existing trusts would lose their tax-exempt status by the beginning of 2011. As a result, a big portion of the money that could have been used to pay dividends to the shareholders or reinvest would be taken away by the government. Ultimately, the new tax regime will result in reduced spending power of all current unitholders and the corporations would become a more attractive means of profit generation than the Canadian income trusts are.

Whichever way the Canadian government decides to pitch its hat, Canadian income trusts present an excellent opportunity for investors and should be thoroughly considered for any dividend minded stock portfolio.

Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

Published

1 week ago

September 6, 2024

Anne Joseph

TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite up more than 150 points, U.S. stock markets also higher

Published

2 weeks ago

August 29, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.

The S&P/TSX composite index was up 171.41 points at 23,298.39.

In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.

The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.

The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.

The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.

This report by The Canadian Press was first published Aug. 29, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Investment

Crypto Market Bloodbath Amid Broader Economic Concerns

Published

1 month ago

August 5, 2024

Harry Miller

The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.

The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.

Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.

The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.

Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.

Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.

Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.

Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.

The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.