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Hi all ... I've tried to find articles / readings that can help me understand this topic better, but I still get confused.

What's the difference between Income Trust distribution and Dividends?
and especially how do they differ in terms of taxation - and thus, how this lead to different strategy in terms of tax efficiency.

Thanks in advance!
 

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This is from million dollar journey, not sure if this is allowed but here it is anyway.


There has been a little bit of confusion in the comments regarding how income trust distributions are taxed. The confusion is in what the distributions are composed of. Typically, when you look at a stock on the market with a distribution, you can safely assume that it’s a dividend. Dividends are great as they are paid out of company pockets with after tax dollars which means a tax break when received by the investor.

Income trusts (stock symbols ending in .un) are different however. Even though they have a distribution that appears like a dividend, they are not always tax friendly. Since income trusts flow through their pre-tax income to investors, it’s the investors who face the bulk of the taxation.

Income Trust Distributions and Tax Implications
Income trust distributions are typically made up of 4 components.

Return of Capital – You may be surprised to hear that a large portion of some income trust distributions are based on return of capital. What is return of capital? It’s basically taking shareholder money and returning it back to the shareholder. Return of capital is not taxed immediately but reduces your adjusted cost base. In a taxable account, this defers the potential increased capital gains taxation until you sell.
Other Income/Interest – Other Income (ie. interest) is also usually a large portion of the distribution. Any interest received in a non-registered account is taxed 100% at your marginal rate.
Dividends – This is typically a smaller portion of income trust distributions but is very tax efficient.
Capital Gains – Capital gains is another popular method of distributions and is taxed 50% of your marginal rate.
Examples
Lets take a look at some popular real world income trusts and their distributions. I typically look into a particular companies distribution by visiting the company website.

Arc Energy Trust (AET.UN) – A popular energy income trust with distributions that consists of 97% income/interest and 3% return of capital (ROC).
Calloway REIT (CWT.UN) – This is a popular REIT that specializes in commercial properties. The distributions (2007) consist of 45.3% income/interest and 54.7% ROC.
Yellow Pages (YLO.UN) – The distributions of this popular brand consists of a wide mix of income sources. 1% capital gain, 1% non-eligible dividend income, 5% eligible dividend income, 2% ROC, and 91% other income/interest.
 

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Thanks for the reply Cal, but the url doesnt work because of the truncuation
Don't know why, but they didn't work for me either. Try these (same source):

Dividends:

http://www.milliondollarjourney.com/how-investing-taxes-work-part-2-dividends-and-interest.htm

ROC:

http://www.milliondollarjourney.com/how-return-of-capital-works.htm

All 4 ( Interest, Capital gains, dividents, and ROC):

http://www.milliondollarjourney.com/income-trust-distributions-and-taxation.htm
 

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Speaking of income trusts, does anyone believe there's any point at all in initiating a position with a non REIT income trust at this time i.e. prior to the 2011 conversion deadline?
Or is it better to wait until well after 2011 when all non REIT trusts would have converted to coporations, any unit price volatality stabilised and the new corp. would have declared at least 2 cycles of dividends?
 

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Speaking of income trusts, does anyone believe there's any point at all in initiating a position with a non REIT income trust at this time i.e. prior to the 2011 conversion deadline?
Or is it better to wait until well after 2011 when all non REIT trusts would have converted to coporations, any unit price volatality stabilised and the new corp. would have declared at least 2 cycles of dividends?
I don't know right now given prices in general, and it probably depends completely on the specific stock in question, but it wouldn't surprise me if many keep on going up; I bought a few in the spring with stupidly high yields. I sold some completely in August when I though things were out of control and there was going to be a correction; wrong.

Now I have some YLO.UN, staggered purchases, and am about up only 1%-2% in terms of price, but have been getting 15% yield for 9 months now. I sold about 50% of what I have in this YLO just recently because I just can't see them keeping it up, and you want to talk about a lot of good will!

I also have the XTR ETF, up ~20% from average purchase price and still paying half decent yield.

That is it for non REIT trusts in my portfolio now and they total about 10% of it. My gut keeps says sell, sell, sell, but I can't let go of those yields. Probably should because the stuff is going to hit the fan at the end of the year for a lot of them I think.

I'm not buying more until the conversion and dust settles for sure; well that's my plan this week. ;)
 

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I would not buy them right now, those that cut the distribution will be hit.

As to the original poster.
I received $640.00 in trust income last year, of that amount only .92 cents
was as a dividend.
The rest was considered as other income.
Short story, dividends are better in terms of taxation.
 

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Cpg

One to take a look at is Cresent Point Energy. They converted from a Trust to a Corp and maintained their yield - currently ~7%. Projected stock price is around $43-45 so there is some capital appreciation possible.
 

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I was thinking at a more general ETF level (XTR, for example).
I am not in a position to buy individual trusts.
If I do enter the trust space, I would go with either XRE or XTR.
Individual trusts are too risky.
 

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I was thinking at a more general ETF level (XTR, for example).
I am not in a position to buy individual trusts.
If I do enter the trust space, I would go with either XRE or XTR.
Individual trusts are too risky.
If you are itching to buy now, I'd say XRE @ 5.5% based on yesterday since it 'should' be less effected 2011; I have some $ waiting for XRE to drop some too. ;). XTR is 7.1% in comparison.

But I'm not sure you should be itching to spend on either right now, but the markets are a crazy thing so how knows really.
 

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Although you're being taxed more on a distribution, i find that the yield is a little bigger so it kind of makes up for it a little bit.
As someone pointed out in another thread; the tax of a .UN distribution completely depends on what the distribution is made up of. Some trusts give out 90+% dividend, some 90+% ROC, some 90+% interest (like YLO.UN), is my understanding, so it depends on the specific one you are talking about, and the tax bracket you are in on what makes most sense.
 
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