Income Trusts - Conversion Options

Once an income trust has made the decision to convert to a corporation, there are two structural options available under the tax rules providing for tax-deferred conversions: the exchange method and the distribution (or redemption) method. The exchange method, implemented by plan of arrangement, has become the more common technique.

Income trust structures typically involve the operating business being held in a limited partnership or corporation, with the trust owning the equity in the operating entity either directly, or indirectly, through one or more flow-through entities. The objective of the conversion is to substitute shares in a listed corporation for outstanding units of the income trust on a tax-deferred basis and, typically, to also collapse the former income trust structure to simplify operations from a commercial and tax point of view.