• Characteristics of Various Types of Securities
• The Ins and Outs of Income Trusts
• The Prospectus – Being Informed
• Understanding Mutual Fund Fees
• Stock Options
• Offshore Investments Sold Through Internet Can Wash Your Savings Away

In an economic climate characterized by market volatility and low interest rates, income trusts are a hot commodity. Low-risk investments offer safe, but low yields. Searching for higher potential returns, many volatility-shy investors have shifted their investments to income trusts. Despite a common perception to the contrary, income trusts are not fixed-income investments and returns are not assured. They are not suitable investments for everyone.

An income trust is an entity that holds an underlying asset or group of assets. Most of the income, these assets generate is distributed to unit holders. In contrast, publicly listed companies usually retain and re-invest their earnings, and sometimes pay out a small portion of earnings to their shareholders as dividends.

An income trust structure is formed when, instead of offering its securities directly to the public, an operating entity creates a trust. The trust offers units to the public and uses the proceeds to purchase the common shares and high-yield debt of the operating entity. The combination of the trust’s equity and debt holdings allows the income to flow through to unit holders essentially tax-free.

The income trust structure offers a number of tax advantages to both the operating entity and investors. As well, current market conditions favor income trusts over conventional initial public offerings (IPOs). Investors often view income trusts as stable and conventional IPOs as risky. The reality is that both types of investment carry varying degree of risk.

Risk and Return

Income trusts are not conservative or fixed-income investments – they are equity-like investments that carry varying degrees of risk. Income trust distributions are not assured and depend entirely on the financial performance of the underlying entity. Also, part of the “return” of an income trust may be repayment of your own capital – the money that you invested in the first place.

Just like any security, the quality of income trust investments varies. In order to obtain a stability rating, a trust must submit an application and a fee, and respond to detailed inquiries from the ratings organization. Not all income trusts are rated. For this reason, consider the stability rating along with other pieces of information.

The risk profiles of individual income trusts depend on many factors, including, but not limited to:

• Business risks specific to the industry involved
• Accuracy of projected reserves or future income
• Production and operating risks
• Local and general economic conditions
• Governmental regulation and environmental matters
• Changing interest rates
• Price of the underlying commodity
• Rate of depletion of the asset

If you are considering investing in an income trust, read and understand the prospectus and other documents describing the trust, in particular the risk factors.

Tax Treatment and Regulation

The projected returns and favorable tax treatment associated with income trusts may look attractive, but the factors affecting the tax position of the trust and investors are very complex. The prospectus describes the business of the trust as well as the possible tax consequences.

Units of income trusts are initially sold by way of a prospectus offering in the primary market. Units are then listed and traded on a stock exchange (a secondary market). For securities regulation purposes, income trusts that distribute securities under a prospectus are reporting issuers and are subject to all of the continuous disclosure obligations of other reporting issuers.

Income trusts are sophisticated investments. Make sure you read and understand the prospectus and other disclosure documents describing the trust and the securities.