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Retirement Planning with Grant Hicks
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 Grant
Hicks, C.I.M., FCSI is a professional speaker, co-author and
a Retirement Planning Specialist A leader in
the financial industry, Grant has been helping Vancouver
Island residents plan and create their retirement lifestyles
since 1989. |
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Income Trusts Revisited
For the past several years, Canadians
have enjoyed the benefits of investing into income
trusts through income trust funds. After all year
after year double digit returns in up and down stock
market returns with the exception of last year. Plus
they pay income on a regular basis.
Some people look at it as a category
that is about to burst, like technology stocks did
in early 2000. Article after article in the papers
suggest to cash in, pay the tax and invest
elsewhere.
That makes sense if more than 30% of
your investments are in income trusts. After all, to
reduce risk we diversify. But if you are holding
income trust funds as part of your overall
retirement income strategy in a diversified manner,
then why sell and pay the tax? If you need the
money, then that is part of your plan.
But to start cashing in investments
and pay tax because of some article you read, think
again. Make sure your decisions are based on your
own personal retirement planning and decision making
process.
We cannot control stock markets,
economies or even news stories, but we can control
our plan. As with all investments, income trust
funds are not without risk. Often, yields for income
trusts can be much higher than for bonds or other
fixed income investments.
Most income trusts are based on
businesses that are stable, mature, and have a
predictable cash flow. These characteristics allow
much of the cash flow generated by the business to
be distributed rather than reinvested.
Also attractive is the tax efficiency
of income trusts. Distributions from income trusts
are taxed differently from dividends which will
change in 2011. A portion of the distribution is
often treated as a return of capital, and the taxes
on this portion are therefore deferred. This
deferral can reduce the unit holder's adjusted cost
base and the amount of capital gains he or she pays
when selling the units. These regular cash
distributions (usually monthly or quarterly) are
what make income trusts and income trust funds so
attractive to investors, especially those seeking
income in their portfolios.
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