Article Detail


Income Funds: Normal Growth Guidelines


December 18, 2006


James G. Morand

The Federal Minister of Finance released on December 15, 2006 guidelines on permitted normal growth for income funds. These guidelines relate to the October 31 proposals released by the Minister, which will tax income funds and their unitholders beginning in 2007 on certain distributions. This tax is deferred until 2011 for income funds existing on October 31, 2006. The deferral is lost if an income fund expands its equity capital beyond "normal growth."

The guidelines outline what constitutes "normal growth," and will allow income funds to increase the amount of their October 31, 2006 equity by 40% until the end of 2007, and by 20% in each of 2008 through 2010. As such, the aggregate increase in equity during the four-year period ending 2010 will be 100%, which should allow for significant growth to occur in existing income funds. These limits are cumulative; to the extent equity is not increased in a particular year, it can be added to a subsequent year's permitted increase.

A further safe harbour will be available for new equity issuances of up to $50 million annually, but not on a cumulative basis.

New equity issued in exchange for convertible debt existing on October 31 will be considered normal growth, as will the issuance of new equity pursuant to a right existing on October 31 to exchange shares or partnership interests for such equity (i.e. retained interests held in operating entities owned by income funds).

Debt existing on October 31 can be replaced with new equity without affecting the safe harbour, as can newly issued non-convertible debt.

The four-year deferral will not be extended (such as to 10 years).

Finance will consider appropriate amendments to facilitate the conversion of trusts back to corporations on a tax-neutral basis.

Below is a link to the Finance announcement.

Guidance Provided on "Normal Growth" for Income Trusts and Other Flow-Through Entities



For further information on this article, please contact [email protected].


Articles By This Author