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What is a Trust Company?

A trust company is described as a financial entity that acts as agent and trustee in the management of trusts, properties and monies. Trust firms oversee funds, maintain records, settle bills and disseminate assets.

This article includes an explanation of income trusts in Canada. It also explains the principal differences between a trust company, bank and credit union. Finally, it gives a brief explanation regarding the concept of Discretionary Trust.

What are Income Trusts in Canada?

Income trusts are considered equity investments but not fixed income securities. These trusts share many of the risks that are natural in stock ownership but more frequently, not the same rights and duties concerning corporate governance and trustee responsibilities. Investors in Canada cannot depend on the provisions in the Canada Business Corporations Act. Investors do not have the right to nominate and vote for a board of directors. Every single trust has a so-called operating risk based on the primary enterprise. The rule is "the higher the yield, the higher the risk."

Additional risk factors include the following:

  • Valuation -Distributions include return of capital that the investor is receiving excess capital back from operations of the trust. A Trust Unit with high Return of Capital distributions will often attract a higher market value because the Return of Capital portion of the distribution is tax deferred until the unit is sold.

  • Lack of income guarantees which is similar to a dividend paying stock. Income trusts do not guarantee minimum distributions or even return of capital. If the business starts to lose money, the trust can reduce or even eliminate distributions; this is usually accompanied by sharp losses in units' market value.

  • Exposure to interest rate risk since the yield is one of the main attractions of income trusts. There is the risk that trust units will decline in value if interest rates in the rest of the cash or treasury market increase. This risk is common to other dividend income based investments such as bonds.

Interest rate risk should also be considered. Many trusts hold long-term capital assets like power plants and pipelines. A substantial portion of the excess income that can be distributed is obtained from a disparity between the life of the asset and the life of the financing associated with it.

Pls see link:

What are the Differences between a Trust Company, Bank and Credit Union?

The differences are regulatory in nature. Canada's banks are federally incorporated and regulated pursuant to the Bank Act. The Bank Act governs three distinct types of banks. Schedule I banks are domestically owned. Schedule II banks are subsidiaries of foreign banks. Schedule III banks are foreign banks with branches in Canada.
Unlike banks, trust companies can be incorporated and regulated at either the federal or the provincial level. By law, only trust companies are allowed to provide trustee functions. Banks can do that only through a separately created trust subsidiary. The other difference is that a bank has full commercial lending powers, whereas trust companies must have more than $25 million of regulatory capital to receive full lending powers with the approval of the Office of the Superintendent of Financial Institutions.

Credit unions are different from banks and trust companies in that they are fully provincially regulated. They are regulated by provincial ministries of finance, the Credit Union Central and the provincial deposit insurance corporations. Credit unions are owned by their members and are typically established to serve a particular group of people based on a geographic area, ethnic background or employer.

Pls refer to:

What is Discretionary Trust?

In Canadian law, discretionary trust means that beneficiaries and their claims to the trust fund are not permanent. It is determined by the conditions established in the trust instrument. If the discretionary trust is related to legal wills, it is normal for the person trying to make the settlement to leave behind a Letter of Wishes for trustees to direct them as to the preferences in the exercise of their discretion. However, these letters are not legally binding documents.

Discretionary trusts can be optional in two aspects. First, the trustees usually have the power to determine which beneficiaries (from within the class) will receive payments from the trust. Second, trustees can select the amount of trust property that the beneficiary receives. Although most discretionary trusts allow both types of discretion, either can be allowed on its own. It is permissible in most legal systems for a trust to have a fixed number of beneficiaries and for the trustees to have discretion as to how much each beneficiary receives. It is also possible to have a class of beneficiaries from whom they could select members provided that the amount to be provided is fixed. Most well-drafted trust instruments also provide for a power to add or exclude beneficiaries from the class. This enables the trustee's greater flexibility to deal with changes in circumstances (and, in particular, changes in the revenue laws of the applicable jurisdiction). Discretionary trusts normally provide for a discretionary distribution of income only.

However, but in some cases the trustees also have a power of appointment with respect to the capital in the trust. Discretionary trusts are usually classified into two forms:
  • Exhaustive- Trustees must distribute all income accruing to the trust fund.

  • Non-exhaustive - Trustees have a power to accumulate income.

Plse refer to: About Discretionary Trust

Maximizing Trust Benefits

Readers have been given a view of components of the trust company and the concept of discretionary trust as well as income trusts. It is now possible for consumers to find about possible benefits to enable them to make full use of these advantages. The key factors for consumers are to exercise prudence and seek the help of the federal government and private sector entities dedicated to the enhancement of living conditions of Canadian citizens.

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