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Friday, February 05, 2016
Saskatchewan Justice

The Income Trust Liability Act establishes limited liability protection for investors in Saskatchewan "income trusts", similar to shareholders of a corporation.

Royalty trusts, real estate investment trusts and business trusts, collectively referred to as "income trusts", are publicly-traded investment entities that are used by investors as a way of obtaining a cash flow from investments to reduce or eliminate corporate tax liability on business income.

Income trusts hold property in an active business (an "operating entity") that produces a revenue stream. The operating entity distributes most of its revenues to the trustee, who is the legal owner of the operating entity, in the form of interest, rent, royalties or a "return on capital". The trustee holds these distributions in trust for beneficiaries, also called "unitholders". The income trust is able to reduce its taxable income by the amount of the distributions to its unitholders and only the unitholders pay tax on the cash flow.

Historically, beneficiaries of a trust have not been held liable to third parties for debts and obligations of the trust. The trustee is the legal owner of the trust property and is, at first instance, the party legally responsible for the obligations and liabilities of the trust. However, in situations where the trust property is insufficient to cover the liabilities, beneficiaries may be called upon to indemnify the trustee for amounts in excess of the investor's initial investment.

The Income Trust Liability Act provides that a unitholder of a Saskatchewan income trust is not liable for any obligation or liability of the trustee. The Act applies only to beneficiaries of income trusts and does not have any retroactive operation. In addition, the trust must be a reporting issuer under The Securities Act, 1988 and be governed by the laws of Saskatchewan in order for the beneficiaries to receive the protection of this legislation.

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