Canada’s income trusts will be allowed to grow over the next four years without jeopardizing their tax-free status, but only within strict limits, the Finance Department said late Friday.

The department also confirmed that trust investors will not face any capital gains taxes when an income trust converts to a corporation.

The details are contained in a new guidance policy issued by Ottawa that spells out how trusts will be treated in the transition period before they all face taxes.

Existing trusts will be allowed to double their equity capital by 2011 — 40% in 2007, and 20% in each of 2008, 2009 and 2010.

As well, the growth of the trust through the issuance of new equity cannot exceed $50 million in any year.

If a trust exceeds the “safe harbour” thresholds, its four-year tax deferral will be rescinded and it will have to begin paying taxes on its distributions immediately.