High-Yield Canadian Royalty Trusts: What's the Catch?

There are several Canadian royalty trusts which trade on the NYSE.

Advantage Energy Income Fund (AAV), based in Calgary, currently yields 11%. Its monthly dividend payments have declined from $0.23/unit in 2004 to $0.12/unit in 2008.

Baytex Energy Trust (BTE), also based in Calgary, currently yields 7.50%. Its monthly dividend payments have increased from $0.16/unit in 2006 to $0.20/unit in 2008.

Enerplus Resources fund (ERF) currently yields 10.70%. Its monthly dividend payments have greatly fluctuated between $0.20/unit and $0.52/unit since 2000.

Harvest Energy Trust (HTE) currently yields 14.40%. Its monthly dividend payments have fluctuated significantly less than other trusts – between $0.29/unit and $0.36/unit since 2005.

Pengrowth Energy Trust (PGH) currently yields 13.50%. Its monthly dividend payments have also fluctuated significantly less than other trusts – between $0.19/unit and $0.23/unit since 2004.

Penn West Energy Trust (PWE) currently yields 12.20%. Its monthly trust distributions have fluctuated between $0.29/unit and $0.35/unit since 2006.

They do look appealing to investors because of their high dividend yields of 10%-15% annually. Not only are the dividends paid monthly, which allows for a better dividend income compounding, but some of them also allow investors to purchase shares through DRIPs at discounted prices. Unlike most other “normal” stocks, dividend payments from the Canadian income trusts tend to fluctuate a lot.

Most trusts are engaged in oil and gas production and have average reserve lives of about 10 years. Unlike similar U.S. trusts, however, Canadian Royalty trusts can purchase new assets and make acquisitions, which could extend their lives forever.

The Canadian government applies a 15% non-resident withholding tax on distributions to U.S. investors. U.S. investors can apply for a refund for at least a portion of the amount withheld. Many Canadian trusts provide information for income tax filing instructions for U.S. unitholders on their Websites. Nevertheless, it can be a complicated process at tax time, thus U.S. investors should consult with a qualified tax advisor before investing.

Like any other investment that offers above-average dividend yields, there’s a catch: The reason why CanRoys are able to pay huge dividends is because they are not taxed at the corporate level and pass all of their income to shareholders. This is going to change in January 2011. Since many trusts pay all of their income in distributions to unit holders, they expand their operations through sales of additional units. The uncertainty related to the 2011 tax law changes make it difficult for trusts to expand. For example, trusts that were formed before October 31 2006 cannot sell more than a certain amount of new units (stock), otherwise they will lose their preferential tax status even earlier than 2011.

Under the existing provisions of the Tax Act, income trusts can generally deduct in computing their income for a taxation year any amount of income that they distribute to unitholders for the year. According to the new bill, introduced in 2006, Income trusts will not be able to deduct certain portions of their distributed income (referred to as specified income).

Pursuant to the draft legislation, the distribution tax will only apply in respect of distributions of income and will not apply to returns of capital. Some trusts have substantial tax pools that could be applied to reduce the impact of the new tax for several years post-2011.

Under the new legislation the proposed tax will be 29.5 percent in 2011 and 28.0 percent in 2012, based upon a 13 percent provincial tax rate and a federal tax of 16.5 percent reducing to 15 percent in 2012. Add this to the 15% tax that U.S. investors already pay on income trust distributions, and the higher yields might not look so good.

Under the budget released by the Minister of Finance on February 26, 2008, the 13 percent provincial tax will be replaced under an allocation formula with the applicable provincial income tax rates for each province in which the income trust has a permanent establishment. Trust are likely to continue to take advantage of growth opportunities with an increased focus on assessing international acquisition opportunities given that revenue from outside Canada will likely not be subject to the new tax. In addition, trusts will likely continue to carefully manage their substantial tax pools to mitigate the impact of the new tax on our unitholders.

Comments

[manusceo]

This is old news since October, 2006.

[Rokjok777]

It's still useful for those of us who weren't aware. Have been an owner of ERF for a while, seems OK

[archman82011]

The Canadian trusts are by far some of the best investments out there right now, and will continue to be.

Why?

The issue regarding the 2011 change is going to be moot for many of the trusts.
Many trusts, both oil and gas royalty, business, etc, have many different ways of holding their payouts steady if not increasing them beyond 2011. Beyond the "pools" cited, there are trusts that have huge amounts of "depreciation&quo... they are going to claim, such as the pipeline trusts.
Power trusts and REITS are not affected at all by the Canadian tax change. (I happen to own a few of those to)

Plus, as of right now, the 2011 tax change is not even a done deal.
It may all be reversed.

There are trusts however that have no weapons to use against the tax change, thus should be watched carefully if one owns them.

Best.

[biomedlives]

I believe that US holders of these trust units can apply the 15% tax withheld as a foreign tax credit on their US federal income tax returns. As always, check with a qualified tax advisor.

[archman82011]

I just want to add one further comment:
There are many Canadian trusts out there, not just Oil/ Gas Royalty trusts, which most people tend to focus on.

There are business trusts, power trusts, REITS, infrastructure trusts, etc, yielding anywhere from 6.5& to 12.%.

Though I am admittedly biased because I own about 9 of these trusts right now, do not be fooled by any doom and gloom articles.

Please see my post above.

Best.

[Jack Yetiv]

I expect that several--if not most--of the trusts mentioned above, will report record earnings in Q2, which will begin to be reported next month.

In addition, I think the reports will indicate that future production, which was being hedged last year at $60-80, is now being hedged at $130 or even more, meaning that even if oil DROPS from $140 to say $120, earnings in 2008 and 2009 will actually INCREASE.

My favorites are PWE and AAV, and I look for 10-20% moves on both in the next 30-60 days.

Jack Yetiv

[User 114790]

Is the income from these trusts taxed as ordinary dividend or income?

[bhakta]

I have most of my money in these trusts, as I appreciate the monthly income and the relative stability of the shares. I also expect the energy trusts will be showing great earnings as they start selling oil and gas at the current prices, not those or one or more years ago. I love the DRIP plan of PGH, which has given me a 25% plus return in the last 12 months.

[BrunoT]

I think there may also be a positive currency exchange benefit for US owners if the dollar drops against the Canadian dollar, which I believe it has done in recent years.

[archman82011]

Trusts are taxed twice:

15% Canadian flat tax- which is recoverable at tax time, so yes you get it back when you file the correct tax form.

15% US dividend tax.

Trusts held in IRA's are treated differently.

[Georealist]

The US "equivalent" of the Canadian Trusts aren't trusts at all.. they are Publically Traded Partnerships (commonly referred to as MLPs)...this is even beyond old news...Is this a makeup paper for High School???
Nice picture...am sure Mom likes it too.

[Pilot Guy]

There is no free lunch here. The trusts are valued efficiently taking into account their yield. If you were an investor in the vast majority of these high yielding trusts last year at this time you would be down in value significantly.. even after dividend yield.
Very few high-yielding trusts are ever rated as 4 or 5 star performers.
I perfer to buy the index fund of Candian Trusts (XTR - up quite smartly in the past 12 months) - if you cherry pick - good luck with that

[licketysplit]

funny thing is i am underwater on my newport taking into account my distribution but won't be for long - i am somewhat baffled by the value some of these trusts - i have to believe that the 2011 tax changes have driven this - non-canadian investors have dumped the units on mass due to the 2011 tax that will cut returns by 25% or so .. and Canadian investors are simply confused by the tax systems and probably don't appreciate that when held in your taxable (non-pension account) that you will be getting a tax credit for any corporate tax paid... this imho has created an unbelievable opportunity for resident of canada and in the case of newport i see significant catalysts to the upside in free cash flow - i.e. increased natural gas drilling due to price moving from about $4 to $13 for nat gas re their oil service companies - i like the diversified conglomerate heavy insider model - in about 4 years my units will have been fully paid off and i will have a peice of these heavy insider ownership busiensses for free...

[licketysplit]

oh and one other comment - the 2011 tax IS a done deal believe me there is no going back

[chazzzzz]

OK, the divedend disapears. Whats left ? In the case for Pwe it is about $4 a share. Now strip out the new taxes. 10 - 20 - 30 % ? Now a Pe multiple of 10 X PWE with no divs = What ?

[Pilot Guy]

OK.. take Newport.. one year stock performance - down 45% - two Star Rating at Globefund - Two year stock price down over 60%.
2007: Loss: $26 million on $569 million in Sales.
The year before loss: $23 million on $372 million sales.
Guarantee on future Dividend payouts - Nada - they can be cut at any time and several Trusts have done so this year.
Take a flyer - hope for a takeover - pray it happens before 2011.

[Vortexx]

It's my understanding that they are building up tax credits that will prolong their distribution level for several more years. The other is that they may change from their present incorportaion to a more normal one that Americans are used too, also again changing what the provinces can take.

[OJO Zafado]

Pilot Gee, Eh?
Your XTR post is quite interesting. As near as I can tell it pays divs out quarterly rather than monthly. Is that correct? Your observation that it has done quite well as of late is true, looking at a chart. The problem I find is that doing the math with data I am able to conjure up from online resources, the dividend yield now seems to have dropped below 7%. A nice pop in the price seems to have resulted in a lower current payout on the % basis. This ETF trades very thinly on the US Pinks as ISHAF . I had a nice gain in ENY a US sponsered ETF that invested in Canadian oil sands and O&G trusts on some rotational basis tied to the price of crude. It paid no dividend at all but for it's Dec distribution. I have owned the EIT.UN or EVDVF if you will for some time. It seems to me it is basically the same product as XTR, with a fund manager doing the Cherry picking. The yield is significantly higher it appears than that of XTR/ISHAF and is paid monthly. While not steady in price it seems to present buying opportunities below the $5.90 level quite often while swinging occasionally into the +$6.15 range. The yield in this price range has consistently been 12-14%. That's net 12% even for US residents, even those who hold it in a tax sheltered account and lose the Foreign tax credit. As far as cherry picking goes I am up 40% in ATBUF Acadian Timber trust. We did a little better in selling 4 partial positions of FDG Fording Coal into it's recent ramp to the sky. While I own all the trusts mentioned by the author, with the Exception of ERF, I am considering a new position in it as they have now sold the dragging oil sands business. I had previously owned it a couple of times and done reasonably well with it as well. I have recently added to PVX and PGH on dips. One point no one blogging here seems to have touched on is how the 2011 tax change will actually benefit US unit holders of CanRoy Trusts in tax sheltered accounts, under the current tax treaty. There are always the unintended consequences of these things. It could be that there will be a rush by US financial planners to put their tax sheltered clients into these trust units on the very eve of the much gloom and doom advent of the new taxable structures of these Trusts. There will be the tax pools sustaining pay outs and the entire distribution will be relieved of the 15% US with holding.

[Pilot Guy]

The argument that I was making did not reflect on all trusts. The article suggested that some HIGH YIELDING trusts were like magic – ignoring the perfect market theory.
XTR pays out quarterly – other ETF’s that cherry pick the universe of available stocks are subject to the same underperformance that has been documented in study after study.
I kinda like Buffet’s advice – buy a universal ETF.
EIT.UN is a fine choice that makes it look attractive with the run-up in crude prices. If that segment declines.. it will crater. It is not a substitute for a broadly representative basket of Trusts like ATR.
ERF is a fine trust – it only yields 5.04% and is a 4 star stock
AND.UN yields 7.6% and is a 4 start stock. These are not the trusts that I or the article was discussing
I am merely suggesting that investors do not chase outlandish Trust yields greater that 12% and not expect nasty surprises such as stock price decline and payout diminishment or suspension. Risk = Return.. you may make out like a bandit.. or lose everything.

[jackh]

IN January a Canadian can hold his trust units in a new (for us) Tax Free Savings Account. The 10% or 12% dividend can then be withdrawn tax free. No income tax at all. As people realize that this is way better return then interest from regular savings the unit values should bid up nicely resulting in a capital gain for early investors..... if held in the TFSA also tax free.

[genesisgkh]

Correction of Pilot Guy
ERF yields 10.6%

[longoil]

The 2010 Canadian Income Trust legislation is not cast in stone.
The current minority Conservative has lost much of its popularity and has been embroiled in a few scandals recently. The Liberal party will most likely capitalize on the dissent around income trusts and implement a more equitable income trust structure (or even the old structure).

The only changes the income trust structure in Canada really needed was to prevent companies like Bell Canada and Telus which have no legititmate reason to be income trusts, other than to use the favorable tax treatment to make up for their incompetent management.

[jackh]

Legislation has been passed. Go to the ING web site. They are getting ready for January.

Liberals have proposed a massive carbon tax..... huge voter backlash. I suspect another 18 months or so until they hash it out and get ready for an election.

[OJO Zafado]

Guy
Warren Buffet thinking is how I ended up buying Acadian Timber the day after the Halloween massacre for less than US $8. There is no magic in yield when an asset class is beaten down. The trusts that participate get beaten down too, to a point. The thing with natural resource trusts is that they still have the resource even in a down market. Look what happened with Grand Cache Coal. Not a trust but some drastically undervalued resources! I do not think the other forestry trusts like CFX and TWF are in much danger of cratering. TWF is a weak one alright but now they are evolving into real estate development. Trees continue to grow larger while harvests are reduced. The assets become more valuable even as the price of the trusts decline. After making it's lows CFX has been standing like Stonewall and his Virginians at +/-$11.50. The dividend has been cut from 16 cents to 12 cents and still there is a 12% return there. Within 18 months of the closing ceremonies in Bejing the 2010 Vancouver Winter Olympic games will kick off . I think there will be enough of a mini boom to support both of those BC based trusts. In the natural resource arena there will always be a demand for ever more computer and toilet paper even if the newsprint business is falling off. The advent of OSB and now wood pellets for home heating means there is an evolution going on in forestry products that should bring "waste by product" down to near zero. The globalization of the world still relys on the lowly wooden shipping pallet as it's foundation. Now we see Atlantic Power falling victim to the utility weakness and high fuel costs. ATP may be a great buying opportunity at this price. As a stapled unit it is particularly advantageous for tax sheltered accounts for US holders. These seem not to be as dangerous for their 10-12% yields as say the recently issued C-PrM, which is just dropping like a rock while yielding over 9%. Your observation on oil prices is correct. Yet there seems little likely hood that oil will collapse. The world's largest economy is just a dead duck with an impending currency crisis. On average more than $50 billion US dollar equivalents are invested from abroad every month in the US. The trade deficits are rising as well as the national debt and current account deficits. When this money drys up or diminishes significantly it will be the intrinsic value natural resource assets that will hold up. If they pay dividends in foreign currencies they will fare even better. There were the tax stimulus rebates, and then the Bear Stearns bailout. Now the US economic policy makers are sitting back in Shock and Awe, as the world markets are correctly perceiving that as far as the US dollar and economy go, the genie is out of the bottle. This has not stopped me from lightening up just a little in BTE! Another Canroy trust "fund" that I find interesting is KYE. In addition to Canroys they own a whole diverse group of MLPs as well as US energy trusts. The +7% dividend is pretty solid. I appreciate your input and opinion on Risk=Reward. Still even in the Halloween massacre very very few lost "everything"... Owning Canroys can have a lot of risks in terms of currency, weather, economic conditions, uncertain tax policy, backwardation and contango, etc. I would not be buying the Swiss Water Decaffeinated Coffee Income Fund any time soon. But an ice maker like the Arctic Glacier Income Fund may be good bet on a long hot summer with the thermostats on those air conditioners getting turned up? If Zimbabwe is the model for the future of South Africa then all things natural resource related in either Canada, Austrailia, Brazil or Russia will be going to higher intrinsic valuations in the medium term.

[oilsands]

chazzzzz, the dividend does not disappear in 2011. The tax is on the dividend. Remember, under the foreign tax treaty, the amount collected by the Canadian govt is a tax CREDIT, not just a deduction.
Very nice at tax time. Don't know if the provincial tax will be treated the same way. For US citizens, the 15% Canadian withholding effectively reduces the net dividends so 14% becomes 12% - until you file your annual taxes. Then you get that withheld amount back in the form of a credit.
The only US corporate sector paying large dividends are shipping firms, and they are certainly volatile, as well.
As to the author's comment implying that the dividends of "normal" stocks do not fluctuate, that is asimply ridiculous.

[oilsands]

P.S. When taking the foreign tax credit, one need not apply for a refund, it is just a paper credit, supported by forms sent to you by the royalty trust. No need to apply to the Canadian govt. Very simple, actually.

[archman82011]

These posts are all great and informative. I would just like to make one more comment. I currently am invested in a bunch of trusts.

The key to buying trusts should be the same as any stock. Sure, you could take a flyer on a stock and hope the price direction goes the way you want it to.

When I buy a trust I apply both the same fundamental and technical analysis I use when buying a US listed stock. Is the trust sound, earning revenue, able to maintain its current payout, and increase it in the future, etc.??

On the technical side, I typically do one of two things. One, I buy trusts that are technically strong, in uptrends, etc.
Examples of this are WTE.UN, PIF.UN, CAR.UN, all of which I have owned for a few years.

Caveat: Ofcourse unforseen earnings announcements, misdeeds, nuclear war, etc, could derail that, but investing always has risks.

Or, I buy a trust that is completely sound in every way, shape, or form, however the market has seen fit to destroy its share price. thus providing me a buying opportunity.
Examples of these are: APF.UN, CWI.UN, and GMP.UN. GMP is what I consider to a lesser extent to be the Goldman Sachs of Canada IMHO.

I own all of those trusts I mentioned. Yes for many trust holders, who have owned trust since before the OCT 2006 tax announcement, many of them have gotten killed even more, yet many of them have come back and are even higher than ever.

Investing is risky, its all part of the game.

On a side note I actually just bought my first US stock in over 16 months, now that it has a dividend established : PM. For all those that are against smoking, etc, I hope you will not hold it against me.

[licketysplit]

just another comment on conglomerate trusts and npf-un.to - valuation on these units are imho way irrationally depressed becuase (a) tax confusion, and (b) market sentiment, and (c) analysts have pissed all over the npf conglomerate vehicle, by applying 20% or 30% NAV discounts - i didn't listen to analysts when they told me to buy nortel at $120 pre-reverse split and i'm not listening to analysis when they beat up on some vehicles/issuer becuase they are not getting enough investment banking business from them... if i can buy something at 4x cash flow with heavy insider ownership and which in my personal assessment has significant upside catalyst to cash flow i will buy and i will buy it all day long - there is alway a chance something can blow up though the diversified stable of busiensses obviously helps mitigate that - its a calculated risk that is for me is within my risk parametres.

also these guys ipo'd at 10$ and 9$ a unit, and bonds were issued at $100 face value all within the last three years - there has been nothing fundamental that has changed that should precipated the value decline of this magnitude in both the units and the bonds...

as indicated i am still marginally underwater BUT after talking with management and scrubbing the financials and seeing the insider buys and the issuer buy back i think i'm starting to realize that there really is nothing i am missing and that this thing is simply mispriced.

[Blind Owl]

One other caveat about the 15% foreign tax witheld by Canada:
You don't get a credit for 100% of the tax withheld, you only get a proportion based on the proportion of gross foreign income to gross total income.
And form 1116 (Forign tax credit) is a bitch to fill out.

[burncapital]

Just want to make a subtle yet very important point regarding the author's article. PWE distributions have not fluctuated. The trust distributed CAN $0.34 in all of 2006, 2007 and 2008 with NO fluctuation or variance. The variance occurs when the distributions are paid to foreign investors which makes it subject to currency conversion.

That's another reason why I like this group. Not only are you long oil and natural gas, but you are also making a play on the weak dollar.

I don't follow the other names as closely as I do PWE but I suspect the same is true for those as well.

[mythoughts]

Blind Owl: Forget about Form 1116 and just include the foreign tax on your 1040 form. Who is going to question this?

[secmaven]

The energy trusts are wasting assets! As the dividends are received you are just getting your capital back and paying tax on it besides. Short term price swings mask the ultimate demise of the business of these energy producers. The big money here is made by the folks who sold the gas/oil in the ground to the trusts. Is investing for the long term in canroys dumb or what?

[ASAP]

Following up on Blind Owl's comment about claiming the Foreign Tax Credit on U.S. returns, he is right about the "proportion" limitation of credit you get in any given year. However, any credit you are not allowed to claim is indefinitely carried forward for likely eventual use in future years, so it is not necessarily lost by any means. As for the complexity, the calculations do look arduous, making use of computerized tax software highly recommended.

[RussellUpsomgrubb]

It's my understanding that if this tax change does become law in 2011, most trusts will just convert to MLPs anyway. PWE has set aside a substantial amount of money for future taxes, which resulted in a $0.77/share loss in the 2nd quarter of 2007. PWE is also involved in a program to recapture C02 which helps to mitigate its increase in provincial taxes in Alberta, home of the oil sands.

[User 217910]

Once CANROY income is taxed by Canada, CANROYs will no longer withhold the 15% and Canadian taxes paid by the trust on its own income (as opposed to the current 15% tax imposed on the dividends of shareholders) will not qualify for a US tax credit and
CANROY distributions will be taxed in the US like any other dividend.

There is talk about "tax pools" and how that may change things somewhat. That has the potential to eliminate Canadian tax on income of a CANROY, rather like a loss carryover. However, even if the CANROY pays no tax due to tax pools sheltering its income, whether or not the distributions will be taxed by Uncle Sam remains to be seen.

There is a tax concept of "earnings and profits" that applies to whether or not dividends are taxable distributions to a shareholder. The US and Canadian tax regimes are very different, and Canadian trusts aren't required to compute earnings and profits under US rules -- so who knows if the distributions will be taxed in the US or not? If a foreign corporation doesn't keep records of its earnings and profits in accordance with US tax rules, ALL of its distributions are probably taxable as ordinary dividends.

[gamma]

there is good and also terrible info concerning trust in this forum.....if u want the very best info....ck out canadian edge by roger conrad , he knows more about trust than anyone out there.......

[ErnieMontague]

There are a number of issues here. Taxation of Canroys by Ca can be deducted as a foreign tax credit, which means you deduct it from your income..... It is not a tax offset. You don't get to reduce the amount of TAX you pay by the same amount, you reduce the amount you are TAXED ON.

Paperwork on ALL canroys can be difficult. If you buy and sell you need to keep track of ALL of your transactions and adjust the basis according to your return of capital in dividend, length of holding, and number of shares. If you buy one, hold it, don't buy and sell for dividends, you will get a surprise on the tax paperwork. Further the dividend can consist of dividend ( qualfied) and return of capital. Some trusts, like PWE have been paying out 100% dividend, some have not.

So buy and hold, beware of the tax implications of multiple trades, and keep track of ALL dividends, as your sale price will reflect a capital gain that must be adjusted by adding the return of capital dividends to the basis.

I hold PWE and HTE. The PWE is naked, the HTE is hedged with calls sold against the position. I also hold SJT ( US trust) and just sold my HGT ( the appreciation was over three years of dividends, and I could not justify holding onto a large long term capital gain.

[ErnieMontague]

IF you want to write off the canadian tax as an offset, it can only be done in proportion to the amount of depreciation of physical assets, a difficult calculation.

[jalo]

If you own 4000 shares of PBH and the income is close to $10,000,how will this income be affected by the 2011 tax in Canada ???

[jalo]

If you own 4000 shares of PGH and the income is $10,000,how will this income be affected by the 2o11 Canada tax change ???

[d_teller]

A lot of confusion here --- Some of the correspondents are Canadian, and some are U.S. tax filers....tax credits are for taxable accounts in the U.S. Up to $400 of foreign taxes withheld by countries that have tax-treaties with the U.S. are simple to report on a 1040. Larger amounts need 1116 filled out, it's detailed, but not difficult.

PGH is going to be a problem if it's still being held in a U.S.tax-sheltered account. PennGrowth Trust has filed for conversion to a MLP, which means a K-1 will be sent after the 1099r's...and the problem in that - is the UBTI (Unrelated Business Taxable Income) which is in Section 20 code V of a K-1. For any owner of a tax-sheltered IRA (Roth, traditional. SEP, Chapter S), etc.) the limit on UBTI (for all accounts combined) is $1000.00...or the disqualification of the shelters. The fiduciary of the shelter needs to file the forms of series 900, and the taxes may not be paid by the owner, but must come from the shelter.

(Many "Hot": ETF's, such as DBA, GLD, IAU, SILV also file K-1s, and commodities aren't allowed in a tax-shelter...only U.S. Treasury minted coins, no bullion, corn, hogs, furs, art, etc....they're considered collectibles. DBA doesn't hold, but it trades futures, and last year's K-1 showed income from straddles and etc., about which the IRS could care less in the IRA, but UBTI can disqualify a tax shelter.) But I digress.

The second thing about MLP's and LLC's and other K-1 reporting types in a shelter...all of the Return of Capital (which changes the short term dividends to a long-term cap gain by reducing the security's basis or cost... is "lost" in an IRA, because withdrawals from IRA's are taxed at marginal rates. As with the tax credit for foreign taxes, the depreciation losses, and cap loss carry-forwards... which are useful in a taxable account, but useless in a tax shelter.

Some of the CanRoys have income from U.S. operations, which will not be subject to the new "Harper" tax rules; Others will be taken out by Venture Capital (PrimeWest Energy, e.g.), when their value declines. Others have such large cap loss carry-forwards, that even under Cdn. corp. tax rules. they won't pay excessive taxes. Others are in Transfer Tithing: Pembina Pipeline, WestShore Terminals, they get paid for passing the stuff along. Others, such as TimberWest are being eaten by Pine Beetles; Still others manage medical clinics in the U.S. and another (U.S. owned, but Cdn registered) has funeral services; while others transport kids to schools or build transport busses. There is indeed a wide variety.

Canadian REITs won't be affected by the new taxation...and unless Congress changes the laws, the dividends are still "qualified" here...providing the holding period is followed, and the Foreign Tax credit applies regardless of the sompany's source of income. These, again, are useless for sheltered accounts.

Moral of this story: many CanRoys are worth while...their prices are affected by their business sector's prospects; there are a lot of interesting investments, but they aren't risk-free! The enthusiasm and skepticism in the postings above are really amusing.

[User 56631]

It's not true that Canadian trusts pay out all of their earnings. The payout ratio fluctuates and is often below 70% unlike the U.S. trusts which pay 90% of earnings. Thus the retained earnings can be used to buy new properties unlike the U.S. counterparts. However, the Canadian trusts must use a partner to take some of the risks of new drilling on their properties.

[PNW]

Couple of points. In 2011 Canada will no longer withhold the 15% they currently take (and you file to get part back). Virtually all the energy trusts sell a significant portion of their production (nat gas). For example, 50% is sold on a futures contract at $6 unit. Today that same gas trades over $13. So, there is an expection of significant cash/earning flow as old contracts expire. Last point is several trusts have announce they already have enough tax credits in place to be tax free well beyone 2011.
FYI, unlike US Trusts, the Candian Trusts buy new assets to replace depletion. In US Trusts just end.

[PNW]

Generally you ignore "earning" for the trusts and look at free cash flow and dividend coverage from free cash flow. As trusts who will be taxed in 2011 they do not want to show a profit.
FYI, the trust are required to show their financial reports just as if the 2011 tax increase was currently in place; but they add back to cash flow the tax liability.
"Known Reserves" is key to understanding the energy trusts. It can be express in volume of know oil/gas in ground or by that number divided by expected prodution to give you "Years of Reserves". Most often the years of reserves range from 8 to 13. But, they do bid on new leases and add to their "known reserves". The point being, not just a dividend play, there is real potential for increase in stock price as the know reserve goes up in value along with energy prices.
When decididng between PGH, PVX, COSWF, PWE, HTE, DAYYF, reasearch the the current value for the assets...several trade at 75% of the value for the know reserve...

[metaforge]

Looks like a careful cut & paste job. Check out the last sentence:

"In addition, trusts will likely continue to carefully manage their substantial tax pools to mitigate the impact of the new tax on **our** unitholders.

Good work kid. Way to copy & paste old news.

[river3582]

So what is the bottom line. I have read all of the comments and there seems to be some confusion regarding the new taxes or if there will be new taxes. I haven't heard about deducting taxes from your income. It usually is used to offset US taxes, using form 1011 if you are married and your foreign taxes are over $600.
This was a good format.

[PNW]

To: River
Suggest you pick one of the trust finds, ERF, PWE, PVX, and go to their "Corporate Website". You can find the site using google search, or go to one of the many financial sites an you will find the link to the corporate site. Each of the companies do a good job of explaining how the firm is impacted by the 2011 tax change and all the the details needed by an investor. Most even give you the chance to send an angry letter to a politician. This site is used by both US and Canadian investors, and each has different issues.

General Comment: Alberta significantly increased it's extraction tax recently, which had a major impact on the energy Trusts. This topic was covered well in the "Globe" newspaper which if free on-line and has an investor site "GlobeInvestor.co... which is very affordable (I think $13? a month)/ GlobeInvestor does a very good job covering Canadian equities and offers the best search engine I have found for researching Canadian stocks that do not trade in the US.

[paultaut]

I don't care what the Tax rate is/will be/may be.

The underlying fact remains that the Oil Trusts have an average life of 10 years and are keeping that steady while other oil companies are hard pressed to find oil around the Globe.

They are oil companies regardless of they they are called now. They have vast unexplored assets and they are very,very unlikely to go the Chavez route.

Each should be treated according to underlying assets, even if those assets are well hidden by management to prevent unsolicited takeovers.

The Canadian Dollar will eventually trade well above the US dollar.

[JOE P.]

IT'S THE ROI THAT COUNTS. HIGH DIVIDENDS DON'T MEAN MUCH WITHOUT AN ACCEPTABLE ROI.

[JOE P.]

IT'S THE ROI THAT COUNTS. HIGH YIELD WITHOUT ADEQUATE ROI IS NOT A GOOD INVESTMENT. THERE ARE CANADIAN TRUSTS THAT GIVE YOU BOTH---YIELD AND ROI.

[bobh79]

The 15% 'Foeign Tax Paid' is listed on line 51 of the 2007 1040.
Just follow the instructions as to the need for Form 1116.
'river3582' on 7/2, above, has it right.

[The ragman]

The 15% Canadian tax can be recovered on your federal tax return, but not in an IRA. The 15% from 14% on pgh still leaves about 11%

[PNW]

Take a look ag BGR, a closed end fund trading at over a 17% disocunt to net asset value today. It holds many of the trusts.

[morgan77]

Great article on oil trusts today on greenfaucet. Talk about how its the perfect way to protect yourself from inflation, how the government created this economic mess, and why old sands will do well long term- hedging. check it out.
www.greenfaucet.com/th...

there's a part II coming as well-- discussion about the risks of oil sands and taxes.

[AmesTiedeman]

These trusts are superb for monthly income. PGH, PWE, HTE and PVX are my 4 favorites.
Do your own research and you decide.

[donaldj]

I have the same four stocks, great income but poor asset increase, I have found that thesse stocks are tied to the financial market TNX and where ever the financial go so goes these four stocks. donaldj


On Jul 19 01:18 PM Ames Tiedeman wrote:

> These trusts are superb for monthly income. PGH, PWE, HTE and PVX
> are my 4 favorites.
> Do your own research and you decide.

[AmesTiedeman]

Donald, I think HTE at under 19 two days ago was a gift. I was surprised someone asked only 18.90. Not many shares went at that price and you can see we are back over 20 already. What is keeping these issues down is the proposed tax changes that look to be coming in 2011. This will create additional tax revenue for the Canadian Government at the expense of the Oil Trusts. If the legislation is changed or amended you could see a 50% rise in the value of the Trusts. Monthly dividends are great. The compounding affect is fantastic too.

[PNW]

I think it is more accurate to say "tax changes" rather than "proposed tax changes". The changes will take effect in 2011. I like HTE but be aware they have stated a desire to greatly expand their refining capacity. The proposed investment is $2 Billion. They are actively looking for a partner. This is not necessarily a negative, but it does create some uncertainty. It is not a pure energy in the ground play. I like ERF and Canadian Oil Sands. CIBC just published a very interesting article about the Trusts, incluing their favorates.
UNG it the Nat Gas ETF. If you pull up a chart of UNG and these trusts you will see they track very closely with Nat Gas; which makes sense.

[HTEPWEsurveyor]

Being that the dividends are considered qualified, and taxed at 15%. Is there a threshold amount (dividends) whereby additional taxes be need to be paid?

[drooyrich]

PNW, I follow HTE closely being my largest holding..they are not going forward with this project without a major commitment through a JV and have said definetly not at the expense of shareholders..the project though is of outstanding importance since it means being able to refine heavy and medium sour crude which will be replacing the light sweet crude the oil is running out of - so the future of this project is outstanding..furthermo... HTE has about 1 billion oil as oil sands (which are not included in their recerve or ressource calculations) which of course constitute a good potential too..and they have one of the lowest % of hedges among the Canroys and regarding their gas production (22%) almost completely hedge free..plus a dividend of 17% !!

[evetsnibur]

I seem to remember that when the Canadian govt decided on the new corporate taxes which would affect the canroys, they also had a provision to exempt all companies that were in business and operating as such under the current laws, from the propsed new taxes. Has that changed?? My Canadian accountants advised that they have seen NOTHING that would change the proposals as I was led to believe. Any insight from anyone??

[evetsnibur]

With everyone talking about the new proposed taxes in 2011 for energy trusts etc..I remember a grandfather section that very cleary stated an exemption for royalty trusts previously established and in full operations prior to the passing of the new law..Has that changed???