munny

Canadian Royalty Trusts Will Never Return to Their Former Glory

Mr. Ward, those wonderful "tax pools" are interesting, but some CPAs I talk to think they are worth less to US investors than those investors think. While tax pools may eliminate the Canadian corporate tax for a few years, the dividedns paid to US holders will probably be fully taxable, not return of capital distributions. Why? The tax pools are made up of deferred Canadian tax deductions that would have been previously deducted in a US tax regime. The Canadian corporations do not keep US tax accounting records and thus their distributions will be deemed to be from "earnings and profits" in the US.

Overall a well-written article. If you follow any finance board, you will find die hard CANROY enthusiasts who bluster, rant and attack in spite of facts and trends, so the negative response to your article is predictable. Your patience in responding to comments is commendable -- it is always nice to try to engage in discussion and education, even with an unruly class.

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

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.