Canadian Royalty Trusts

by dd on Jul.16, 2008, under royalty trusts

Taxes

15% Canadian flat tax is withheld by your broker - which is recoverable at tax time, so yes you get it back when you file the correct tax form (IRS form 1116 - foreign tax credit). 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 with tax software.

15% US dividend tax.

Trusts held in IRA’s are treated differently.

Analysis

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 production 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.