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Thread: Canadian Gov't trashes Royalty Stocks ...

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    Banned Melonie's Avatar
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    Default Canadian Gov't trashes Royalty Stocks ...

    This is in reference to past postings where the subject of oil / gas / coal royalty stocks have been discussed as a possible very high 'interest' (actually high dividend) alternative investment. Basically, the Canadian gov't has set a new tax rate of 34% which will apply to royalty trust company profits, thus greatly reducing the amount of dividends they can pay (i.e. reducing their equivalent 'interest rate' by at least 1/3rd).

    I'm not sure yet how the Canadian gov'ts move would actually affect the taxes which must be paid by non-Canadians who own shares of these royalty trust stocks. However, Canadians and non-Canadians alike will wind up taking their financial lumps as the share price of such Canadian royalty trust stocks appears to be falling off a cliff.

    The 'mechanism' behind this seems to be that the typically high individual and corporate tax rates in Canada had created an incentive where wealthy Canadians and Canadian corporations could 'shelter' some of their income from taxes via the purchase of / conversion to Canadian royalty trust stocks - thus creating a strong 'buyers market' for these stocks. However, with the announced tax change, this tax 'shelter' incentive has been erased, causing those rich Canadians to sell off and reinvest in other sectors which now have a better risk versus (after-tax) reward equation.

    Note that there are also royalty trust stocks which are NOT Canadian based, and are thus not covered by this new tax. However they do occupy the same market sector, and thus may have caught some 'downdraft'. Disclaimer the only royalty trust stock I own at the moment is WTU ... a natural gas royalty stock based on wells in the Southwest US ... which wasn't affected much by the Canadian tax change so far.


    Also, as discussed in many other threads, in today's global economy any change in taxation and spending policy by a particular country tends to set in motion international reactions regarding cross-border cash flows, international investments etc. which that particular country is powerless to prevent. It remains to be seen how this will play out in the long run in terms of Canada's economy, but the Loonie's exchange rate dropped significantly right after the announcement was made.

    There has already been some speculation done, with the result being that the Canadian gov't decided to simultaneously increase the 'low income tax credit' paid out to Canadians over age 65 to compensate for the loss of value / income the change in royalty trust taxation policy is undoubtedly going to create on their retirement savings / pension funds ...



    Of course this doesn't help younger Canadians much, nor does it help older Canadians with incomes that are too high to qualify for the tax credit subsidy, nor does it help Canadians of any age who are employees of such corporations.
    ~
    Last edited by Melonie; 11-02-2006 at 04:51 AM.

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    God/dess Deogol's Avatar
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    Default Re: Canadian Gov't trashes Royalty Stocks ...

    They vote for their own tax increases.

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    Default Re: Canadian Gov't trashes Royalty Stocks ...

    Good thing I don't invest in Canada, heh.

    I [i]almost[/in] invested in a Canadian income trust recently, but decided to put the money on my mortgage instead...good call, apparently.

    Feature costumes for sale!

  4. #4
    Sitri
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    Default Re: Canadian Gov't trashes Royalty Stocks ...

    My Oil Trust stock plunged 15% yesterday. I went though all of the proposal and I can see from the Canadian Finance Minister's point of view how these were being abused.

    There is a 4 year phase in on Trusts that were formed before yesterday. That should help. Instead of a 10% return, (before U.S. taxes), it will be about 8.5% eventually.

    So it goes.

    Although it is a hit, if you look at the overall return and risk relative to other U.S. stocks, it still looks attractive at this point. It was just really really attractive before

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    Banned Melonie's Avatar
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    Default Re: Canadian Gov't trashes Royalty Stocks ...

    They vote for their own tax increases.
    Not wanting to delve too far towards the political, but apparently Canadians have the same problem as Americans when it comes to voting on taxes. On the one hand, the 'official press release' would have voters believe that such taxes are leveed on all citizens, and that the 'rich' will be required to pay a higher percentage. On the other hand, the 'real world situation' is that the rich avail themselves of attorneys, accountants, international finance etc. and arrange their investments / assets to take advantage of tax favored investments (like the royalty trust stocks). Therefore, contrary to the 'official press release', the persons who typically wind up bearing the heaviest 'real world' tax burdens are not the rich, but the middle class.

    I'm sure that with this recent change in Canadian royalty trust tax policy, the accountants and attorneys are already hard at work researching the next great 'tax favored' investment to take the place of royalty trusts. Unfortunately for most of us 'amateurs', odds are that remaining 'tax favored' investments are going to wind up having a large 'minimum buy-in' which the rich can easily afford but which will price out middle class 'amateur' investors who can't / won't drop $10-25-50-100,000 on a single investment. The royalty trusts were one of the few tax favored investments that could be purchased by us middle class 'amateurs' for a couple of thousand dollars.

    Although it is a hit, if you look at the overall return and risk relative to other U.S. stocks, it still looks attractive at this point. It was just really really attractive before
    in the longer term, this remains to be seen ... as it is contingent on the degree of future corporate money available after taxes for 'reinvestment' + dividend payments to stockholders

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    Senior Member asianlady's Avatar
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    Default Re: Canadian Gov't trashes Royalty Stocks ...

    hate to say it bt they had to do it to stop a trend of companies hiding behind the trust to avoid taxes if it continued it would have broke the goverment with most companies planning on doing it then what the corps get off scot free and you know who would make that up the little guys in raised income tax and other taxes I don't feel sorry for the corps at all they should pay their fair share of taxes
    small and cute

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    Banned Melonie's Avatar
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    Default Re: Canadian Gov't trashes Royalty Stocks ...

    ^^^ again this is something that 'looks good on paper', but the 'real world' effects usually turn out somewhat different. For example, the event that apparently precipitated this latest Canadian gov't action was the announced plans of Telus (cell phones and broadband) and BCE (a.k.a. Bell Canada) to go the trust route. So essentially, since corporations always pass on the bulk of any tax increases to their customers in the form of higher prices - and particularly those industries whose prices / rates are 'gov't regulated' to some degree - the money necessary for Telus and BCE to pay their 'additional' taxes is now going to come from increased prices for Canadian phone bills, Canadian internet access, and Canadian cell phones. Additionally, Telus and BCE will now have less money available for (re)investment into infrastructure improvements, meaning that despite higher bills Canadian internet speeds won't be faster and Canadian cell phone service won't have fewer 'dropouts'. And if there is any serious competition from 'independent' phone, broadband and cellular companies, the next thing to rear its ugly head will be calls for 'givebacks' and 'layoffs' affecting the highly paid union employees of Telus and BCE. And of course there will be unquantifiable losses for stockholders of Telus and BCE, as well as losses for Canadians whose pension funds had invested in Telus and BCE.

    But hey these corporations will now pay their 'fair share' ...
    ~
    Last edited by Melonie; 11-02-2006 at 05:31 PM.

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    Senior Member susan22's Avatar
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    Default Re: Canadian Gov't trashes Royalty Stocks ...

    May actually turn out to have been a good buying opprtunity.

    According to Brown Brothers Harriman:

    “In addition to the fact that these trusts will still enjoy their favorable tax status until 2011, there is another consideration that is likely to support prices and the Canadian dollar over the intermediate term. Under the current rules, if non-Canadians acquire a majority of shares in a trust, the trust loses its tax exemption. This has discouraged foreign acquisition of trusts. This seems especially true in the energy space. The trusts themselves have been gobbling up energy producing assets. One industry report calculated that trusts accounted for 60% of the C$22.7 bln energy producing assets purchased this year, which is nearly twice last year’s pace.

    For their part, foreign companies already are responsible for half of Canada’s oil and gas output, according to the Canadian Associated of Petroleum Producers. Trusts control account for about 14% of Canada’s oil and gas production. If trusts lose their tax exemption, the risk is that they become take-over targets for foreign companies. Such bids could help support share prices and the Canadian dollar, on a medium term view.

    There is another current that dovetails with this one. There is a large country that is awash with capital and has a nearly insatiable appetite for raw materials, commodities, and especially energy. China. China’s State Council, the country’s top governing body launched a new initiative at the end of October to encourage domestic companies to invest and expand more overseas. This past April, China began relaxing the restrictions on foreign exchange outflows and created the QDII—Qualified Domestic Institutional Investors. Thus far the government has approved about $11.6 bln of outflows for investment purposes. The goal is to boost this to about $60 bln a year by 2010. Chinese outward bound investment rose by 26% in 2005 to $6.9 bln. This includes equity investment as well as the reinvestment of earnings from those investments. The investments have been concentrated in four industries, mining, manufacturing, telecoms and transportation. Chinese investors would seem to have the desire and the means to consider investing in Canada’s energy belt. While foreign purchases of Canadian dollars to buy trust assets may help support prices, it would seem to reduce the amount of tax revenue that Flaherty seems to think can be made up by eliminating the tax advantage for trusts.”

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    Default Re: Canadian Gov't trashes Royalty Stocks ...

    ^^^ let's hope for the sake of US / Canada trade and foreign relations, that this is not a 'ploy' to transfer the ownership / control of Canadian energy assets into the hands of the Chinese !!! While this might be beneficial for Canadian royalty stocks and Canadian gov't revenues in the short term, it is likely to cause US / Canadian trade / security / investment issues to sink to even lower levels than in the days of Jean Chretien !!!

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