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Tickers in this Article: BTE, HTE, PVX, PGH, FDG, TCK
With a historic and lively presidential election campaign under way in the United States, it's entirely understandable that the vast majority of the American public has very little interest in the general election currently taking place in Canada.

However, for a not-so-small group of U.S. investors who have placed their bets over the years on the widely followed Canadian energy trusts, many of which are inter-listed on U.S. exchanges and include companies like Baytex Energy Trust (NYSE:BTE), Harvest Energy Trust (NYSE:HTE), Provident Energy Trust (NYSE:PVX) and Pengrowth Energy Trust (NYSE:PGH), it may be worth showing more than passing interest to how things are proceeding north of the border.


Because the party that gains the upper hand in the Canadian Parliament could have a direct bearing on the ability of this group to continue paying out distribution yields that in some cases exceed 18%.

Trust Tax Deadline Just Over Two Years Away
Back in October 2006, the then-Conservative government of Prime Minister Stephen Harper shocked Canadian investors with a surprise announcement that it would be altering the tax rules that allowed Canadian trust entities to avoid paying corporate-level taxes. By avoiding corporate-level taxation, the trusts were able to increase their payouts significantly, producing yields that were sometimes in the double-digit range. The new tax rules will make the trusts fully taxable by the end of 2010 – a little more than two years away. (Interested in the subject of taxes? Check out Using Tax Lots: A Way To Minimize Taxes.)

As things now stand, the trusts have two basic choices: convert back to the corporate structure that means paying corporate taxes and slashing payouts and yields, or sell out to another entity, preferably at a premium. While those Canadian trusts opting for the former option have seen their share prices plunge, a good example of the latter can be seen in the recent sale announcement of Fording Canadian Coal Trust (NYSE:FDG) assets to Teck Cominco (NYSE:TCK). Fording unit holders managed to get a price about 17% over the pre-deal market price of Fording shares.

The fact that deals like Fording come more than two years before the trust deadline reveals the extent to which some players in this drama see little chance that the Canadian government will ever reverse or modify its decision on trusts. There is a sliver of hope, however.

In Canadian Politics, Sometimes The Unexpected Can Happen
While it's currently behind in the national polls, the Canadian Liberal party has consistently gone on record in favor of reducing the corporate tax burden set to be imposed on the trusts from 31.5% to 10%. It also has supported efforts by the Coalition of Canadian Energy Trusts that call for an investigation of Conservatives' claims that trust structures cause "tax leakage".

While it's a longshot bet at this point that Liberals can form the next government, in the sometimes-contradictory world of Canadian politics - where a fellow Conservative like the populist Premier of Newfoundland Danny Williams is actively campaigning for Harper's defeat - anything seems possible. As was summed up in a recent piece in the New York Times, the Conservatives have everything needed to win but are not winning, while the Liberals have everything needed to lose but are not losing.

If the Conservatives fail to consolidate their power with a majority win this time around, that could set the stage for another contest a year or so out, during which they might be inclined to roll back their decision on trusts. This move would play to the natural Conservative constituencies of Western Canadian oilmen and income-oriented retirees, who were badly burned when the surprise announcement on trusts was made in 2006 and are not likely to vote Conservative until they see some redress.

The Final Word
Like the rest of the oil and gas sector, the recent sharp pullback in energy prices has pummeled the inter-listed energy trusts. While a rebound in oil and gas prices as we approach winter would be the natural catalyst for a revival in this group's fortunes, failure by the Conservatives to win a majority could provide an additional tailwind to a group that looks decidedly oversold at this juncture. (Want to learn more about the oil patch? Check out Oil And Gas Industry Primer.)

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