WHAT IS Canadian Royalty Trust (CanRoy)
BREAKING DOWN Canadian Royalty Trust (CanRoy)
CanRoys do not physically operate any oil, gas or mineral assets; these activities are run by outside parties. Investing in a CanRoy allows the investor to gain exposure to the energy industry without having limited exposure to individual companies. CanRoy trusts tend to involve older mines and wells, meaning that the productivity of these assets is on the decline, and thus income from the trust declines over time unless more assets are purchased.
Because the primary draw of a CanRoy is that it pays a high dividend, investors can experience higher volatility and risk when interest rates or oil prices change. Investors are attracted to these units for the income they provide, so the quality and stability of that income is an important component to the unit price. CanRoys initially were not taxed at the corporate tax rate, but Canadian government tax policy has evolved so that CanRoys pay some corporate taxes. Because different CanRoys have different structures, there is some variation in how the IRS regards their distributions. In most cases, the IRS classifies CanRoys as regular operating companies and treats their distributions like dividends. In other cases, the CanRoys are treated as partnerships, and investors receive a K-1 statement each year. CanRoys can have an ownership twist. While some trusts are structured with no limits on non-Canadian ownership, others have structured their trust indenture in such a way that non-Canadian ownership is capped at a specified level.
And, if the level is exceeded, the company can force non-Canadian owners to sell their units.
Energy trusts differ slightly between Canada and the United States. Canadian energy trusts are able to add new mineral properties to the trust, thus providing for an indefinite life as an actively managed mineral investment fund. U.S. energy trusts may not acquire new properties, so have a fixed quantity of reserve assets that decline gradually as the minerals are mined and sold. Eventually, U.S. energy trusts run out of mineral assets and become worthless. Energy trusts in general exist solely to hold oil and gas mineral rights. Energy trusts pay out the lion's share of the profits they collect to their investors. Energy trusts are advantageous in the U.S. because they are exempt from corporate taxation if they distribute more than 90 percent of their earnings to investors. In this way, energy trusts are similar to real estate investment trusts, or REITs.