DEFINITION of 'Canadian Royalty Trust - CANROY'

An oil, gas or mineral company that is organized as a trust rather than as a traditional corporation. The CANROY does not physically operate the oil, gas or mineral assets; operational activities are run by outside parties.

Because they are organized as a trust, Canadian Royalty Trusts initially were not taxed at the corporate tax rate. This allowed a CANROY to save more cash, which it used to pay a larger-than-average dividend to its investors. The Canadian government changed its tax policy.

BREAKING DOWN 'Canadian Royalty Trust - CANROY'

Investing in a royalty trust such as a CANROY allows the investor to gain exposure to the energy industry without having limited exposure to a certain company's operations. 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.

Royalty 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. Unlike royalty trusts in the United States, CANROYs may be actively managed and can acquire new properties (U.S. trusts have to stick to their original properties), allowing them to theoretically keep income levels stable.

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