What Is a Canadian Royalty Trust (CanRoy)?
- A Canadian Royalty Trust–also called a CanRoy trust–is an oil, gas or mineral company that is organized as a trust rather than as a traditional corporation and is established in Canada.
- A CanRoy trust is similar to an energy trust: investors can earn royalties and other income, but unlike a trust that only owns mineral rights, the CanRoy trust owns–but does not operate–the physical infrastructure of the mines or wells.
- CanRoy trusts have flexible structures but tend to focus on older mining or extraction infrastructure for cash flows.
- Canadian and foreign investors can buy shares in a CanRoy but tax treatments are different depending on where the investor lives.
How Canadian Royalty Trusts Work
Investing in a CanRoy allows an investor to gain indirect exposure to the energy industry without having direct exposure to individual companies in the industry. CanRoy trusts tend to be invested in older mines and wells. This means that the productivity of these assets is on the decline, so income from the trust declines over time unless more assets are purchased. CanRoys do not physically operate any oil, gas or mineral operations; these activities are run by outside parties with direct interests.
Because the primary draw of a CanRoy trust 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 investments because of the income they provide, so the quality and stability of that income is an important factor in the unit price. CanRoy trusts were initially not taxed at the corporate tax rate, but the Canadian government's tax policy has evolved so that now some CanRoy trusts pay corporate taxes.
Because CanRoy trusts have different structures, the IRS treats their distributions differently. In most cases, the IRS classifies a CanRoy trust as a regularly operating company and treats their distributions like dividends. Sometimes they are treated as partnerships and investors receive a Schedule K-1 statement each year.
In some cases, CanRoy trusts have an ownership twist. While some trusts are structured with no limits on non-Canadian ownership, others have structured their trust indenture so that non-Canadian ownership is capped at a specified level. If that level is ever exceeded, the company can force non-Canadian owners to sell their units.
Energy trusts are different in Canada than they are in the U.S. Energy trusts in Canada can add new mineral properties to the trust, so the trust has an indefinite life as an actively-managed mineral investment fund. Energy trusts in the U.S. cannot acquire new properties so they 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 the U.S. generally exist solely as a means of holding oil, gas and 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.