Energy Trusts -- Barrons article "Where Lies the Tax Burden?"
TAXATION WITHOUT REPRESENTATION. American investors are becoming reacquainted with their history as a result of a surprise proposal by the Canadian government to tax royalty trusts, which have become hugely popular with investors on both sides of the border.
Analogous to real-estate investment trusts, royalty trusts pass through their income to investors, who pay taxes only once on those earnings. Income-parched investors, primarily individuals, have flocked to the double-digit yields paid by the trusts. Canadian corporations, meanwhile, have been increasingly attracted to the trust structure to reduce their tax bite.
In reaction to the swelling numbers of such conversions, the Canadian Finance Minister announced plans late Tuesday to tax the trusts. Wednesday, prices of royalty trusts plunged as much as 16% on the New York Stock Exchange, where they trade in tandem with Toronto. In less than a day, a year or more of income was wiped out...
The new tax treatment wouldn't take effect until 2011, however, and wouldn't even hit Canadian investors, explains Robert Willens, Lehman Brothers' tax expert. "For Canadians, it's irrelevant." Canadian investors can "impute" taxes paid by corporations, effectively getting around the double taxation of dividends, which the "primitive" U.S. tax system doesn't allow, he adds. As part of tax change, the Canadian corporate tax rate also will be lowered to 18.5%.
The only beneficiaries of the current royalty-trust structure are tax-exempt investors, such as retirement funds and endowments, and non-residents. "It's all about U.S. investors," Willens says of the proposed tax change, which he says will likely gain passage because it was proposed by the supposedly business-friendly Conservative government.
Of course, the Canadian government doesn't have to worry about the ire of American voters or tax-exempt entities. It can freely impose this taxation in the absence of representation of those constituencies.
Even though their taxes won't be hiked, Canadian investors in royalty trusts, many of them retirees, can't be happy with the hit they took as a result of the plan. According to one estimate quoted by Dow Jones Newswires, some C$26 billion ($23 billion) of value in the royalty trusts was wiped out Wednesday...
Full Story: online.barrons.com
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