A royalty trust is a type of corporation, mostly in the United States or Canada, usually involved in oil and gas production or mining. However, unlike most corporations, its profits are not taxed at the corporate level provided a certain high percentage (e.g. 90%) of profits are distributed to shareholders as dividends. The dividends are then taxed as personal income. This system, similar to real estate investment trusts, effectively avoids the double taxation of corporate income. Texas oilman T. Boone Pickens is often credited with creating the first royalty trust in 1979; however Marine Petroleum Trust (Marps) was created in 1956, twenty three years earlier.
Characteristics of royalty trusts Royalty trusts typically own oil or natural gas wells, the mineral rights of wells, or mineral rights on other types of properties. An outside company must perform the actual operation of the oil or gas field, or mine, and the trust itself, in the United States, may have no employees. Shares of the trust generally trade on the public stock markets, but the trust itself is typically overseen by a trust officer in a bank. They are a powerful investment tool for people who wish to invest directly in extraction of petroleum or mining of other materials, but who do not have the resources or risk tolerance to buy their own well or mine. Additionally, since trusts often own numerous individual wells, oil fields, or mines, they represent a convenient way for the average investor to diversify investments across a number of properties. Also, since commodities are considered a hedge against inflation, the popularity of royalty trusts as investments rises as interest rates rise, and their shares often rise as a result. These trusts often attract investors with their relatively high yields; in 2007, their distributions were often in the 10 to 15 percent annual range. This makes the shares sensitive to interest rates, as share prices are likely to decline in periods of rising interest rates, and to rise when interest rates fall. Additionally, royalty trusts in the United States and Canada usually involve oil and gas fields or mines which are at or past their production peak, and will gradually decline in output as well as revenue; however, the infrastructure to develop them has already been built, so that an investor can expect a reasonably steady income stream. In addition to allowing investors to achieve high distribution returns, especially during periods of low interest rates, royalty trusts allow investors to speculate directly on commodities such as gas, oil, or iron ore without having to buy futures contracts, or use the other investment vehicles traditionally associated with commodities—since the trusts trade like stocks. During times when a commodity price is rising, the share value as well as the dividend return of a trust engaging in production of that commodity will rise as well.
Canadian royalty trusts (CanRoy) Royalty trusts are found mainly in Canada and the United States; there is also one in Germany. Canadian royalty trusts, called "Canroys" or "CanRoys", typically trade on the Toronto Stock Exchange, while some of the larger trusts also trade on the New York Stock Exchange. Canroys usually offer higher yields than U.S. trusts; for non-Canadian investors, this higher yield is reduced by the 15% foreign tax withholding that is absent in the U.S. trusts. The most significant difference between Canadian and U.S. royalty trusts involves their legal status in their respective countries. In the U.S., trusts are not allowed to acquire additional properties, once they are formed. Since they are restricted to their original properties – for example, a group of oil fields or natural-gas-bearing rock formations—they can be expected to be depleted over time, the royalties they pay out will correspondingly decline, and eventually the trust will be dissolved. In Canada, trusts may be actively managed, and run as businesses. They may have employees, issue new shares, borrow money, acquire additional properties, and may manage the resources themselves. Bell Canada Enterprises corporate unit Yellow Pages Group converted to Yellow Pages Income Fund on 25 June 2003, making it the "first high-profile conversion to the trust structure". Their income fund raised "$1-billion in the process". According to a 2012 article in Canadian Energy Law,
"The royalty trust and income trust markets trace their origins to 1986 and 1995, respectively. As interest rates declined during the period and beyond these trusts became popular, since they provided lofty yields well in excess of the prevailing interest rate payable by corporations with similar credit ratings. The reason for the discrepancy was primarily due to the fact that royalty trusts and income trusts were flow-through vehicles that avoided the payment of corporate level tax. The yields payable by these trusts varied, but were typically in the 8 – 10% range." Richardson argued that by 2012 foreign asset income trusts (FAITs) had revived interest regarding income trusts in Canada. Because FAITs involve assets outside Canadian borders, they are "not subject to traditional Specified Investment Flow-Through (SIFT) rules".
… excerpt ends here. Continue reading the full article.
