Canadian Income Trusts Time To Buy Or Dump?

On October 31, 2006 -- now dubbed the "HalloweenCanadian income trusts fell 10 to 20%, destroying
Massacre" -- Canadian Finance Minister Jim Flahertyabout $C 35 billion of market capitalization.
shocked the income investing world by announcing thatYet there are good reasons for continuing to invest in
beginning 2011 all Canadian income trusts would beCanadian royalty trusts:
taxed.1. The oil and natural gas companies own highly
The law that enables Canadian companies to switchstrategic energy assets in a politically stable part of the
their business structure from a corporation to a trustworld.
that's free of taxes so long as their net profits are2. The tax proposal is, so far, only a proposal. It may
returned to the trust unitholders, goes back to 1985, butnever be passed by Canadian Parliament. About 5%
was little known outside the energy and naturalof Canadian voters own these trusts. They want to
resources industries.continue to receive their large monthly dividend checks.
In the 1990s, most Canadian investors were just as3. Current royalty trusts continue to operate under the
caught up in the high tech bubble as Americans, andold rules, and pay very high dividends. They're now
so Bay Street paid little attention to companiesrelatively cheap to buy.
pumping oil and using an unusual business structure to4. Too many companies with businesses unsuitable for
avoid taxes.the business trust structure were converting over to it.
That changed with the Tech Wreck of March-AprilIt requires a high cash flow and the ability to survive as
2000. Since then, Canadians and eventually Americana business without keeping lots of cash on hand. Many
and other investors seeking high yields for theirbusinesses need to retain their cash to reinvest in
investment funds had been pouring money intocapital equipment.
Canadian royalty trusts.5. For investors who live outside Canada, receiving
The business trust structure works well for companiesincome in Canadian dollars is a good way to hedge the
in industries with a high cash flow. This worksrisk that their currency's buying power is falling (as the
especially well for energy and natural resourcesUS dollar is now doing.)
companies now that oil prices are making record highsEveryone must make their own choices regarding their
almost daily, and other commodities are alsoown money and investments, but right now seems a
skyrocketing in price around the world, thanks togood time to put a portion of your investment funds
increased demand in China and India.into some of the better oil, natural gas, utility and
And this dovetails nicely with the Canadian economy,infrastructure Canadian royalty trusts.
for that country is rich in natural resources. Their oilEnergy prices will have ups and downs but anybody
sands alone probably have more oil than Saudi Arabia.who fills their automobile with gasoline or heats their
So until October 31, 2006, knowledgeable incomehome knows the long term trend is up. Since much of
investors were buying up CanRoys -- and getting athe energy supplies outside of North America are in
terrific return on their investment. This included monthlypolitically unstable parts of the world (the Mideast,
dividends checks with yields of up to 17%. And manyVenezuela, and so on), investing in Canadian energy
of the trusts rose in market price as their businessessources and infrastructure, and receiving high-yield
prospered and demand for trust among yield-hungrymonthly dividend checks to boot, seems almost a
investors kept rising.no-brainer.
Following the October 31, 2006 that the ConservativeOf course, you should remain diversified, so don't put all
Party of Canada intended to break its implicit campaignyour retirement money into these funds.
promises not to raise taxes, overall unit prices of