Canadian Income Trusts after the 2011 Conversion:
The Top 3 Canadian Oil Trusts and Canadian Energy Trusts to Buy Now
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As investors in Canadian oil and gas income trusts and dividend-paying Canadian income trusts (also known as Canadian royalty trusts), it’s critical that we don’t buy into all the bull. Rather, the key is to stay focused on two main points.
First, the underpinnings of the long-term energy bull market are still very much alive and well. Long term, this is bullish for Canadian energy trusts.
Mainly, global energy demand is set to rise exponentially in coming years, as the developing world raises its standard of living. And the industry’s current base of production doesn’t come close to meeting it.
Second, the best Canadian oil trusts are still extremely cheap. Not only do they trade at huge discounts to the value of their reserves in the ground, but they’re battle tested against the worst possible conditions. The debt of the best Canadian energy trusts, never really very high in the first place, is at its lowest level in years. And despite record volatility in the prices of their principal products, Canadian energy trusts are having few if any problems accessing credit.
Yields are still in double-digits and are now protected by extremely conservative assumptions for realized selling prices, which in turn are backed by systematic hedging.
For many Canadian oil trusts, costs are falling, spurred by penny-pinching management but also by the long-awaited drop in production costs due to slack conditions in the energy services business.
Currently our basis for analysis on recommending Canadian oil trusts is a mix of a company’s assets, financial and operating strength, and distributions relative to current prices.
As of Jan. 1 , 2011 all Canadian Income Trusts and Canadian Energy Trusts became Investment Flow-Through (SIFT) entities that are subject to tax at a rate approximately equal to corporate income tax rates.
The outsized dividends paid by these Canadian income stocks in the report dwarf those of a typical
Here’s a sneak peak of what we cover in much more detail in the report:
Canadian Income Trust #1—
The Canadian energy trust for the savvy investor.
Canadian Income Trust #1 has substantial experience in unconventional horizontal drilling. In July 2005, it drilled the first “multiple-stage-frac” horizontal well in the Upper Montney formation (a natural gas shale area straddling
Canadian Income Trust #1’s expertise in horizontal “frac” drilling and its growing portfolio of natural gas wells perfectly positions the company to capitalize on the long-term global shift towards natural gas. And it pays a solid and growing dividend.
Canadian Income Trust #2—
Canadian royalty trust giant.
Canadian Income Trust #2’s robust business plan provides many opportunities to boost revenue, cash flow and dividends going forward. The upshot for Canadian Income Trust #2’s stock is a combination of robust and reliable growth potential yield selling at a modest valuation and paying a high and sustainable yield north of 6 percent. Combine this high dividend yield with growth-induced capital appreciation, and Canadian Income Trust #2’s stock is a solid bet for annualized total returns of 15 to 20 percent.
Canadian Income Trust #3—
A Canadian income trust for today’s income investor.
Canadian Income Trust #3 has been a huge winner for investors and there’s still a lot more upside in the company that dominates its infrastructure construction niche. The key barometer of Canadian Income Trust #3’s future earnings is order backlog, which is very healthy at more than CAD1 billion. This ability to win public sector contracts continues to keep business solid.
More on Canadian Income Trusts
Canadian income trusts are set up as a manager and distributor of funds, with the trust as the owner of the assets where monies are derived. When you invest in Canadian oil trusts, part of the larger Canadian energy trusts classification, you get the growth potential of Canadian oil and gas trusts along with the safety and consistency of cash distributions.
The Canadian income trusts market is seeing a lot of action on the demand side, and with another cold winter forecasted for North America, Canadian income trusts, particularly Canadian energy trusts and Canadian oil trusts, are being bid up to very healthy levels. This makes it a great time to invest in Canadian oil trusts but it’s important to understand the structure of these Canadian energy trusts and the associated tax implications.
Taxation on Canadian energy trusts and Canadian oil trusts can be as complicated or simple as the tax scenario of the person holding an interest in the Canadian income trusts market. And while it’s impossible to detail here all the various tax scenarios for Canadian income trusts for our readers, let’s take a look at the basic Canadian energy trusts taxation realities that will determine how you’re affected as a non-Canadian energy trusts investor.
At their core, Canadian energy trusts and Canadian oil trusts are designed to reduce the incidence of double taxation, which drains cash from most ordinary investments. Canadian income trusts avoid double taxation, which entails profits taxed at the corporate level, and then taxed again as dividend distributions to shareholders who hold Canadian oil trusts and Canadian energy trusts.
Canadian tax law allows for Canadian income trusts to circumvent this pesky intrusion by delivering cash flow from Canadian income trusts operations directly to shareholders, effectively rendering corporate profits and distributions one and the same.
When distributions are made from Canadian income trusts there are two types of payments made to unit holders (i.e. shareholders): return of capital—the repayment of a portion of your Canadian income trusts investment—and a return on capital (your income). As with any dividends, the latter is taxable income—the Canadian government will take a cut . This is no different from dividend taxation practices in the US.
But even better for Canadian energy trusts and Canadian oil trusts is that what Uncle Stephen (Harper) taketh, Uncle Sam giveth back. You can claim that 15 percent tax as a credit on your US filing. In other words, the IRS will actually compensate you for the losses you’ve incurred from the Canadian government by holding Canadian income trusts. Residents of other countries may also have similar treaties to this Canadian income trusts’ allowance. So it’s wise to hold both Canadian energy trusts and Canadian oil trusts.
Investing in Canadian energy trusts and Canadian oil trusts can be a very lucrative venture. Request your report today.
Chief Investment Strategist, Canadian Edge
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