.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;}
Dear Mr. Berko:

W.S., Vancouver, Wash.

Dear W.S.:

Some dentists are notorious for keeping old magazines in their waiting rooms. I glimpse Money magazine when it comes out, and I’ve not seen any recent discussion about Canadian royalty trusts (CRTs). So you might ask your financial adviser to revisit his dentist and check the date on that magazine.

Yes, many CRTs pay generous dividends (10 percent to 15 percent) and have a multiyear record of extraordinary dividend payments – which might stop abruptly as a rabbit’s tail in January 2011. Because Money failed to address this, along with its CRT recommendations, I’m certain as a sunrise that the article’s date is pre-2006.

CRTs can pay those generous dividends because they’re not liable for Canadian corporate taxes, providing they distribute their income to shareholders. This seemed like a superb idea, so a number of big non-energy Canadian companies began to convert their corporate structure to trust status to avoid paying taxes. But the Canadian government saw the scribbling on the ramparts and changed the rules.

Beginning in 2011, all existing trusts will pay taxes at the same rate as regular corporations. Darn, darn and darn, they killed the goose! This change may hurt most CRTs long before 2011 rolls around.

Every time a barrel of oil or a cubic foot of gas is taken from the ground, the trust’s reserves are drained by that amount. Previously, a trust would compensate for the loss by using its high-yielding shares as currency to purchase additional assets. That was an attractive inducement for someone who had oil properties to sell. But now that those shares have lost their glitter, good acquisitions will be harder to find, and many CRTs will not be able to maintain their generous payouts.

So without incentive to pay its earnings to investors, many CRTs will use their cash (after taxes) to fund expansion, which is expected to reduce their distribution yields to as low as 3-5 percent. So between now and 2011, some CRTs will convert to regular corporations, many will have to reduce their distributions as their reserves dwindle, and some with significant reserves may continue their high payouts until “boomsday.”

Frankly, I think right now may be a wise time to unload CRTs rather than buy them, because those Canadian geese are no longer laying golden eggs. It saddens me to recommend the sale of issues that have been good friends during the past five or so years; they’ve paid marvelous dividends to our clients and maintained their values. And though I believe that these CRTs might not reduce their dividends this year, certainly some of them will do so by mid-2009.

Months before that happens, the insiders will dump their shares, and the stocks’ market values will begin to melt like butter on a hot skillet. So I’m reminded of some very special advice from a wise man: “It’s always better to sell too soon than too late.”