Canadian Trusts

A Introduction to Canadian Income Trusts, Canadian Royalty Trusts, Oil and Energy Trusts.

Canadian trusts are investment syndicates that pool their money to buy a cash flow generating asset with the cash flow after expenses distributed back to the unit holders. Canadian trusts do not engage in exploration, development, construction or manufacturing. They focus on ownership and management with a view to generating income.

There are many different kinds of Canadian trusts, depending on what they invest in. There are Canadian oil and gas income trusts (sometimes called Canadian royalty trusts), real estate investment trusts (REITs), stock market sectoral investment trusts and many specialty trusts.   Here, we will focus on Canadian income trusts, also known as Canadian royalty trusts, Canadian oil trusts, or Canadian energy trusts.

Canadian Income Trusts

Canadian income trusts are business entities that buy assets which generate steady cash flow from operations or royalties - often a lot of cash flow. These cash cows are also called Canadian unit trusts, Canadian royalty trusts, or Canadian income funds, depending upon their industry and various formal distinctions.

Canadian income trusts use part of their cash flow to pay expenses and make provision for buying future assets to keep the business going. They send the rest out to shareholders. Usually these distributions are the lion's share of cash flow - sometimes over 80% of it.

Also see Canadian Income Trusts - Our Viewpoint

Canadian Royalty Trusts

Canadian royalty trusts are oil and gas companies that, because of their special tax status, pay out a large percentage of their cash flow to shareholders (unit-holders) in the form of monthly dividends (distributions).

Although many Canadian royalty trusts have in-house exploration and development capabilities, most grow primarily by acquiring additional operating companies.

In terms of structure, a Canadian royalty trust typically controls an operating company, which purchases oil and gas properties using the trust’s capital. The trust then receives royalty and/or interest payments from its operating company.

Canadian Oil Trusts

Canadian oil trusts, also known as Canadian royalty trusts, are oil and gas companies that, because of their special tax status, pay out a large percentage of their cash flow to shareholders in the form of monthly dividends.  The largest Canadian oil trust is Canadian Oil Sands Trust

Canadian Energy Trusts (Also see Canadian Energy Trust List)

In a Canadian energy trust, the underlying asset is acquired by the operating company, typically using a combination of third party debt and funds received from the Canadian energy trust (through equity offerings and/or its own third party debt), in exchange for the grant of royalties, debt and shares. Net operating cash flow, generated from the sale of crude oil, natural gas and NGLs produced and other services provided, is passed on to the Canadian energy trust as distributable cash flow through a combination of payments under the royalties, interest and principal on the debt and dividends or capital repayment under the shares.