Do you know anything about this scheme or scam?
Cross-Border Tax Client .
david ingram replies:
It is almost laughable. This has been travelling around for a couple of
They are referring to INCOME TRUSTS SUCH as Enerplus (ERF), Petrofund (PTF)
or Provident Energy (PVX).
These have been paying 15% (not 12) for most of the last 4 years. The
laughable part is that yesterday Canada announced new legislation to tax the
income starting in Jan 2007. It is expected that the news will reduce value
of Income Trusts by 20 to 30%.
A kicker is that a non-confidence motion TODAY (Thursday the 25th) will mean
that there is going to be an election and if the liberals are not
re-elected, the legislation may change again.
Be that as it may, the income Royalty Trusts have NOTHING to do with Canada'
social programs and are NOT ( I repeat) NOT guaranteed by the Canadian
Rob Garrick wrote a great article in the Globe and Mail. I am taking the
liberty of repeating his article here because I am too lazy and too tired to
bother writing more here. Congrats Rob on a great article.
News from globeandmail.com
Tuesday, October 25, 2005
The wacky world of income trusts, American style
You won't know whether to laugh or cry when you see what a U.S. investing
newsletter has to say about income trusts.
"Canada's government-authorized royalty checks [that's the term used for
trusts] can ensure you never -- ever -- run out of money," says a promotion
for the 12% Letter, which specializes in high-yield income investing. "Smart
Americans cashing in on this program are pocketing $59,000 to $162,000 every
2 to 3 years."
What's laughable is how the 12% Letter offers up yet another example of the
cockeyed view Americans have of this country. But there's a serious side to
all of this, too. With its idealized picture of income trusts as a
government-authorized investing bonanza, the newsletter highlights the way
in which some investors in Canada misunderstand trusts. It also plays into
some of the criticisms that the anti-trust crowd have raised.
According to the 12% Letter, income trusts are being referred to by some
financial types south of the border as the "Canadian royalty checks
program." Readers of the newsletter are advised to think of trusts as an
example of the great social benefits of being a Canadian.
"You probably already know that Canada is famous for its huge social
programs -- like free health care, the Guaranteed Income Allowance
(otherwise known as 'The Allowance') and federal training and employment
programs," the promo for the 12% Letter says. "What you may not know is that
there's a unique situation right now in Canada that is allowing Americans to
fund part or nearly all their retirement."
The 12% Letter is written by Craig Walters, a former equity analyst and
currently the managing editor of Stansberry & Associates Investment
Research, which is based in Baltimore. Those of you who are familiar with
the wacky and wild world of investment newsletters will have an idea of what
we're dealing with here. There are headlines about investments offering the
moon and stars (43-per-cent bonds, for example) and breathless prose about
The information about trusts -- sorry, the "royalty checks" program -- is a
bit, um, garbled. But it does capture the gold-rush mentality that took hold
of the trust market just before Finance Minister Ralph Goodale made it clear
the government was taking a hard look at the trust sector.
Take, for example, this business of trusts being a government-authorized
money tap. As recently reported by my colleagues Steven Chase and Patrick
Brethour, the trust structure has never formally been adopted by Ottawa. The
reality is that the government had almost no role in the creation of trusts,
other than a technical tax ruling made two decades ago that authorized the
And yet, we have the 12% Letter telling readers that in trusts, the Canadian
government has found a way to redistribute money from wealthy corporations
to average citizens. "It's like being put on the board of directors of the
biggest and richest companies in Canada -- because the profits are sent
directly to YOU," Mr. Walters writes.
Unfortunately, lots of investors have bought into the belief trusts were put
on earth to help people who wanted investment income but couldn't live on
the pitiful returns of bonds and term deposits.
No question, Ottawa fostered this belief by letting the trust sector grow to
huge proportions before getting serious about controlling it. But the
reality is trusts have always been vulnerable to government intervention.
One of Mr. Goodale's major concerns about trusts is that they deprive the
government of hundreds of millions in tax dollars. Trusts pay no taxes
themselves, instead passing on earnings to investors who are liable for
taxes according to their personal circumstances.
The 12% Letter offers a direct provocation on the tax issue because it
recommends trusts to American investors, who pay less tax on trust
distributions than Canadians. An American trust unitholder would face a
15-per-cent withholding tax on money paid by a trust, whereas Canadians who
own trusts outside a registered retirement account would face tax rates as
high as 39 to 48 per cent, depending on the province of residence.
In the world of the 12% Letter, trust distributions are an almost magical
source of money: "Some folks live solely off the checks . . . others
reinvest the money . . . and some use the money for extravagant and exotic
This hyperbole is a killer for trusts because it supports the contention by
some critics that they're a moneymaker for the wealthy and meaningless to
the regular folk. In truth, a wide swath of people have benefited from
trusts through direct investments or indirectly through mutual funds and
Misinformation is rampant on all sides of the trust debate, which means that
finding the right balance between the needs of government and investors is
going to be hard. Over to you, Mr. Goodale. The future of the Canadian
"royalty checks" program is in your hands.
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