Canadian oil and gas trusts are in the midst of positioning themselves for a federal tax change effective next year in which trusts essentially will be taxed the same way that corporations are taxed.
An Oct. 31, 2006, proposal from Ottawa has been dubbed the great Halloween massacre by some in Calgary, headquarters for several of Canada's largest trusts. Existing trusts received a 4-year grace period from the tax change so their effective date is Jan. 1, 2011.
Traditionally, trusts paid little or no corporate tax, enabling them to distribute most earnings to their investors or unitholders. The 2006-07 legislation and resulting tax law applies to all Canadian income trusts, of which energy trusts account for more than half.
The Coalition of Canadian Energy Trusts unsuccessfully sought a tax exemption from the Canadian government, saying that without the exemption, energy trusts would be less likely to continue investing at the same levels, which could lower Canadian production.
Canadian Finance Minster Jim Flaherty said trusts cost the Canadian government hundreds of millions of dollars yearly in lost revenue. He said the plan was designed to "restore balance and fairness to the federal tax systems by creating a level playing field between income trusts and corporations."
Best route sought
In the intervening years since the income trust tax legislation was announced, oil and gas trusts and their attorneys have worked to determine the best route for their companies and their investors.
A spokesman for the Canadian Association of Petroleum Producers said trusts can continue doing business as trusts under the higher tax rate, adjusting their distribution policy, or they can convert into corporations. "These plans depend on the individual circumstances for each trust," he said.
Canadian Oil Sands Trust, Calgary, plans to retain the flow-through tax attributes of a trust structure as long as possible. Marcel Coutu, president and chief executive officer of Canadian Oil Sands, noted 2010 marks the company's last year as an income trust.
"We do not expect our transition to a corporate structure to change our approach to the business," he said while outlining the company's 2010 budget on Oct. 28, 2009. "We thus expect our dividends will be variable, similar to the distributions we have paid as a trust, reflecting changes in crude oil prices and economic conditions, and Syncrude operation performance and capital commitments." Canadian Oil Sands Ltd. is a joint venture owner of Syncrude Canada oil sands operation near Fort McMurray, Alta.
Enterra Energy Trust's board unanimously approved conversion to a corporation to be named Equal Energy Ltd. Don Klapko, Enterra president and chief executive officer, said the name change was intended to "create a new market brand with the conversion."
Klapko said, "We've worked extremely hard since late 2007 to stabilize our balance sheet, our asset base, and our credibility within the capital markets as we move toward a growth-oriented E&P corporation."
The corporate conversion remains subject to regulatory approvals and approval of at least two thirds of Enterra's unitholders. An information circular proxy statement is expected to be mailed to unitholders in late March with a special meeting expected to be scheduled in May.
Daylight Resources Trust bought Highpine Oil & Gas Ltd. for $530 million (Can.) in 2009 saying its rationale was the transaction "provides additional financial flexibility as the trust considers converting to a corporation."
In its 2010 outlook, Daylight Resources said it intends to propose to unitholders that Daylight convert into a corporation. "Timing of the conversion is dependent upon a number of factors; however, we expect to propose conversion no later than May 2010 at our annual general meeting."
Penn West Energy Trust said it continues to review organizational structures and alternatives. "The outcome of these evaluations will determine Penn West's most appropriate future business model however there are no current plans to convert out of the trust model until at least 2011," it said.
WoodMac report
Wood Mackenzie Ltd., Edinburgh, issued a report shortly after the tax change was announced, saying Canada's new tax structure for income trusts could reduce the value of the oil and gas trusts. WoodMac suggested some of the smaller, more-focused trusts might struggle while the larger trusts, having more diverse assets, will continue under a corporate structure.
The oil industry has a long history of being resilient, particularly the Alberta oil patch, despite financial roller coasters and legislative changes.
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