Monday, November 5, 2007

The Conservatives are more focused on saving face and not admitting they made a mistake - John Dielwart, Arc Energy Trust

"I personally and we collectively were quite naive a year ago at this time. We thought the facts mattered. We thought getting it right was the most important thing.

Our coalition has delivered a report that clearly refutes every single reason the government gave for acting against energy trusts and any objective viewer sees that we have an incredibly strong case including their own witnesses at the finance committee hearings. But quite frankly they are more focused on saving face and not admitting they made a mistake although clearly they have.

Therefore with this government, with this finance minister...

We're optimists, if we weren't we wouldn't be in this business. You always think there is hope, but there's more hope with a different party in power."

John Dielwart, October 31 2007



Additional Information:
How the Conservative decision impacted Arc Energy Trust

Nov 1, 2005 - Oct 31, 2007




Do Energy Trusts Cause Federal Tax Leakage?

No. Federal and provincial government revenues are actually enhanced by the energy trust structure. During the past five years, CCET member trusts have generated greater taxes both provincially and federally than would have occurred had they been structured as corporations.

In 2005, the oil and gas trust sector generated over 30 percent of the tax revenue collected from publicly-traded Canadian entities in the oil and gas sector while representing only 16 percent of the revenue. Oil and gas royalty trusts have also generated over 40 percent more taxes than Canadian publicly traded senior independent producers on a unit-of-production basis.

The capital intensity of oil and gas exploration and production generates significant tax pools. As a result, oil and gas exploration and production corporations have historically paid minimal corporate taxes. In contrast, distributions from energy trusts generate:
  • current personal income taxes from Canadians;
  • additional tax from compounding investment in tax-deferred accounts; and
  • a 15 to 25 percent withholding tax from foreign investors.
Because most CCET unitholders live outside Alberta, where all energy trusts are based, Canadians throughout the country share in the distributions paid and their provinces of residence benefit through hundreds of millions of dollars of increased tax revenues. Alberta, in turn, receives the benefit of additional
royalties on mature oil and gas producing assets, spending on goods and services in the province, employment and associated taxes, and all of the ancillary economic spin-offs associated with increased activity.
Source: Canadian Energy Trusts: An Integral Component of the Canadian Oil and Gas Industry


A perspective on U.S. Flow-Through Structures

In support of its decision to tax trusts, the Department of Finance (DoF) stated that other countries (in particular the U.S. and Australia) had previously taken steps to shut down similar flow-through structures. We do not believe that this is an entirely accurate description. In the U.S., there are approximately 214 publicly traded flow-through entities, including master limited partnerships (MLP), limited liability corporations (LLC) and trusts, with a combined market cap of over $465 billion.

In this report, we provide some background on flow-through structures in the U.S. We also look at how U.S. flow-through valuations compare to Canadian trusts. In our opinion, these U.S. flow-through entities could become acquirers of Canadian trust assets over the coming years given the former’s significant cost of capital advantage and the suitability of the Canadian trust assets for their structure.

U.S. flow-through structures are essentially the same as Canadian trusts. The majority of pre-tax income is passed through to individual investors in the form of distributions and each investor pays personal tax on his or her distributions.

While the income of these entities must come from specified sources to qualify, the definition of these sources covers a broad range of industries, including oil and gas (production, transportation and refining), mining, fertilizer, propane distribution, timber and real estate.
Source: Digging Deeper