More than a decade ago, I launched Canadian Edge, an investment advisory focused on income trusts and other dividend-paying securities that traded on the Toronto Stock Exchange.
Like master limited partnerships, trusts avoided the double taxation that occurs on corporate profits and then dividends by passing through substantially all of their profits to shareholders. Investors benefited from generous dividends, while the company could retain more cash flow to invest in growth opportunities.
The government ended this favorable tax treatment in October 2006, leading to a huge selloff in income trusts and setting the stage for a wave of conversions to traditional corporations. By the start of 2011, all but a handful of trusts had gone through the change, agreed to be acquired or declared bankruptcy during the Great Recession.
Despite all the fear and loathing, best-in-class Canadian trusts emerged stronger than every after converting to corporations. Dozens even absorbed their new tax obligations without reducing their payouts. And the healthiest former income trusts resumed regular dividend growth
Of course, the massive decline in North American oil and gas prices since summer 2014 has taken its toll on one-time income trusts that operate in the energy sector.
By January 2016, Western Canada Select, a heavy crude oil that historically has traded at a discount to West Texas Intermediate, had slumped to a record low of less than US$13 per barrel.
Meanwhile, spot natural-gas prices at the AECO Hub in Alberta earlier this year plummeted to a record low of US$0.61 per million British thermal units.
(Click graph to enlarge.)