HAVE YOU EVER HEARD OF A CANROY?

Canroy is short for Canadian Royalty Trust. These are investment vehicles out of Canada which have been very popular with American retirees. An abbreviated definition is that these trusts own interests in natural resources mainly oil and natural gas. In recent years trusts have been formed for iron ore, coal, and synthetic oil. Their popularity with income oriented investors is because they tend to distribute 75% of their income on a monthly basis. Yields have reached as high as 16% on invested capital. One of the reasons for the high yield is that they haven't been subject to Canadian corporate taxes....No longer true. Canada's relatively new minister of finance has announced that in the future, they will be taxed as corporations. This to the dismay of retired investors, many of which sold off their investments for as much as 25-40% lower than pre-announcement prices. One of my colleagues, a very seasoned investor announced that "Canada will never get another dollar from me. Not even a Moosehead."

Most of our clients didn't lose money in this disaster, mainly because we preferred to keep our royalty investments in the US, where we think we are more familiar with the investing environment. Now that prices have dropped, are canroys now attractive? There are a number of reasons to think this may be true. 1. While corporate taxes will definitely mean that there is less to distribute to investors, the new taxation will not be implemented for existing trusts until 2011. The rules may change by then. 2. Plans are under way to reduce Canadian corporate tax brackets which will reduce the effects of the new rule. 3. Depletion allowances are such that much of the income is considered to be a return of capital and not taxed. If 12-14% distributions sound good to you, it might be a good idea to diversify your income stream by adding small amounts of these vehicles to your portfolio. While we probably won't add these to accounts other than those large enough to absorb some risk, I may add some to family accounts.

Getting back to real estate, I was interviewed by a reporter for an article that appeared in the November 20 of Time magazine and quoted as saying something to the effect that "As soon as you have a bunch of empty bedrooms, you should consider downsizing to a smaller house because owning more house than you need is a poor allocation of capital." I qualified that statement that stated that this was from a strictly financial perspective. I don't know if that was clear in the article but I am well aware that it is never a strictly financial issue. Living under the bridge along Cherry Creek gives you the benefit of a good neighborhood at very affordable prices from a "strictly financial perspective." Still, did we really need to go from an average new home size of less than 1000 square feet in the 1950's to almost 2400 today? One of my main concerns is that the economy of the future may not allow us to continue to allocate so much capital for the simple purpose of putting a roof over our head. We should discuss this more in future posts. Send me an e-mail if you have any ideas on this subject.