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What are royalty trusts?

Royalty trusts are a tax shelter that give you a stream of income based on a natural resource such as oil or gas.

When you buy royalty trusts, you are purchasing an opportunity to share a company's future profit from a specific pool of oil and gas or from a particular mineral reserve until the resource runs out. They are issued by resource companies. The income you receive is often paid monthly or quarterly. The key to both the value and risk of these trusts is the life remaining in the resource asset upon which they are based, how quickly the asset is being depleted and what part of your yield is a return of capital. When interest rates are low and oil and gas prices are high, they may pay better returns than bonds or GICs. Royalty trusts do not give a guaranteed rate of return. The price of the trust units, which trade on stock exchanges, move up and down like regular shares. The unit price will tend to fall if interest rates rise, or if prices for oil and gas or minerals drop. Although they are income-generating investments, royalty trusts can be used to hedge against inflation since they are less vulnerable to rising interest rates than conventional income investments. Since commodity prices are set on a worldwide basis, royalty trusts offer a hedge against a fall in the Canadian dollar. An example is Athabasca Oil Sands Trust, which passes to investors earnings generated from Alberta's oil sands. This royalty trust trades on the Toronto Stock Exchange, with the symbol AOS.UN. Tax on the dividends you receive from royalty trusts may be deferred and, depending on the particular royalty trust, payouts from these securities vary, as do the extent they may qualify for capital gains treatment or royalty tax credits. Royalty trusts can be held in an RRSP. Royalty trusts are a complicated product. Consider seeking professional investment advice.