Canada tightens grip on trusts

Gary Park

Petroleum News Calgary correspondent

The Canadian government has put a squeeze on thriving oil and natural gas income trusts, which now face the prospect of foreign ownership restrictions.

When the government of Prime Minister Paul Martin tabled its first budget March 23 it unveiled proposed rule changes that could effectively cap foreign stakeholdings in individual trusts at 49.99 percent.

The threat posed by the budget is the intention to close a tax loophole “in the definition of taxable Canadian property” by imposing a 15 percent withholding tax on Jan. 1, 2007.

Three trusts listed on both Canadian and U.S. markets — Enerplus Resources Fund, Provident Energy Trust and Pengrowth Energy Trust — felt the pinch over the next few days as they were confronted with the prospect of forcing some U.S. investors to relinquish their units, while PrimeWest Energy Trust and Petrofund Energy Trust could be faced with barring new U.S. investors.

Current estimates of the level of non-resident ownership are Provident at 70 percent, Petrofund at 66 percent, Enerplus at 64 percent, with Pengrowth and PrimeWest in the range of 45 to 50 percent.

Provident, Petrofund and Enerplus have indicated they intend to use the next 33 months to figure out ways to boost their Canadian ownership, including floating different types of units in Canada and the United States.

The trusts said they intend to market new units in Canada, sidestepping a U.S. sales push.

The Martin government wants non-residents to own less than 50 percent on average over the course of a calendar year.

Brian Ector, an analyst at Scotia Capital, warned the foreign cap could trim 5 to 10 percent off the market value of some trusts.

Other analysts said the interlisted trusts could struggle to adapt, but believe the trusts will at least have time to make the adjustment.

Enerplus chief financial officer Robert Waters said he was struggling to understand how the government “expects us to get in line by 2007, but is vague as to how they can control” the change.