UK Accounting Glossary
A royalty trust is a type of corporation usually involved in mining. It is taxed according to special regulations, whereby its profits are not taxed at the corporate level provided a certain high percentage (e.g. 90%) of profits are distributed to shareholders as dividends. The dividends are then taxed as personal income. This system, similar to real estate investment trusts, effectively avoids the double-taxation of corporate dividends.
Royalty trusts typically own oil or natural gas wells, or the mineral rights of wells. Corporate shares generally trade on the public stock markets. They are a powerful investment tool for people who wish to invest directly in oil or natural gas, but who don’t have the resources or risk-tolerance to buy their own well. Additionally, since trusts often own numerous wells, they represent a convenient way for the average investor to diversify investments across a number of properties.
Royalty trusts often attract investors with their relatively high yields. This makes the shares sensitive to interest rates, as share prices are likely to decline in periods of rising interest rates, and to rise when interest rates fall.
Royalty trusts are found in Canada and the United States. Canadian royalty trusts, called CanRoys, typically trade on the Toronto Stock Exchange, while some of the larger trusts also trade on the New York Stock Exchange. CanRoys usually offer higher yields than U.S. trusts; for non-Canadian investors, this higher yield is somewhat reduced by a foreign tax withholding that is absent in the U.S. trusts.
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This glossary post was last updated: 13th February 2020.