Few people know about a class of Canadian public companies that trade on the stock market called Royalty Trusts. They trade like normal stocks; however, Royalty Trusts is a special business entity in Canada which receives special tax breaks from the Canadian government. In exchange for these tax breaks, they are required by law to pay out at least 90% of all earnings to shareholders.

Canadian Royalty Trusts are created so that the dividends are taxed as personal income and the corporation is not taxed at the corporate level, therefore avoiding double taxation. This is a great income generator for investors as many of the Royalty Trusts are paying double digit dividends annually just by holding these stocks, whether the stock goes up or down.

Most Royalty Trusts are based on a revenue source for a specific asset(s) that the corporation owns. These assets are varied depending on the company and can be in such industries or sectors as mining (gold, uranium etc.), timber, oil and gas or even a patent portfolio.

Today, I will focus on the Canadian Oil Royalty Trusts and give a few examples of some hot ones which have been giving some high returns in the past few years because of the rising oil prices. The double digit dividends are hard to argue with if you are an income investor. An added bonus is the appreciation in stock value as well because of oil prices.

Here is a small list of some oil and gas related Canadian Royalty Trusts traded on the U.S. stock market:

Precision Drill Trust was included as an example of a non oil asset trust, however, it is part of the oil industry that provides contract drilling, service rig, and ancillary services to oil and natural gas exploration and production companies. It is also pays out some handsome dividends as well.

While these are Royalty Trusts that are traded on the U.S. stock exchanges, the majority of them are traded on the Toronto Stock exchange. A good brokerage firm should be able to place the trade on a foreign exchange for a small fee. Some of the stocks traded on the TSE will also trade on the U.S. pinksheets, so you can find them there as well.

One thing to keep in mind, the dividends that these Royalty Trusts pay out can run for years or decades, however, some are limited because of the assets they own is finite. Meaning the assets, like oil or gas is limited to the amount of reserves that are still in the ground.

The best way to invest in the Royalty Trusts is find a company that has large reserves that stretch out for years and continues to add to their reserves through exploration or acquisitions. The dividends will keep on paying as long as the oil and gas supply is being produced by the company. The rising oil prices will also add to the value of the stock that you hold.

Note: It was brought to my attention from a reader that BPT was not a Canadian Trust, but indeed an American Trust, so it has been removed from the list. There is also a proposal on the table by the Canadian government to do away with the tax benefits of the Royalty Trusts by 2011 and be taxed at the corporate level. This can have a negative impact on future dividend payments. However, for the time being it is still a proposal; the bill must be passed by Parliament and signed into law. About 5% of Canadian voters own income trusts, which means if this passes they will see their spending power decreased if these trusts are taxed. I can not predict what the Canadian Parliament or politicians will do. Investors will have to make their own choices regarding their own money and investments.