The Oxford Club recently recommended Penn West Energy Trust (PWE).  It pays a 12.8% dividend.  I am thinking about buying it along with some other energy trusts.  I like the large dividends.  I think some of their return is the return of capital and would not be taxed.  Would I be better off putting these type of investments in my after tax account or my IRA?  

I hold 'em in an IRA, but it would be better to have them in a regular taxable account.  The Canadian government imposes a 15% tax on those diveys, and you can't deduct that on your tax return.  If held in a regular taxable account, you can.

[quote user="alpha28"] I think some of their return is the return of capital and would not be taxed.  Would I be better off putting these type of investments in my after tax account or my IRA?  [/quote]

I hold three such companies in a taxable account - PWE is not one of them.  The average current yield of the three is 13.5% and their average YTD appreciation is 10.1%.

The distributions show up monthly with a 15% deduction for the Canadian tax.  When my tax return is filed, I receive a credit for foreign taxes paid on the qualified dividends.  So . . . I'm even with respect to taxes.  Canada is happy and so is Uncle Sam.

As I indicated, there has been no return of capital with the three I hold.  I checked the PWE website and they indicate 'minimal' return of capital for their 2007 distributions.  In general, you should probably plan on paying your 15% federal tax on these types of investments - and you're sort of 'taxed as you go' if you hold them in a taxable account.

ElLobo, does holding these in your IRA mean you lose that 15% foreign withholding forever and you're eventually taxed again on the dividends you've received?

Regards.

Cliff

I own a couple of income trusts + Canroys.  As far as I can determine I'm out the 15%.

Talked to Amertrade about this issue but they saw no way out of the mess.  No offsetting credits if held in IRA.  If any one has any differing info pls post.  Over the years i have come not to trust these guys when discussing foreign taxes.  

Cliff,

"does holding these in your IRA mean you lose that 15% foreign withholding forever and you're eventually taxed again on the dividends you've received?"

Yes.

(I look at that 15% loss as if the Canroy retained it and wasted it on a bad acquisition or share buyback program or other such nonesense.  IOW, it makes no difference to me whether the Canroy or the Canadian government wastes my money!)

As I understand it, my IRA would have to file a tax return to receive the credit.  Which begs the question that, if my IRA would file a return (due to excess distributions from MLPs held in the account), could it claim the credit?

Although I own a small amount of PWE, I do so because of its exceptional oil/gas reserve position. I wouldn't bank on that dividend as Can. taxes go up 35% in a few years and my read is this tax won't get reversed when it begins in 2011. There is much talk about tax pools minimizing taxes but I put little faith in this analysis and even if it were true, its affect will be only temporary. If you add 35% in taxes, that only leaves 10-20% of current cash flow for dividends. Whats more, as time moves forward, it will be necessary for an increase in capital expenditures to produce similar amounts of oil/gas as current production is coming from the lower hanging fruit. Management has frequently debated the prospect of substantially reducing or omitting the dividend due to the prospect of potentially high capex...eventually it will happen, probably sooner than later. The best outcome would be for PWE and like Canroys to staple the unit into a high yield bond(converting part of it to debt and paying interest)  and part common but if that is on the horizon, I haven't seen it.