What is an income trust?
An income trust is an equity investment vehicle designed to deliver cash flow from operations to unitholders in a tax-efficient manner. Unlike corporations, income trusts are designed to distribute cash flows from underlying businesses on a “before-tax" basis. However, distributions to unitholders do carry similar risks to dividends from corporations in that they are dependent on the earnings and cash flow of the underlying business, and they do not have any of the guarantees of fixed income payments from bonds.
In the case of Canadian Oil Sands, the Trust holds, directly and indirectly, royalty interests on the production of synthetic crude oil and associated products attributable to certain working interests held by its operating subsidiaries in the Syncrude Project. The royalty interest is equal to 99% of the revenues from the sale of the Working Interests’ share of production, less all cost and expenses including both operating and capital costs, taxes and debt service costs incurred by the operating subsidiaries. The operating subsidiaries also may make intercompany loan payments to the Trust. Please see Trust Structure for a schematic depicting the relationship among the Trust and its operating subsidiaries.
After markets closed on October 31, 2006, Canada’s Minister of Finance, Jim Flaherty, announced proposed changes to the taxation of Canadian income trusts. The full text of the government’s announcement can be found at:
http://www.fin.gc.ca/news06/06-061e.html
How can I purchase units of Canadian Oil Sands Trust? Can I purchase units directly from the Trust?
No, you cannot purchase units directly from us. You may contact a financial advisor to help facilitate the purchase of our units. Our website provides a list of the analysts who provide investment research on Canadian Oil Sands Trust, and you may want to contact one of these firms as their financial advisors would have access to this research. Alternatively, you may also contact your bank, many of which have established vehicles through which you can purchase investments. The Trust, however, does not recommend or support any such analysts and you should do your own due diligence on these analysts and their credentials.
Does Canadian Oil Sands offer a DRIP (distribution reinvestment plan)?
No; Canadian Oil Sands Trust suspended its Premium Distribution, Distribution Reinvestment & Optional Unit Purchase Plan (DRIP) effective January 31, 2007.
The DRIP provided efficient and cost-effective equity to support the Trust's financing plan for Syncrude's Stage 3 expansion. With the successful completion of that expansion in 2006, the Trust no longer requires this source of funding. The Trust may reinstate the DRIP in the future if required to fund new investing activities.
How can I purchase units of Canadian Oil Sands Trust as a resident of the U.S.?
Canadian Oil Sands does not have a U.S. listing and has no plans to acquire one at this time. We also do not have an American depository receipt (ADR) through which you could purchase our units. Consequently, you would need to contact an investment advisor who is familiar with purchasing equities on the Toronto Stock Exchange to help facilitate your purchase of Canadian Oil Sands Trust units. We trade on the Toronto Stock Exchange under the symbol COS.UN and a current unit price in $Cdn is available on our website. It is also our understanding that we trade on the over-the-counter pink sheets system in the U.S. under the symbol COSWF; however, investors should be aware that this system may not provide the liquidity to offer the most competitive pricing for Canadian Oil Sands Trust units. There are also limitations on the percentage of non-Canadian residents who can hold Trust units; please see the responses to the next two questions below for more details.
Does Canadian Oil Sands Trust plan to list on a U.S. exchange?
Canadian Oil Sands does not have a listing on a U.S. exchange and has no plans to acquire one at this time. In order for Canadian Oil Sands Trust to maintain its status as a mutual fund trust for the purposes of the Income Tax Act in Canada, the Trust must be considered to be primarily for the benefit of Canadian residents or hold 90% of its assets in certain non-taxable Canadian property. The Trust indenture under which the Trust was created currently provides that no more than 49% of the units of Canadian Oil Sands Trust can be held by non-Canadian residents.
Canadian Oil Sands Trust is not a reporting issuer in the U.S. and is not registered with the SEC; however, we do file disclosure documents with the securities commissions in Canada. To view all of the Trust's filings, please visit http://www.sedar.com./.
What is the level of non-Canadian resident ownership of Canadian Oil Sands’ trust units?
Based on information from the statutory declarations by Unitholders, we estimate that, as of February 12, 2008, approximately 32 per cent of our Unitholders are non-Canadian residents with the remaining 68 per cent being Canadian residents. Canadian Oil Sands' Trust Indenture currently provides that not more than 49 per cent of its Trust units can be held by non-Canadian residents.
The Trust intends to require its Unitholders to complete statutory declarations as to their residency status each quarter to enable the Trust to monitor its level of non-Canadian resident ownership. The Trust Indenture requires all Unitholders to provide such statutory declarations when requested to do so by the trustee and transfer agent.
Statutory declarations are considered to be a more accurate measure of non-Canadian residency status since each Unitholder’s position is sworn in an affidavit rather than relying upon geographical address data. The statutory declarations are only as of a specific record date, and therefore may still not reflect the current ownership level of the Trust’s units; however, given the limitations in the securities registration system and the lack of any process for real-time residency information to flow to the trustee and transfer agent, the Trust is of the view that statutory declarations are currently the most appropriate method of determining the residency status of its Unitholders. The reported level of Canadian ownership is subject to these limitations and the level of Canadian ownership may change at any time without notice.
When, based on the statutory declarations or other relevant information, which may still include geographical lists, the level of Units held by non-Canadian residents is 46 per cent or more, Canadian Oil Sands will issue a press release advising of the increased level. The Trust will also advise whether it anticipates reaching the 49 per cent or more non-Canadian resident Unitholders and that, in such case, each person purchasing the Units, whether through a broker or directly in registered form will need to complete a declaration. If the level of non-Canadian resident ownership appears to be approximately 49 per cent or more of non-Canadian residents, Canadian Oil Sands will make a public announcement that no further sales to non-Canadian residents will be allowed. No transfers will be allowed without the completion of a declaration indicating their status as a Canadian or non-Canadian resident. As part of such announcement, the Trustee shall state that it shall not accept a subscription for Units from or issue or register a transfer of Units to a person unless the person provides a declaration that the person is a Canadian resident. In addition, the Trustee will send a notice to non-resident holders of Units, chosen in inverse order to the order of acquisition or registration or in such other manner as the Trustee may consider equitable and practicable, requiring them to sell their Units or a specified portion thereof within the specified period of not less than 60 days. If the Unitholders receiving such notice have not sold the specified number of Units or provided the Trustee with satisfactory evidence that they are Canadian residents within such period, the Trustee may, on behalf of such Unitholders sell such Units and, in the interim, shall suspend the voting and distribution rights attached to such Units. Any sale shall be made on the Toronto Stock Exchange and, upon such sale, the affected holders shall cease to be holders of Units and their rights shall be limited to receiving the net proceeds of sale upon surrender of the certificates representing the Units.
How is the Syncrude Crown royalty calculated?
Under Alberta’s generic Oil Sand Royalty, the Crown royalty is calculated as the greater of 1% of plant gate revenue before hedging or 25% of plant gate revenue before hedging, less Syncrude operating, non-production and capital costs.
Syncrude began paying the higher rate in the second quarter of 2006.
What were the units initially issued at?
The current Canadian Oil Sands Trust (COS.UN) is the result of a merger between Athabasca Oil Sands Trust (AOS.UN) and Canadian Oil Sands Trust (CO.UN) in July 2001.
Athabasca Oil Sands Trust (AOS.UN) Initial Public Offering was on November 16, 1995 for $10 per Trust unit.
Canadian Oil Sands Trust (CO.UN) Initial Public Offering was on June 5, 1996 for $14.15 per Trust unit.
What makes Canadian Oil Sands Trust a unique investment opportunity?
Canadian Oil Sands is the only public investment vehicle that provides non-diversified ownership in Syncrude. The Syncrude asset offers long-life reserves, production expansion and a premium quality, synthetic light oil product. Canadian Oil Sands Trust seeks to optimize value to its Unitholders by managing a prudent financial structure and risk management plan, providing the opportunity for rising free cash flow (funds from operations less capital expenditures and reclamation trust contributions), which would be available to pay distributions to Unitholders.
How is the Trust managed?
The Trust is managed by Canadian Oil Sands Limited, a wholly owned subsidiary of the Trust. Canadian Oil Sands Limited has a core team that manages all aspects of the Trust’s business. Marcel Coutu, President and Chief Executive Officer, leads the Trust and reports to a board of independent directors. The Trust pays no management fees to a third party manager nor any transaction fees for acquisitions and dispositions, and is focused on maintaining one of the lowest cost structures in the trust sector.
How is the Syncrude Joint Venture managed?
The Syncrude Project is a joint venture undertaking among Canadian Oil Sands Limited (36.74%); Conoco Phillips Oilsands Partnership II (9.03%); Imperial Oil Resources (25%); Mocal Energy Limited (5%); Murphy Oil Company Ltd. (5%); Nexen Oil Sands Partnership (7.23%); and Petro-Canada (12%).
The Syncrude Project is operated and administered by Syncrude Canada Ltd. on behalf of the participants. As operator of the Syncrude Project and as representative of the participants, Syncrude is responsible for managing and operating all oil sands operations of the joint venture including the mining, extraction, upgrading and utilities facilities at Mildred Lake; the mining, primary extraction and slurry transportation facilities at Aurora; and the Research Centre in Edmonton, Alberta. Syncrude is also responsible for identifying and developing future expansion opportunities and for obtaining and maintaining all regulatory permits, licenses and approvals.
On November 1, 2006 Canadian Oil Sands announced the launch of a long-term management services agreement between Imperial Oil and Syncrude Canada Ltd. Under this agreement, Imperial Oil will provide operational, technical and business management services to Syncrude Canada Ltd., which is expected to result in further sustainable improvement in Syncrude’s operating performance. The agreement also supports the development of Syncrude’s preliminary Stage 3 debottleneck and Stage 4 expansion plans, ultimately expected to increase production to over 500,000 barrels per day, gross to Syncrude, late in the next decade.
Strategic direction for Syncrude's operations is governed by a CEO Committee comprised of the key decision maker from each Joint Venture owner. Joint venture project decisions are scrutinized by the Management Committee, and generally require unanimity for major expansions and a majority for most other approvals. Both committees are chaired by Canadian Oil Sands.
What is your distribution policy?
Distributions are not formulated by written policy at Canadian Oil Sands, but are the purview of the Board of Directors with advice from senior management. The Board will assess each distribution in light of the relevant circumstances, and distributions may need to be altered accordingly. The major criteria considered in the context of distributions are: current and forecast crude oil prices, production volumes, operating and capital costs, maintaining an investment grade credit rating, and ensuring financing capacity for Syncrude's expansion projects and/or acquisitions. Distributions are expected to reflect some of the variability of free cash flow once Canadian Oil Sands approaches fuller payout.
What are the tax implications of investing in Canadian Oil Sands?
For more information on this question, see Tax Information.
Canadian Unitholders
Distributions to Unitholders are typically comprised of a portion that is considered income and a portion that is considered a return of capital. The income portion must be included in income and may be taxable while the return of capital reduces the adjusted cost base of the units for tax purposes. The allocation between these two portions depends on the nature of the cash flows the trust receives and the tax deductions the trust is entitled to claim in determining its income.
Distributions that are deemed a "return of capital" reduce the original cost base of the trust units, deferring any tax consequences until the units are sold, deemed to be sold or the cost base of the units becomes negative. Any portion of cash distributions not considered to be a return of capital must be included in income and may be taxable. Historically, the portion of Canadian Oil Sands Trust’s distributions that were considered taxable was classified as "other income" on the T-3 Summary Forms in respect of the year in which the distributions were received.
For a summary of the taxability of the distributions paid since inception, please see Distributions, Canadian summary.
U.S. Unitholders
As Canadian Oil Sands Trust has not made an election to be treated as a partnership for U.S. purposes, we believe we are considered a corporation for U.S. tax purposes with a portion of the distributions paid by the Trust qualifying as dividends for U.S. tax purposes. A determination of the portion of the distributions that will be treated as dividends is made by March 31 of the following year.
Under Canadian legislation, a 15% Canadian withholding tax is deducted on the total amount of the distribution at source when the distributions are paid to U.S. residents. Taxable U.S. residents may be able to recover all or a portion of the 15% Canadian withholding tax by claiming it as a foreign tax credit on their U.S. tax return.
For a summary of the taxability of the distributions paid since inception, please see Distributions, U.S. summary
The above information is not intended to be, and should not be construed to be, legal or tax advice to any Unitholder. Unitholders should obtain independent advice regarding the income tax consequences of their investment.
What are the risks of investing in Canadian Oil Sands?
The price of oil is the single most important factor affecting the performance of the Trust. Syncrude Sweet Blend has historically received a price that is within a relatively narrow range around the benchmark price for crude oil, West Texas Intermediate (WTI), at plant gate. Changes in natural gas prices also affect the Trust because natural gas is consumed in the production process. Crude oil and natural gas prices fluctuate in response to market demand, economic conditions and other factors beyond the control of the Trust. Other risks reflect the Syncrude operations, and where possible, Syncrude management focuses on managing these risks, which include production levels and operating and capital costs. The Trust's sensitivities to these risks are outlined in its Guidance Document. Please see the Annual Information Form and the Management's Discussion and Analysis sections of the Trust's quarterly and annual reports (Financial Reports) for further information regarding the risks of investing and the Trust's financial-risk management program.
How does Canadian Oil Sands Trust manage risk?
Canadian Oil Sands manages risk at several different levels. The first is through a comprehensive insurance program that mitigates the risk of the Trust's share of Syncrude's assets from physical damage. During periods of significant capital expansion, the Trust may consider hedging to reduce the exposure to volatile crude oil prices and protect the cash flow needed to funds its capital programs. When the Trust is not undertaking large scale capital expansion programs, the philosophy is to generally remain unhedged and fully exposed to crude oil prices.
Did a split of Canadian Oil Sands Trust Units occur?
Canadian Oil Sands Trust Units split on a five-to-one basis effective the close of business on May 3, 2006 (the Split Date). The Units began trading on a post-split basis at the opening of business on May 1, 2006, the second business day preceding the Split Date, according to the Toronto Stock Exchange (TSX) rules.
Management and the Board of Canadian Oil Sands believed that having a greater number of Units at a reduced price per Unit would enhance liquidity, increase investor interest in the Trust and our business, and bring the trading price of the Units into a more accessible range for retail investors.
More information is available in the Management Proxy Circular dated March 10, 2006.
Are there any tax implications of the Unit Split?
To determine any gain or loss on Units you dispose of after the Split Date, you will have to proportionately reduce the adjusted cost of Units held to reflect the increased number of Units held giving effect to the split.
As an example, if you had 100 Units at an adjusted cost base of $50 each, you would have 500 Units with an adjusted cost base of $10 each immediately following the Unit Split.
The Trust has been advised by outside legal counsel that, under existing Canadian income tax law, and taking into account all published proposals for its amendment, the Unit Split will not result in taxable income or any gain or loss to Unitholders. Unitholders may wish to consult their tax advisors to determine the proper adjusted cost base of their Units after the split.
The Trust has been advised by outside legal counsel that, under existing U.S. federal income tax law, the Unit Split will not generally result in taxable income or in any gain or loss to the Unitholders. The amount paid for (that is, the tax basis of) the existing Units will generally be allocated proportionately to the total Units held after the split. This results in a tax basis for each Unit that is 20% of the tax basis of the Units held just before the split. A Unitholder's holding period for Units received in the split will include the period for which the Unitholder has held his or her existing Units. Other rules may apply to Unitholders of two or more lots of Units or Unitholders who are subject to special provisions under the U.S. Internal Revenue Code. Those Unitholders should consult their tax advisors to determine the proper method for allocating the tax basis and to determine the holding period for each of their Units. The foregoing discussion addresses only the U.S. federal income tax consequences of the current transaction and does not address the U.S. federal income tax consequences of other splits that may occur in the future. The foregoing discussion also does not address the U.S. federal income tax consequences of holding and disposing of Units.
More information is available in the Management Proxy Circular dated March 10, 2006.
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