FATCA’s impact on publicly traded trusts

My friend’s blog, Beating the Index, has recently been promoting the virtues of two high payout energy trusts that the Calgary oil guys have set up to exploit US legacy oil and gas by using horizontal drilling and multi-fracking technologies.  The Canadian government ended the income trust structure for most Canadian companies on January 1, 2011, because it provided a tax loophole for foreigners investing in Canada, and corporate profits could escape the country with a mere 15% withholding–in the income trust, the profits flowed through to individual distribution recipient who then declared it on their taxes as unearned income.  Apparently, the income trust structure (or something similar) is still available for Eagle Energy Trust (EGL.UN) and Parallel Energy Trust (PLT.UN) because they are exploiting a foreign source of income.

In the past, I’ve merely responded to Beating the Index by saying that I’m out of the US market because of the persecution of US persons, though I thought that EGL.UN, an asset held in Canada, would be a safe because Mich could buy or sell it without IRS implications.  But now I am not so sure, because it dawned on me this morning that FATCA doesn’t impact Foreign Financial Institutions (FFIs) only but also foreign trusts.  So this morning I asked Mich:

Hey Mich: I was wondering if you have had a chance to determine what the implications of FATCA will be on these Canadian trusts, considered “foreign trusts”. I think that companies like Eagle Energy Trust or Parallel Energy Trust like banks, foreign trusts must determine and declare to the IRS all of their US persons. If they do not become FATCA compliant they will experience a 30% withholding of their US source income. In order to be FATCA compliant such trusts would have to either go off the public market (because ownership changes on daily basis), or brokers would have to keep track of who is the US person (i.e., the trust could only be traded by a FATCA compliant FFI).

I don’t know what the implications of this are. It may result either in the conversion of the trust to a regular corporation or to these trusts going private before 2014. Let me do some homework, but this sort of thing is complicated enought and too few people realize the financial damage that the Obama administration is doing to the world economy. FATCA threatens to dismantle the world economy, or at least, the United States’ participation in it.

I am still of the opinion that the Canadian FFIs will either comply with FATCA, thus violating the Human Rights of their clients who are deemed by the IRS to be US persons (that includes permanent residents who hold Green Cards and US citizens, and dual Canadian and US citizens, and potentially anyone born in the United States); or because of complaints, they will not be able to comply, and as a result, there will be a sudden exodus of Canadian investments from the United States. The worldwide impact of FATCA is estimated to be at least 14 trillion of foreign assets leaving the United States (see http://isaacbrocksociety.com/2011/12/11/fatca-a-ticking-time-bomb-for-the-economy/ ).

I am wondering if anyone knows the answer to this question:  How will FATCA impact trusts like Eagle and Parallel?

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