Saturday, March 11, 2006

Caution with Canadian Oil Income Stocks in IRA's

Beware of the problems of putting Canadian oil income stocks in your IRA accounts (either regular IRA's or Roth IRA's). For that matter, be careful about putting any stock from any non-US company in your IRA. The problem is the foreign tax that is withheld from your dividends. I ran into the problem with a couple Canadian stocks including Provident Energy (PVX) which I put into my Roth IRA. I started noticing that Canadian taxes were being withheld from my dividend payments, which were effectively reducing my yield. This stock is currently paying about 11.4% but after the tax, it brought the yield down to about 9.7%, still a very high yield but it would be nice to have that additional 15% of cash flow that is being distributed. I asked my stock brokerage firm what I could do about it and they said 'nothing'. I asked my CPA what I could do about it and he said that if I owned the shares personally, there is something I could do about it but since the shares were held by a retirement account, there was nothing I could do (talk to your own accountant, I'm not providing accounting advice).

In addition, I understand that there may be some partial tax sheltering of the dividend due to depletion, which would be another reason for holding an oil income stock outside a retirement plan instead of inside. For example, Petrofund Energy Trust (PTC) recently stated that 8.86% of their distributions for 2005 are non-taxable. Something to consider.

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