Here’s some food for thought.

First your broker, not the Canadian government, is charged with withholding dividends. The percentage of dividends that are withheld, however, seems to be highly variable.

For example, Enterra Energy Trust (ENT.UN)—an oil and gas royalty trust—reports a 15 percent withholding tax on 70 percent of dividends paid to US investors for the period August through December 2004. The remaining 30 percent will be untaxed. Up through July, the tax was only levied on 50 percent of the total dividend paid to US investors.

That would seem to be consistent with the fact that some of Enterra’s dividend is tax-advantaged return of capital, while some if not. Some subscribers, however, have reported a 15 percent tax on substantially all of Boralex Power Income Fund’s (BPT.UN) dividend, but no tax levied on Vermilion Energy Trust’s (VET.UN).

That’s despite the fact that Vermilion has typically classified more than half its distribution as return on capital, taxable as an ordinary dividend. Meanwhile, more than a quarter of Boralex’ dividend has historically been a return of capital.

No matter how these issues are ultimately resolved, the Canadian withholding tax does not diminish the appeal of trusts, either for dividends or capital gains potential.

Even if you fail to file on your US taxes to reclaim taxes withheld by brokers on behalf of Canada, there’s still a strong yield advantage, particularly when you consider trust distributions are considered “qualified income” and will be taxable at a maximum of 15 percent in the US at least to 2008.

Given what appears to be general confusion about trust taxation, however, it looks like a few wise steps can minimize what you wind up paying. Brokers, for example, are apparently not withholding the 15 percent of US investors dividends on trusts held within IRA accounts. That’s under the terms of a tax treaty signed between the US and Canada.

The good news is with tax time still a ways off, we’ve got some time to collect the right information and take action. That’s the point of the report you’ll be receiving in the coming weeks.