Frequently Asked Questions
1. What are Gross Over-Riding Royalties (GORR's)?
Royalties are a percentage ownership entitlement in the gross production from oil and gas wells that provide income to investors.
The attractiveness of royalties is that they are paid off of top-line revenue prior to any operating responsibility or expenses that occur when managing the oil or gas wells.
2. Why buy units of a WCSB Royalty Income Limited Partnership rather than publicly traded shares of energy companies? Buying a professionally managed WCSB Royalty Income Limited Partnership (“WCSB Limited Partnership”), rather than shares in oil & gas companies, provides investors with ‘Top-Line’ revenue through direct ownership of oil & gas production while at the same time providing for capital gains potential. WCSB Income Limited Partnerships also eliminate exposure to capital market risks (i.e. the volatility typically associated with owning shares of publicly traded oil and gas companies.) Furthermore, a WCSB Limited Partnership can provide Canadian investors with access to oil & gas royalty investment opportunities that are generally available only to institutional investors.
3. Who manages the joint venture programs to which WCSB invests? Our Calgary based Oil & Gas Management Team is led by Bill Bonner, Peter Bolton and Martin Davies of Brickburn Asset Management who together, have over 60 successful years experience in oil and gas investing.
4. Are the tax benefits legitimate?
Yes! The tax benefits are well accepted in Canada and have been in place through legislation for over 30 years. The other consideration with WCSB Limited Partnership’s is that the funds invested stay in Canada to be used to create genuine and valuable economic activity and growth within Canada’s energy sector. Furthermore, the tax deductions are only available to individuals who pay Canadian taxes. The Partnership and General Partner have received a tax opinion from Borden Ladner Gervais LLP on the investment structure and tax deductions. (For the full text on this opinion, please refer to the prospectus of the offering to which you are considering an investment in.)
5. What are some of the risks?
Perhaps the most significant risk is commodity (oil and natural gas) price volatility, and to a lesser extent, risks associated with engineering and production activities.
One factor to remember is that our geological and engineering team has over 30 years of experience in the oil and gas industry.
Another important factor that significantly mitigates risk is the 100% tax deduction that investors realize. This tax deduction returns back to investors about 45% of their investment from their tax savings, leaving them with an "at risk" investment amount of approximately 54% to 56% of the original cost of investment.
6. What corporate activities qualify for the tax deductions?
The Government of Canada has stringent requirements that must be met in order to determine whether an activity is development or exploration in nature. The key difference being the amount of write-off allowed. Exploration and certain development activities can be written off at 100%. The companies to which WCSB invest in have experience in determining which classification of activity they are investing in, and the investment agreements in place with these companies ensure they spend the funds as agreed.
7. What is the ACB (Adjusted Cost Base)?
The adjusted cost base or “ACB” is generally what you originally paid for your investment. However, once you realize the tax deductions from the Limited Partnership, you are deemed to have an adjusted cost base (ACB) of nil (a nil adjusted cost base means that when you sell your investment, you
get to claim capital gain which gets preferential tax treatment in
comparison to otherwise paying tax on income,) which is due to the receipt of the tax deductions that will approximately equal your original investment amount.
8. How long does it take to receive the full 100% write off?
The majority of the deductions (40-50%) come in the first year of investment. Another 20-25% in deductions can be expected in the second year with a remaining 25% - 30% over the next 3 years.
9. How much is my tax deduction for the tax year in which I invest?
The partnerships intend to invest 100% of available funds into development programs or to a lesser extent exploration activities. Therefore, the expected tax deduction for a limited partner in the year of purchase is approximately 40-50% of the amount invested with the balance deductible over the next four years. Because of these tax deductions, investors may be able to reduce their effective net ‘at-risk’ capital to approximately 54% to 56% of their original investment (please see the prospectus for the relevant partnership for a full description of these calculations)
10. What about my capital losses from other investments?
If you sold investments and created a capital loss that you have not yet claimed, it can be carried back three years and forward indefinitely. This allows you to offset other capital gains against these losses, thereby reducing the tax you pay. Any capital gains resulting from the sale of your investment can be offset against any unused capital losses you may have.
11. Are there enough quality oil & gas companies willing to issue GORR's?
Yes! Many oil & gas companies are willing to issue GORR’s because they are a friendly source of capital which helps finance the development of their proven reserves. This increased production from proven reserves can significantly help oil & gas companies by providing cash flow to the companies without the companies having to finance the development through dilutive equity issues or through debt which can impair their balance sheets. This option further protects oil & gas companies from exposing themselves to unfriendly competition through working interest joint venture partners. Further, the oil & gas companies are entitled to book any new reserves developed which can enhance their companies’ share value.
12. What will your investment focus be - oil or natural gas?
The Partnership’s objective is to own a relatively balanced portfolio of both oil and natural gas production.
13. What will the client receive within 1 year of investment?
Within the first year of investment investors can expect to receive a 40 – 50% tax deduction on their invested capital with the balance to follow over the next 4 years. Investors can also expect to see the commencement of cash distributions within approximately 6-9 months from the closing date of the offering to which they invested. These cash distributions are directly deposited into their account.
14. What kind of tax deductions can the investor expect to see if the WCSB development programs are 100% successful?
WCSB generally invests in low-risk development “in-fill” wells. In the event of a 100% successful development program, the tax deductions would in turn be approximately 30% per year on a declining balance basis.
15. Why does WCSB have CEE tax deductions if they are typically not involved in exploration projects?
In the event that a WCSB development well isn’t successful, it gets reclassified from CDE to CEE and thus becomes a 100% tax deductable Canadian Exploration Expense.
16. How and when do I receive my T5013A Tax Slip?
Prior to the end of April of the year following the purchase of your WCSB investment, you will be mailed a T5013 federal tax receipt form from your investment dealers back office.
17. When is the liquidity event expected to occur?
The liquidity event of each WCSB Limited Partnership is estimated to take place about 2.5 -3 years after the final closing of the offering. Generally it takes about 12-15 months for new wells to settle into a reliable production range and once the wells have been on stream for 12-15 months, WCSB will then commence the process of packaging them for sale.
18. What can I expect to receive at liquidation?
An investor can expect to receive cash, shares of a publically traded company or a combination of the two upon liquidation of the WCSB Limited Partnership. Alternatively you may receive redeemable shares of a mutual or investment fund or other similar investment vehicle. If shares are included at liquidation there will be no extra fees above normal brokerage expenses to sell your shares for cash.
19. What are the tax consequences to the investor at time of liquidation?
If upon liquidity, the investors receive shares of either a mutual fund or publically traded company a tax event is typically deferred. If upon liquidity, the investors receive cash in exchange for their Limited Partnership units investors will have to pay tax at capital gains rates in the year of liquidation.
20. Does WCSB pay any premiums like flow-through share limited partnerships do?
No. One of the significant advantages of a WCSB Limited Partnership is that WCSB does not pay any premiums to the oil and gas companies in which WCSB partners with. This allows WCSB to have 100% of available capital invested directly into royalties from producing wells.
21. Can corporations benefit from buying flow-through?
Yes, corporations have the same advantages buying flow-through as does the individual investor. Please see ‘Tax Advantages for Corporations’ on our website for further information.