Review of Consolidated Results

Future Income Tax

The difference between the accounting basis and tax basis for assets and liabilities is referred to as a temporary difference for purposes of calculating future income taxes. The future income tax liability of Canadian Oil Sands primarily represents the temporary difference between the book value of capital assets and tax pools of the Trust’s subsidiaries at the substantively enacted tax rates expected to be in effect when such temporary differences reverse.

Future income tax expense in 2006 increased to $18 million from $1 million in 2005. The increase in 2006 includes a $15 million expense adjustment related to the prior year; however, the Trust has not restated prior year’s financial statements as such adjustment is not considered material. Also included in 2006 is a future income tax recovery of $29 million, as a result of substantively enacted reductions to future provincial and federal corporate tax rates and elimination of the federal surtax during the second quarter of 2006. The remaining variance from the prior year relates to changes in temporary differences.

In 2006, Canadian Oil Sands completed an acquisition of Canadian Arctic, as more fully discussed later in this MD&A, which resulted in a $52 million increase to the Trust’s total future tax liability on its Consolidated Balance Sheet at December 31, 2006. The additional future tax liability recorded on acquisition reflects the temporary differences between the book value of the Arctic Island assets and the related tax pools at the substantively enacted tax rates expected to be in effect when such temporary differences reverse.

The federal government’s recently proposed income tax changes for income trusts are likely to have an impact on the Trust’s future income tax calculations if such tax changes are enacted.  The new income tax rules have not yet been legislated as of the date of this MD&A, nor have the accounting regulators finalized guidance on future income tax rules associated with the taxation of trusts. However, if the new legislation and accounting guidelines are put into effect, we estimate the Trust’s future income tax liability would increase by approximately $0.6 billion, with a corresponding decrease to net income in the period when the legislation is substantively enacted. The potential increase is a result of Canadian Oil Sands Trust’s temporary differences, which may be required to be tax-effected.