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Paramount Energy Trust Advises on Reporting Distributions On 2006 U.S. Income Tax


CALGARY, ALBERTA -- (TSX: PMT.UN) The following information is being provided to assist U.S. individual Unitholders of Paramount Energy Trust (“PET”) in reporting distributions received from PET during 2006 on their Internal Revenue Service (“IRS”) Form 1040, “U.S. Individual Income Tax Return” (“Form 1040”).

This summary is of a general nature only and is not intended to be legal or tax advice to any particular holder or potential holder of PET trust units. Holders or potential holders of PET trust units should consult their own legal and tax advisors as to their particular tax consequences of holding PET trust units.

Qualified Dividends

In consultation with its U.S. tax advisors, PET believes that its trust units should be properly classified as equity in a corporation, rather than debt, and that dividends paid to individual U.S. Unitholders should be “qualified dividends” for U.S. federal income tax purposes. As such, the portion of the distributions made during 2006 that are considered dividends for U.S. federal income tax purposes should qualify for the reduced rate of tax applicable to long-term capital gains. However, the individual taxpayer’s situation must be considered before making this determination.

PET has not received an IRS letter ruling or a tax opinion from its tax advisors on these matters.

Trust Units Held Outside a Qualified Retirement Plan

With respect to cash distributions paid during the year to U.S. individual Unitholders, 38.96% percent should be reported as a return of capital (to the extent of the Unitholder’s U.S. tax basis in their respective units) and 61.04% percent should be reported as “qualified dividends”.

The portion of the distributions treated as “qualified dividends” should be reported on Line 9b of Form 1040, unless the fact situation of the U.S. individual Unitholders determines otherwise. Commentary on page 23 of the Form 1040 Instruction Booklet for 2006 with respect to “qualified dividends” provides examples of individual situations where the dividends would not be “qualified dividends”. Where, due to individual situations, the dividends are not “qualified dividends”, the amount should be reported on Schedule B - Part II - Ordinary Dividends and Line 9a of Form 1040.

For U.S. federal income tax purposes, in reporting a return of capital with respect to distributions received, U.S. Unitholders are required to reduce the cost base of their trust units by the total amount of distributions received that represent a return of capital. This amount is non-taxable if it is a return of cost base in the trust units. A return of capital for U.S. tax purposes is calculated differently than for Canadian tax purposes. For U.S. tax purposes, a return of capital occurs only after all the current and accumulated earnings and profits of a corporation have been distributed. If the full amount of the cost base has been recovered, any further return of capital distributions should be reported as capital gains.

U.S. Unitholders are encouraged to utilize the Qualified Dividends and Capital Gain Tax Worksheet of Form 1040 to determine the amount of tax that may be otherwise applicable.

The taxable portion (for Canadian income tax purposes) of the distributions is subject to a minimum 15% Canadian withholding tax that is withheld prior to any payments being distributed to Unitholders. Beginning in 2005, the return of capital portion (for Canadian income tax purposes) of the distributions is also subject to a 15% withholding tax that is withheld prior to any payments being distributed to Unitholders. Where trust units are held in a cash account, we believe the full amount of all withholding tax should be creditable, subject to numerous limitations, for U.S. tax purposes in the year in which the withholding taxes are withheld. Where trust units are held in qualified retirement account, the same withholding taxes apply but the amount is not creditable for U.S. tax purposes.

The amount of Canadian tax withheld should be reported on Form 1116, “Foreign Tax Credit (Individual, Estate, or Trust)”. Information regarding the amount of Canadian tax withheld in 2006 should be determined from your own records and is not available from PET. Amounts over withheld, if any, from Canada should be claimed as a refund from the Canada Revenue Agency no later than two years after the calendar year in which the payment was paid.

Investors should report their dividend income and capital gain (if any), and make adjustments to their tax basis in PET’s units, in accordance with this information and subject to advice from their tax advisors. U.S. individual Unitholders who hold their PET trust units through a stockbroker or other intermediary should receive tax reporting information from their stockbroker or other intermediary. We expect that the stockbroker or other intermediary will issue a Form 1099-DIV, “Dividends and Distributions” or a substitute form developed by the stockbroker or other intermediary. PET is not required to furnish such Unitholders with Form 1099-DIV. Information on the Forms 1099-DIV issued by the brokers or other intermediaries may not accurately reflect the information in this press release for a variety of reasons. Investors should consult their brokers and tax advisors to ensure that the information presented here is accurately reflected on their tax returns. Brokers and/or intermediaries may or may not be required to issue amended Forms 1099-DIV.

Trust Units Held Within a Qualified Retirement Plan

No amounts are required to be reported on a Form 1040 where PET trust units are held within a qualified retirement plan.

2006 Summary of U.S. Tax Information

The following schedule summarizes, on a per trust unit basis, the U.S. tax treatment of monthly cash distributions paid by PET (prior to Canadian withholding tax) for the period January 1st to December 31st, 2006. The amounts are segregated between the portion of the distribution that would be reported as a qualified dividend and the amount reported as a return of capital. The amounts are expressed in $ U.S. converted on the date of payment.

Taxable Deferred
Cash Cash Qualified Return of
Record Payment Distribution Conversion Distribution Dividend Capital
Date Date ($ Cdn) Rate (1) ($ U.S.) ($ U.S.) ($ U.S.)
Dec 30, Jan 16,
2005 2006 0.2400 0.8637 0.2073 0.127 0.081
Jan 31, Feb 15,
2006 2006 0.2400 0.8665 0.2080 0.127 0.081
Feb 28, Mar 15,
2006 2006 0.2400 0.8656 0.2077 0.127 0.081
Mar 31, April 17,
2006 2006 0.2400 0.8731 0.2095 0.128 0.082
April 28, May 15,
2006 2006 0.2400 0.8977 0.2154 0.132 0.084
May 31, June 15,
2006 2006 0.2400 0.8947 0.2147 0.131 0.084
June 30, July 17,
2006 2006 0.2400 0.8832 0.2120 0.129 0.083
July 31, Aug 15,
2006 2006 0.2000 0.8912 0.1782 0.109 0.069
Aug 31, Sept 15,
2006 2006 0.2000 0.8933 0.1787 0.109 0.070
Sept 29, Oct 16,
2006 2006 0.2000 0.8783 0.1757 0.107 0.068
Oct 31, Nov 15,
2006 2006 0.2000 0.8780 0.1756 0.107 0.068
Nov 30, Dec 18,
2006 2006 0.2000 0.8640 0.1728 0.105 0.067

Total 2.6800 2.356 1.438 0.918

(1) Bank of Canada noon rate on date of payment

About PET
Paramount Energy Trust is a natural gas-focused Canadian energy trust. PET’s Trust Units and Convertible Debentures are listed on the Toronto Stock Exchange under the symbol “PMT.UN”, “PMT.DB”, “PMT.DB.A”, and “PMT.DB.B” respectively.

The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.



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