Tuesday, May 29, 2007

The takeover of Alcan by Alcan't

In the dog eat dog world of corporate takeovers, you have to get the players straight. In this case Alcoa is Alcan and and Alcan is Alcan’t.

As confusing as that may seem at first blush, it’s actually very easy to remember when you realize that Alcoa can defend itself from foreign takeover, whereas Alcan can’t. Despite the reciprocity that we all think may be contained under NAFTA, the sad truth is that Canada didn’t sign a NAFTA deal with Alcoa’s home country. For incorporation purposes, Alcoa resides in Pennsylvania and is protected by the rules that govern incorporation in that state. Meanwhile, the target is governed by rules not of Quebec’s making, but those of Canada. Alcoa can defend itself from takeover whereas Alcan can’t. Not my idea of meeting the lofty goal of a level playing field. Time for Canada to wake up to the real world before Canada becomes Can’t ada. That can’t be too far off.

Wasn’t taxing income trusts also universally promoted under that equally false construct known as leveling the playing field?

Canada is currently under the rule of Canada’s New Government™, who on economic matters seem hell bent on maintaining the status quo. Maintaining the status quo is a sure fire way to render Canadian companies not only more vulnerable to foreign takeover but further serves to economically coddle Canadian companies in such a way that they never learn how to be competitive in the first place. Take the income trust issue. This is the most ill-conceived policy known to modern man. Flaherty has even outdone himself. This is a quantum leap of stupidity that vastly exceeds the “merits” of his jailing the homeless policy.

Through the evolutionary process of aligning the needs of capital users with the needs of capital providers, a new form of business organization emerged in Canada. We were very much on the forefront for once, and now others are emulating our demonstrated success, just as Canada now finds itself in the hands of a totally uninformed group in office who are quick to pull the plug on this grand experiment, just as it was nearing the finish line as the rightful victor. This new business organization was so sought after by the capital providers in both Canada and abroad, that the capital providers accorded higher values to those businesses that structured themselves in such a manner. These” early movers” were, in turn, duly rewarded by the marketplace with a lower cost of capital making them inherently more competitive and better able to pursue a broader range of investment alternatives not otherwise economic for their lesser brethren, the traditional corporations. Only good came from that, e.g. the tertiary oil recovery method known as CO2 sequestration used in Canada’s mature oil fields, a boon for the environment, oil recovery and shareholders and Canada’s potential leadership in new tertiary recovery techniques. Virtually all of which is being done by the low cost of capital income trusts. Done by choice, not through environmental legislation.

So what does Canada’s New Government™ do? Do they consult? No. Do they panic? Yes. Panic first and legislate second and firmly enshrine the status quo into place. Alcan is a member of that status quo. Just like Inco was a member of the status quo that got acquired by foreign owned CVRD. It will no doubt come to all of you as a great surprise to learn that Inco was seriously considering conversion into an income rusts as viable defense alternative to defend itself from the hostile CVRD takeover. You could get the whole story from Inco CEO Scott Hand, but now that he sits on the Manulife board, his memory may have faded. The conversion of Inco to a trust would have been a huge bonanza, especially for Canada’s treasury and continued pride of place as the mining center of the world that we are slowly conceding to others, not to mention a bonanza for Inco’s shareholders and the Canadian capital markets.

So by actively coddling Canadian companies through enforced legislation that turns the clock back to yesterday’s status quo, we are raising a whole generation of government coddled companies, like BCE, Manulife and Power Corporation and those who were successful in enshrining the status quo to the detriment of the emergence of a more competitive and sought after form of business model. It’s no wonder that “Molson’s can’t sell beer to Mexicans”. Corporate Canada is constantly coddled as captive market competitors unaccustomed to real world competition. That strategy bodes poorly in the world of globalization. By protecting these companies from the realities of the larger world, government is simply attempting to give extended life to an endangered species. This benefits no one. Not even the coddled companies themselves, as these protectionist policies protect no one, least of all Canada’s overall competitiveness as a nation. Why do you think Dominic D’Alessandro has jumped so vociferously on the protectionist bandwagon? He sees the writing on the wall and it reads, John Hancock. He doesn’t want to become someone else’s John Hancock. If Dominic D’Alessandro truly wants to compete in the real world, he needs to live in the real world. Capital providers, not capital users should define the capital market ground rules. We have the proverbial wolf in the hen house.

We demand a level playing field, not a contrived and fictitious level playing field whose angle is only measured by words not degrees. To the extent that government’s tax collection is unaffected (as it is in the case of income trusts), then capital providers should be the sole decision makers of which shoe best fits. Failing that, we’ll take our money to markets where it’s well treated and well respected and that certainly isn’t going to be the next greatest debt financing by the second coming of BCE known as KKR. Too bad they won’t be offering a 20% discount on their home phone service the way they offered a 20% discount on investors’ BCE bond portfolios. The worst part of that damnable approach is that it is the cable company version of negative option billing. By the way, what number do I call to cancel my Bell Canada phone account? Rogers Home phone sounds like my kind of company. I think the cable guy now understands what the phone company never did. This is the world of ERISA, not capital market’s carpet baggers. (see Diane Francis' article Canada Lacks Investor Protection.

It’s time that the ERISA mindset permeated Canada’s New Government. How difficult can that be?

Or can’t, as the case may be?

Saturday, May 26, 2007

How very Freudian

I re-read Jim Traver’s excellent article in today’s Toronto Star entitled “Conservatives know it's true because they say so” and realized that I had missed the two most concise and revealing observations.

The first was about Stephen Harper’s intellectual thought process: “More troubling than the decisions is the absence of quantifiable justification”. This supports what I have been saying since the outset. Unlike a debate about same sex marriage or the merits of the Afghan mission, all the cornerstone assertions being made in support of taxing income trusts are quantifiable constructs. So where’s the quantitative analysis and justification? If our government is allowed to subvert parliament by not presenting facts when facts are available, then why even have a representative democracy, if it’s not accountable to the truth?

The second is an insight into Canada’s news gathering reality which is that virtually all of Canada’s news gathering and reporting is conducted by corporately owned media. The income trust issue is one that pits the capital providers against the capital users, Corporate Canada wants to preserve its dominion over Canadians savings alternatives and choices. They have successfully enjoined this government in this end purpose. They have helped concoct and propagate the myriad falsehoods about income trusts ranging from the fraudulent (tax leakage) to the absurd (ponzi schemes). The proud captains of Corporate Canada behind this grand rouse obviously consider a $35 billion loss to be a trivial matter since it only works out to an average loss of about $20,000 to $35,000 per investor. This is trivial in the minds of these players, as we recently learned that most of these folks have company funded pension plans with values in the neighbourhood of $25 to $35 million, This after years of hard work and stock option gains of, pick a number, $8 million a year for a lowly Bank CEO to the pretax equivalent of $57 million in 2006 for the Desmarais brothers.

To think that the corporate ownership of media in Canada, and thereby the corporate agenda, isn’t working its way into the coverage of the income trust issue, is to suggest that Corporate Canada is a spiritual order with the most lofty of altruistic goals. If that were the case then why is an honest and seasoned reporter like Jim Travers saying: “ it ultimately rests on the press and its corporate barons to defend democratic freedoms enshrined in the Constitution.”

Now that we have finally acknowledged who calls the news media shots, it’s time for these corporate barons to step up to the plate in defense of our democracy and the integrity of our capital markets. Failing which they will only becoming certified robber barons, rivaling those at the turn of the century. No one, not even the barons themselves, will benefit from that in either the short term or the long term. The larger world we live in, will see to it.

Wednesday, May 23, 2007

Jack Layton’s blind adherence to Harper’s tax policy helps promote the sell out of Canada

by Brent Fullard

Jack Layton is an enigma wrapped inside of a riddle. Jack Layton would be the first to call for an open and transparent government, much as he made an impassioned call upon the government to stem the recent wave of foreign takeovers of Canadian companies and to avert the surrender of our energy resources to U.S. interests. However, Mr. Layton need only look into the mirror to recognize a major source of these problems. Jack Layton’s support of the Conservative’s plan to tax income trusts is a major contributing factor to these recent events, making the NDP complicit in the sell out of Canada to foreign Big Business interests.

The single greatest antidote to foreign takeover of Canadian business is not a set of rules such as those previously instituted under the Foreign Investment Review Agency (FIRA), but rather fully valued companies in the capital markets. This is particularly true in the case of defence against financial buyers such as foreign private equity who are scouring the world, locust-like, looking for undervalued opportunities. Prior to this past Halloween, Canada had developed its own “made in Canada” source of capital to fund and grow Canadian businesses, namely income trusts, which also allowed these businesses to achieve full capital market valuations.

Income trusts are like a myriad number of other businesses like law firms and accounting firms, even mutual funds and the corner grocery store that do not pay taxes on their earnings, provided that the earnings are fully distributed to their owners, who in turn pay full rates of personal taxation. Many have decried income trusts in the false belief that the overall tax collection is less than if these businesses were corporations. It should be realized that, on average, corporations in Canada pay taxes at the rate of 6.2%. The small portion of these corporations’ earnings that are paid out as dividends are, in turn, taxed at only two thirds the rate of personal taxation.

Given this simple arithmetic, it is easy to recognize that income trusts have the potential to generate as much in taxes for the government than if these same businesses were structured as corporations. With the sole intention of shutting down the public income trust market (but not similar entities such as private trusts), the Conservatives reversed their widely touted election promise and introduced an income trust tax at the rate of 31.5%, five times the average corporate rate of taxation. They also placed restrictive growth constraints on these otherwise vibrant and growing businesses.

Requests for the tax analysis under the Access to Information Act have only resulted in 18 pages of blacked out documents. This seems to be okay with the NDP, as they are writing to their constituents saying: “We are confident that the government’s estimates of future tax leakage are solid”. Obviously Jack Layton supports a “faith based” form of tax policy formulation. These matters are discernable truths. Canadians deserve the truth. Mr. Layton has opted for faith over truth. This has consequences. Truth or consequences.

As a result of the introduction of this tax, the entire income trust sector and companies like BCE and Telus that had announced their intention to become income trusts saw their values plummet by 17% and greater overnight. This value disparity persists to this day. Even though the trusts have recovered in price they remain undervalued, as the broader market is up over 13.5%. The entire $200 billion income trust market comprised of 250 companies, of which 40% are in the energy sector, is at significant takeover risk.

Incredulously, this new tax and growth restrictions do not apply to foreign buyers. As such, we have witnessed 17 takeovers of trusts in the last three months totalling $10 billion of which 15 were by foreign acquirers, mostly private equity. The energy trust sub-sector is responsible for 20% of Canada’s oil and gas production and own virtually all of Alberta’s energy infrastructure assets like pipelines. These companies are highly undervalued “sitting ducks” awaiting the inevitable takeover by their U.S. cousins in the $480 billion Master Limited Partnership (MLP) market, a growing and vibrant market. These MLPs are patiently waiting for the legislation to pass before pouncing on this enormous gift of economic stupidity from the Canadian Government.

Mr. Layton seems oblivious to this reality and his central role. However, labour is not quite so oblivious, as evidenced by the words of CEP president David Coles who had this to say about the foreign takeover of telecommunications giant Bell Canada Enterprises (BCE):

"I think Prime Minister Harper should send an unequivocal message to the investment community that he will not allow foreign interests to take control of these key economic and cultural development industries."

Perhaps David Cole’s time would be better spent educating Jack Layton on the workings of income trusts. Had BCE been allowed to convert to an income trust as it was planning to do, its units would be trading today at $40.00, which would provide no incentive for foreign private equity buyers like KKR and Cerberus to make a bid for BCE. Furthermore, as an income trust, BCE and its unitholders would be paying $800 million a year in taxes, which is $550 million more than Ottawa presently collects from BCE and its shareholders, and sadly to say, it is $800 million a year more than Ottawa will collect from BCE and its new owners, who will purchase BCE through a mountain of debt known as a leveraged buyout, whose interest will be sheltered from taxes, since interest is fully deductible under the “preferred” corporate model.

And there you have it. Jack Layton is now the defender of the corporate model of business ownership rather than income trusts to the detriment of labour, seniors saving for retirement, the hollowing out of Canada, the loss of energy sovereignty and a major loss of tax revenue that individual taxpayers will be shouldered with. Shows you the consequences of faith based tax policy. Shows you the consequences of Jack Layton’s leadership of the NDP. Fat cats eating the mice.


About the author:

Brent Fullard is the Founder and CEO of the Canadian Association of Income Trust Investors (www.caiti.info) that was formed in direct response to the proposed taxation of income trusts with the purpose of advocacting on behalf of the over 2.5 million income trust investors and the 70% of Canadians who do not have pensions. CAITI has over five thousand Founding Members who joined in the first two weeks of its existence, including eight investment managers who manage income trust investments for well over a million Canadians. Brent spent over 20 years in the Canadian investment banking industry, most recently as the Executive Managing Director and Head of Equity Capital Markets for a major bank owned dealer. Brent has an MBA from Queen’s University and a B.Sc. from the University of Toronto.

Tuesday, May 22, 2007

The Self Benevolent Tax Policies of Jim Flaherty

Jim Flaherty flatters himself by portraying his own self as an average everyday kind of guy who frequents the Tim Horton’s in Whitby. This is part of a grander ruse to deflect Canadian’s attention from the fact that Jim Flaherty’s tax policies are designed with his own personal circumstances in the forefront of his mind. Jim Flaherty served as Ontario’s Finance Minister for 14 months back in 2001 and now as Canada’s Finance Minister for about as long. During these cumulative two and half short years, Jim Flaherty has wasted no time whatsoever feathering his own nest with a total of four Jim Flaherty specific tax breaks, one at the provincial level and three at the federal level.

(1) As Provincial Finance Minister, Jim Flaherty was the misguided person who on the one hand advocated jailing the homeless while at the same time introduced tax refunds for parents sending their children to private school. That was 2002, the year that Flaherty sent two of his boys to Trinity College School, a private boarding school in Port Hope.

(2) Jim Flaherty’s third son is developmentally challenged. This no doubt was the inspiration behind one of the select number of targeted tax breaks for individuals in Flaherty’s recent budget that helps parents save toward the long-term financial security of persons with severe disabilities under the new Registered Disability Savings Plan allowing them to set aside up to $200,000 tax-free for their children’s care. Not being one to be exposed to the whims of the provinces, Jim Flaherty also discussed the plan with provincial finance ministers in mid-December. Flaherty considers that provincial reforms are essential to ensure that family contributions are not clawed back by provincial disability income programs.

(3) Jim Flaherty has been both an MPP and an MP. When Jim Flaherty vacated his provincial seat to run federally, his wife ran successfully for his vacated provincial seat and is now an MPP. When Flaherty was in provincial politics he was active in the abolishment of pensions for MPPs. This was not an altruistic endeavour, as all sitting MPPs like himself received undisclosed lump sum cash payouts in lieu of pensions. Therefore Flaherty will have a pension as an MP, but neither he nor his wife will have one for their service as MPPs. Flaherty’s income splitting for seniors in the recent budget is again ideally suited to his own personal circumstances. Income splitting for seniors is actually only pension income splitting that applies to only 14% of seniors. Flaherty and his wife are part of that select 14% of targeted Canadians to receive this most generous of tax benefits.

(4) Jim Flaherty and his wife were partners in a law firm known as Flaherty Dow Elliott. Flaherty Dow Elliott is a private limited partnership that operates as a tax flow through entity or FTE. There are a myriad number of FTE’s including mutual funds, limited partnerships, trusts, etc. whereby earnings are not taxed at the FTE level , but rather in the hands of the individual taxpayers who own the FTE. Jim Flaherty thought that there was something particularly pernicious about certain FTEs but not others. He claimed certain FTEs but not others resulted in tax leakage and represented a tax loophole and caused great damage to the prosperity of our economy. The particular subset of FTEs that Jim Flaherty targeted for a new form of double taxation at the rate of 31.5% was public income trusts and public limited partnerships. Flaherty Dow Elliott is not a public limited partnership, but simply a private limited partnership.

What’s the distinction? Well, if Flaherty Dow Elliott were a public limited partnership then individuals who are not lawyers but rather average Canadians seeking to provide a form of stable retirement income in a protracted low interest rate environment could become fractional owners of Flaherty Dow Elliott. As with public income trusts many thought that public limited partnerships represented a new form of democratization of the Canadian capital markets. Obviously, the notion of the democratization of the Canadian capital markets represented competition for Canadian’s limited, but growing, investment capital, capital that had previously been captive to the products and securities of those who actually run Canada, namely Corporate Canada. Something had to be done. Flaherty was their man, since Jim Flaherty is the master of self benevolent tax policies and gross fiscal hypocrisy. Let’s double tax RRSPs at a rate up to 64%, and thereby tax the living existence out of income trusts for the benefit of foreign private equity, large Canadian life companies, pension plans and Corporate Canada at large. We’ll call it the Tax Fairness Plan. The fact that we promised Canadians that we would never tax income trusts won’t stop us and nor will the fact that it will actually induce the very outcome it is ostensibly meant to serve, namely tax leakage. Tax leakage that didn’t even exist in the first place. Who cares so long as it plays well at the Whitby Tim Horton’s, the epicentre of Flaherty’s political hypocrisy and self benevolent tax policies.

Tuesday, May 15, 2007

The Panels are Blossoming in Ottawa

Now that spring is here and Canada’s New Government™ has come to the realization that they actually know more about how to run Canada’s economy into the ground than they do about running it wisely, they have turned to a new fashion statement. And who better to be first out of the gate that new fashion trend than Maxime Bernier who today was sporting this new “panel” fashion outerwear:

Industry Minister Maxime Bernier will soon launch a panel of experts to review Canada's competition policies and propose improvements.

Not wanting to be outclassed or outdone, Jim Flaherty was quick to respond with his own panel fashion statement, however Jim prefers his “panels” as “roundtables”

"To ensure a comprehensive consideration of the factors involved in interest deductibility and a smooth implementation, a Technical Roundtable of tax professionals, chaired by the Department of Finance, will be invited to work with government officials at a technical level to ensure that the proposal functions as intended. This Roundtable is a short-term project that will operate independently of the Expert Panel."

Too bad panels weren’t in fashion last fall, otherwise Fashion Editors like Diane Francis would have had no reason to recently write:

“I dread to imagine what the discussion around the federal cabinet table was last fall concerning measures such as income trusts or interest deductibility restrictions."

Did anyone bring up the potential, unintended consequences?

Was a huge menu, and range of varied options the topic of lively, heated and lengthy discussion?

Were the nuances of capital market reactions, or taxation matters, debated?

Was the obvious alternative of cutting taxes on dividends instead of trashing income trust promises a subject of great discussion?

Were the studies, commissioned by the previous government, and its many other solutions, reviewed carefully over days and nights by all cabinet members so they could deliberate in an authoritative fashion?

Or was talk just about how to finesse the treachery to seniors and Alberta about a promise broken?

Or did it zero in on how this would affect voting results in Quebec?”

As with any fashion, they are fickle, No doubt this panel fad will pass quickly as the Conservatives are simply trying to put out fires by appearing as if they are doing something tangible. Therafter it is certain they will return to their patented and trademarked form of government known as Canada’s New Government (all rights reserved CPC 2007). Speaking of panels and/or roundtables and/or councils, what ever happened to that Seniors Council that was launched by Marjorie LeBreton back a few months ago as the Conservatives hastily patched together something resembling a “we care about seniors” persona (in the belief an election was imminent) after they had summarily terminated the 27 year existence of the Council on Aging? Does the Seniors Council consist of more than that guy from the pension superannuation committee and an employee of the government? Have the new members been indoctrinated in the mindset that destroying seniors nest eggs is a good policy? That’s probably slowing them down a bit.

Saturday, May 12, 2007

Flaherty throws Bay Street a bone

Flaherty throws Bay Street a bone. That’s the title of today’s front page article in the Globe and Mail which appears here.

Let’s be clear on one thing. This very much was a “bone”, as Flaherty’s intent at the outset was to shut down all interest deductibility on foreign acquisition debt, not simply “double dipping”. There’s no question about that. This is obvious from his words in the Budget.

As Stephane Dion pointed out in Parliament on Thursday:

“Our problem is what is written in the budget. We are working with what the budget says. The minister was not obligated to write that. Here is the sentence:

Budget 2007 will eliminate the deductibility of interest on debt incurred by corporations to finance foreign affiliates.

This has to do with the entire deductibility. This would mean that our companies could no longer do business in the global economy with the same tools as the Americans, Japanese and Europeans.”

Why am I not surprised that this bone would have been forthcoming, since it occurs on the eve of Flaherty’s Bay Street Press conference on Monday, and since this particular bone appeases the the very same dogs who Flaherty appeased after those canines had successfully orchestrated the elimination of their competition (for investment capital and for investment products sold by them) by getting this compliant, incompetent and morally bankrupt government to tax the living existence out of income trusts, namely Corporate Canada, the CCCE , life insurers and the like. Their identities are now well known to all, as their level of visibility has become even higher on the interest deductibility issue. I would estimate that the overlap between these two special interest groups (preserve interest deductibility and kill income trusts) is at the very least 80 percent.

However it’s worth noting that their level of hypocrisy is about 100%, since interest is simply to the corporate model what distributions are to the income trust model.

Preserving the deductibility of interest under the corporate model, simply means preserving the ability to service interest payments from pre tax earnings and have the interest taxable in the hands of the investor.

That’s all we are calling for in the case of income trusts. We seek to preserve public income trusts as an ongoing member of the very large group of flow through entities and retain the shared ability for public income trusts to make distributions from pre tax earnings and have the distributions taxable in the hands of the investor.

Sounds like doing so would achieve many of Flaherty’s objectives such as Tax Fairness and Levelling the Playing Field. If it’s good for the goose, why not the gander? Furthermore the 31.5% tax on income trusts only affects PUBLIC income trusts. What’s with that? How is that Fair? How does that level the playing field? Meanwhile every other flow through entity known to man such as private income trusts (including those held by pension plans) private partnerships (such as those used by Flaherty’s former law practice) mutual funds, family trusts etc. etc. go on untaxed and unabated. What kind of tax fairness plan is that? Why is it that the federal civil servants who concocted this brand of fairness are able to own in their pension plan these trusts without being taxed or subject to growth constraints or capital constraints?

Meanwhile in the perverse name of fairness, average Canadians are faced with retroactive double taxation of their trusts and limitations on their trusts’ growth and capital raising which has led to a material loss in Canadians’ life savings, a situation that is being opportunistically exploited by these very civil servants through their in-house pension plan, the Public Sector Investment Board who have obviously targeted this event driven opportunity for exploitation, as evidenced by their recent takeover bid for undervalued Thunder Energy Trust. The sole source of this undervaluation (Flaherty’s tax/ Flaherty’s growth restrictions) is magically (actually legislatively) and immediately alleviated upon transfer from average Canadians to the federal civil servants. Hard to imagine fairness being more unfair than that or the level playing field being more inclined against average Canadians to the betterment of their supposed servants. Shareholder oppression and economic expropriation at the hands of the federal government and to the economic benefit of the civil service. Good thing we have provincial securities regulators and not the single national regulator that Flaherty is a big and only recent proponent of, as there is hope that the shareholder complaints filed by Thunder Energy Unitholders will be heard by at least one of the six provincial regulators with whom this complaint was filed. Come to think of it, I have to check to see if Newfoundland and Labrador was one of the six. If not, assume that there are now seven chances at success to block this shareholder oppression of a deal.

Let’s assume neither of these two issues (deductibility and taxing trusts) had anything to do with fairness per se and everything to do with tax revenues to the government, Foreign acquisition debt is primarily held by foreigners. Therefore from a tax collection standpoint , Canada collects nothing from foreign lenders in the way of taxes. Flaherty himself actually saw to this tax drain outcome himself by eliminating the 15% withholding tax that used to be paid on interest to foreign investors. Flaherty’s Budget 2007, reduced this to zero. How is that for internally inconsistent policy? Close this loophole. Open that loophole. The waterworks of Ottawa, with Flaherty as water quality manager. This new withholding tax loophole of Flaherty’s vastly facilitates leveraged buyouts of Canadian business by foreigners and with foreign capital, however, Jim Flaherty would have us believe that “it’s not his fault”. In the absence of accepting responsibility, perhaps he could give us an explanation as to the policy intent behind why he created this tax loophole for foreigners, or is that another thing that he "now wants to take a look at”.

Meanwhile from a tax collection basis, income trusts are/were a bonanza for Ottawa. This reality is being actively suppressed by Ottawa. That’s why they fought so adamantly to prevent the Public Hearings. That’s why they released 18 pages of blacked out documents in response to Gord Tait’s filing under the Access to Information Act. That’s why they now want these documents returned for fear they actually revealed something (which they clearly did, and it wasn’t helpful to their case ). That’s why they tried (yet failed) to discredit former senior Department of Finance official, Yves Fortin., both pre hearings and at the hearings. It’s difficult for this style of government, when they have former senior individuals from the Finance Ministry who are well informed and not easily intimidated. Intimidation no doubt explains why no one at Finance was willing to attribute the reason behind the unexplained surge in personal tax collection that was reported on by Steve Chase in the Globe on October 27, 2006, which as former Director General Of Tax Policy at the time and now in private practice, Len Farber, will tell you was attributable to the greater tax collection associated with businesses that were formerly structured as corporates and subsequently as trusts.

It’s time for Flaherty to throw us a bone. Throw us the truth. We are hungry for the truth. We can live with the truth. In fact we can’t live without it. Throw us the 18 pages of documents. This time without the blackout. Come in Jim, call our bluff. Prove that we’re wrong. Prove the case or drop the tax. Better yet, prove the case or drop the writ.

Time for the open democracy that you heralded would be forthcoming with Canada’s New Government (trademark registered, CPC 2007, all rights reserved) and the promise of a renewed level of heightened transparency and accountability. Never before have Canadians been heightened to these depths before. We have you and Stephen Harper to thank, as there is now only upside on the horizon as it relates to accountability and transparency

Flaherty has proven himself very adept at throwing bones in the past. In fact, the act of bone throwing played a very large role in his 2006 income trust tax implementation. The biggest bone was the one he threw to the pension plans. Remember the hue and cry from pension plans under Goodale. They went so far as to mobilize their pensioners to go to MPs offices five at a time. I know, since my mother is one of their beneficiaries, however she is not one of their desciples. Funny, not a peep from them this year. Do you think they lost the fight or do you think they were thrown a bone? Do you think the bone had a good policy intent? Do you think the bone thrown to pension plans helped advance tax fairness? Do you think the bone thrown to pension plans helped to level the playing field? Do you think carving out the ability of pension plans to own private trusts (that were formerly the very same public income trusts) without any restrictions whatsoever, will solve the myriad problems of tax leakage, economic impairment, ponzi schemes and human immunodeficiency syndrome that the critics of trusts are leveling at this odious and pernicious investment vehicle?

The act of throwing bones had a very important role in the Income Trust issue under Flaherty’s stewardship. Flaherty has been the chief bone thrower. People need to remember that we have all been to this movie before in the fall of 2005 when Ralph Goodale was the Finance Minister and the powers within DoF were fomenting him to act on the clear and present danger of trusts (read the clear and present danger of trusts to the ongoing underwriting business and private equity investment activities of Goldman Sachs, the comforts of Corporate Canada and to the purveyors of competing products such as life annuities etc.). That movie never played all the way to the end, but the actors in most visible opposition to the trust tax made their presence well known at the start of the movie, most notable of whom were the Pension Plans, CAIF, CARP, and Canaccord, as the largest non bank owned retail broker in the country.

There is one common denominator between Goodale’s time as Finance Minister and Flaherty’s time as Finance Minister, and that is the Finance Ministry itself and certain key players within it such as former Goldman Sach’s investment banker Mark Carney. These people clearly had and have an aggressive agenda to kill the income trust market, their challenge was to find a rationale that would resonate with all Canadians. Hard to know who was the creative genius/sleight of hand artist who came up with the idea of telling Canadians that income trusts result in tax leakage. Such a righteous clarion call argument could be made to be true through “data mining” and selective exclusion of a large portion of the taxes that are paid by income trusts. Eureka!, said the creative mastermind of this strategy, let’s leave out the 38% of taxes that are paid on income trusts held in RRSPs. We will call them exempt accounts and we will arbitrarily exempt all the taxes they pay from our analysis. Who cares if our own DoF website refers to RRSPs as tax deferred and has no definition for the term tax exempt. Why be hamstruck by terms, definitions or even reality. We have a higher calling and a greater mission at stake. We will call the result tax leakage. We will call our policy tax fairness. We will tell Canadians that we are leveling the playing field. For good measure, we will even tell the “old folks” that we are strengthening the social security system for pensioners and seniors. There is strength is strengthening our bogus arguments with evocative terminology. This has got to work, now we just have to contend with the likes of CARP, CAIF, Canaccord and the Pensions. We don’t want them on the scene as they were last year. How can we render them less effective and bring possible influence to bear on theor behaviour at this screening of last years’ movie?

Many have accused Flaherty’s solution to the “problem” (i.e. The non-existant problem of tax leakage) as lacking in creativity. That charge is irrefutable , since he employed the sledge hammer approach to fine carpentry. He was however not without his creative side in his plans to placate these “known pockets of resistance”. His acts had no policy rationale whatsoever, as evidenced by his beneficial carve-out treatment of pension plans thereby creating a gross inequity between pensions and individuals and had the gall to brand it tax fairness.

As to the other parties, one has to question the Conservative party’s motives and curious timing behind the appointment of the Executive Director of CAIF to the National Research Council (NSERC) by Industry Minister Maxine Bernier on November 1, 2006 or the perceived conflict associated with the acceptance of such an appointment. So too the appointment of the CEO of Canaccord to the Vancouver Olympic Committee Board (VANOC) on Nov. 2. As to CARP, who profess to advocate on behalf of their claimed membership of 400,000 what does it mean when their advocacy position/advice on income trusts is branded with the corporate logo of IPC Financial which is the Investment Planning Council, which is owned by Investors Group, in turn owned by Power Financial. We clearly know where Power stands on this issue as reported on November 2 in the Globe. This account reads more like a scene from the TV show Fear Factor......I guess the fabricated sense of economic doom worked on the highly impressionable duo of Harper and Flaherty. Just imagine this pair if confronted with a real national disaster:

“High-profile directors and CEOs, meanwhile, had approached Mr Flaherty personally to express their concerns: Many felt they were being pressed into trusts because of their duty to maximize shareholder value, despite their misgivings about the structure. Paul Desmarais Jr, the well-connected chairman of Power Corp of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico, and told him he should act quickly to stop the raft of conversions, according to sources.

Amid this escalating tension, Mr Sabia's phone call became a flashpoint, prompting the federal government to accelerate its crackdown on the sector. Mr Flaherty was convinced the twin conversions of icons such as Telus and BCE would incite other corporate titans to follow in their wake.”

The only thing Flaherty had to do after Halloween was to convince David Dodge that the comments Dodge had made immediately prior to Halloween that could only be construed as favorable for the preservation of income trusts were considered unhelpful to his bosses' new mission in life. Killing trusts and throwing bones. Flaherty probably forgot to call the Governor as Flaherty was too busy arm twisting the Canada Pension Plan Investment Board and the various Provincial Treasurers about the virtues of killing trusts in the name of stemming tax leakage. Very comforting to know that these people endorse policies right out of the gate without a scintilla of evidence about the cornerstone assumptions, I guess they subscribe to the notion that average Canadian investors are able to fend for themselves in the Canadian capital markets. On that point, I believe David Dodge is correct, for wasn’t it he who famously said that the Canadian equity markets are like the wild west? If that’s the case its time for an honest Sheriff in town. Flaherty need not apply.

Tuesday, May 8, 2007

"Chart A shows clearly"

This is Flaherty’s testimony at the Public Hearings on January 30, 2007:

“Chart A shows clearly this trend in income trust conversions and the path we were all on. As you can see on the chart from '03 to '06 the huge increase in 2006 in the first 10 months only of 2006. This represented a clear and present danger to our tax system and our economic structure. Evidence was mounting that we were running a real risk of turning into an income trust economy, an economy where tax avoidance drove business investment decisions and foreign investors stood to make significant gains at the expense of Canadian taxpayers.”

I have one question, where is Chart B?

“Chart B shows clearly this trend in income trust takeovers and the path we are all on, As you can see on the chart from Oct ‘06 to May ‘07 the huge increase in the first 6 months since Halloween. This represents a clear and present danger to our tax system and our economic structure. Evidence is mounting that we are running a real risk of turning into a foreign private equity economy, an economy where tax avoidance drives business ownership decisions and foreign investors stand to make significant gains at the expense of Canadian taxpayers” (read: $35 billion)

I couldn’t have said it better myself. Chart B is attached for anyone wishing to acknowledge this version of reality. As we all know, Flaherty is better at fear mongering in the name of job security than he is at truth acknowledgement and factual disclosure, therefore this is information not so freely available from the Department of Finance but rather from the private sector which has to cope with flawed government policies.

Announced Acquired Ticker Buyer Value Buyer Info
Jan 15, 2007 Sunrise Senior Living REIT SZR.UN Ventas, Inc. (NYSE: VTR)* 2,280 US based REIT
Nov 6, 2006 Halterm Income Fund HAL.UN Macquarie Infrastructure Partners 173 New York based infrastructure inv firm (US$30B), parent company Aus
Feb 4, 2007 Great Lakes Carbon Income Fund GLC.UN Oxbow Carbon & Minerals Holdings Inc. 786 part of the Oxbow Group, a private energy company based in US (Florida)
Feb 9, 2007 Norcast Income Fund NCF.UN Pala Investment Holdings Ltd 87 UK (Jersey), international alternative investment fund
Feb 1, 2007 Lakeport Brewing Income Fund TFR.UN Labatt Brewing Company Ltd 210 Labatt is owned by InBev (Belgium)
Dec 20, 2006 Calpine Power Income Fund CF.UN Harbinger Capital Partners 880 US (Alabama) Private equity/real estate/distress situations
Feb 14, 2007 Entertainment One Income Fund EOF.UN Marwyn 177 UK based investment firm (PE, MBOs, etc)
Feb 16, 2007 Amtelecom Income Fund AMT.UN Bragg Communications Inc 129 Bragg owns Eastlink, a private telecom competitor based in the Maritimes
Dec 4, 2006 Alexis Nihon REIT AN.UN Homburg Invest Inc. 919 Investment firm with lots of properties (Based in NS, Canada)
Feb 26, 2007 Clean Power Income Fund CLE.UN Macquarie Power Income Fund (MPT.UN) 419 Canada based Income Trust
Mar 18, 2007 Associated Brands Income Fund ABF.UN TorQuest Partners 43 Canada based private equity firm
Apr 1, 2007 KCP Income Fund KCP.UN Caxton-Iseman Capital Inc. 804 New York-based private equity firm
Apr 3, 2007 Gateway Casino Income Fund GCI.UN New World Gaming Partners 886 JV of Publishing and Broadcasting Limited (PBL) and Macquarie (both Australian)
Apr 10, 2007 Liquor Barn Income Fund LBN.UN Liquor Stores Income Fund (LIQ.UN) 158 Competitor, Canada based Income Trust
Apr 16, 2007 VOXCOM Income Fund VOX.UN UE Waterheater Income Fund (UWH.UN) 109 Canada based Income Trust
Apr 16, 2007 UE Waterheater Income Fund UWH.UN Alinda Capital Partners LLC 1,740 US (NY) based private equity firm
Apr 24, 2007 Thunder Energy Trust THY.UN PSPIB/Overlord Financial 406 Public Sector Pension Investment Board (Canadian PP)
Apr 30, 2007 Custom Direct Income Fund CDI.UN EdgeStone Capital Partners 237 Canadian based P/E
May 4, 2007 Canada Cartage TRK.UN Nautic Partners 252 US based Private Equity (group of buyers)

Friday, May 4, 2007

Who let the horse out of the barn?

Now that the horse is out of the barn, Manulife CEO Dominic D'Alessandro wants the government to close the door as reported in today’s Globe column entitled: “CEO urges action on takeover frenzy”.

Well the sad truth is that Dominic D’Alessandro was one of those who most visibly argued that opening the barn door was a good thing in the first place. At least for income trusts. At least for him. That was on February 1st when he gave testimony before the highly unbiased and non partisan Finance Committee, as follows:

Mr. Rick Dykstra (St. Catharines, CPC): Mr. Fortin, we've got letters from finance ministers from across this country, from every province in the country. The finance department supports this. Mr. David Dodge has made his comments today, Mr. D'Alessandro, Mr. Dancey. You're in opposition to that and as a former member of the Department of Finance you made an absurd comment that I think discredited you as witness here today by stating that big corporations behind the scenes have influenced the ministry of finance in their decisions. Are you suggesting that's what happened when you actually worked for the Department of Finance? Or is that happening after you left?

Mr. Yves Fortin: No, sir. Mr. Chairman, what I am saying is that the corporations are applauding the measures because it suits them. That's what I'm saying. Do not try to distort what I said.

Mr. Rick Dykstra: That's not what you said in your statement, sir. Mr. D'Alessandro, your position on this in terms of...

Mr. Dominic D'Alessandro: The notion and the implication that somehow the government on this file is responding to initiatives that originated with corporations is not based on reality.

“not based on reality?” Well, let’s explore the revelations on this matter contained in the very testimony of Dominic D'Alessandro, who a few short moments prior to this closing comment of his had these self-contradictory remarks to make:

“It's my opinion that the income trust sector in Canada is increasingly populated by businesses other than those whose principal activity is the operation of real estate or royalty producing assets.”

This is the “not in my backyard” argument.

“We at Manulife Financial engage in a number of businesses in Canada. Some of these businesses could quite conceivably be structured to qualify for income trust treatment. I think this is true for many, if not all of the other financial institutions in Canada. We would all, in time, have faced intense pressures to break up our companies.”

And how pray tell would that have been a bad thing, since doing so may have diminished your empire, but it would have maximized shareholder value (and government tax revenues as well)?

“It is worth remembering that it was for such businesses that the current tax regime was originally designed.  In June of last year, CI Financial converted to trust status.”

Okay now we’re getting somewhere close to the root of the problem. Correct, CI Financial was an “early mover” who saw that the tradeoff between the higher value of a trust versus the foregone freedoms of being a corporation, argued in favour of conversion to a trust to maximize shareholder value.  In doing so CI achieved a lower and more competitive cost of capital as accorded (solely) by the supply demand dynamic of the market for income trust issuers and not by any “tax loophole” or tax benefit. Given that CI had converted to a trust, this placed pressure on Manulife and Power Financial to do likewise. The CEO’s of these companies had reasons to resist this pressure. Whose purposes did those reasons serve? Shareholders or management?

“I don't think this is the best way to allocate capital within an economy. After all, capital is important for all companies. Capital provides confidence to employees, suppliers, and customers. Capital allows businesses to cope with downturns in activity, and capital provides the means with which to take advantage of growth opportunities which may present themselves in the marketplace.”

This is a facile argument on many levels. First, the capital providers make these capital allocation decisions, not corporations and not management per se. Second, placing restrictions on where capital providers can place their money will hardly lead to optimal economic decisions or optimal capital allocation. Let’s be honest, your goal in killing trusts is to remain the prettiest girl in town. Third, if what you are saying about coping with downturns is true, then are you saying that the Capital Adequacy Guidelines administered by the life insurance regulator are not sufficient? Are you saying that Manulife needs to increase its Tier 1 and Tier 2 capital adequacy? That could easily be arranged on either a voluntary or administered basis if this were a legitimate concern to you. Or was this just calculated fear mongering on your part?

“I don't know why we would want a tax regime that would discourage the accumulation of an appropriate level of retained earnings by the corporate sector.”

Again a very revealing comment. I have a one word answer: BCE. BCE was formed out of Bell Canada. Bell Canada used to distribute all of its earning to a shareholders. Under those circumstances, Bell Canada was a good investment. Bell Canada was subsequently allowed by Parliament to become the holding company known today as BCE for the sole purpose of reinvesting the earnings of Bell Canada. BCE management thought that they were Warren Buffett. They weren’t. They reinvested all the retained earnings in the corporate equivalent of Florida swamp land. That’s why they haven’t paid taxes in decades(?). They are writing off all the squandered retained earnings none of which were in the end “retained” but rather squandered. The overall track record of Corporate Canada on reinevestment returns hardly makes this argument of Mr. D’Alessandro’s  a very compelling one. That’s why investors prefer investing in income trusts, they prefer making their own reinvestment decisions, thank you very much.

So there you have it, this whole debate is over who controls  investors’ money. Investors themselves or Corporate Canada? Problem is we aren’t an economic island unto ourselves. It would appear that Dominic D’Alessandro has at least wakened up to this reality. There’s still hope that he may acknowledge that Canadians’ investment capital is Canadians’ investment capital and not his. Better come to that realization soon before Canadian investment capital seeks out more favourable investor-friendly markets such as the US High Yield Market, the US Tax Free Municipal Bond Market or the US Master Limited Partnership Market. As was so succinctly stated in the Herold Energy Investment Outlook of February 2007: “Capital flows to where it is well treated.”

I think we will observe a similar  phenomenon in the next election, when it comes to where the votes will most easily flow to.

News flash to Flaherty: Prove the case or drop the tax.

Thursday, May 3, 2007

Sharper than you think

The internet is a powerful tool. It allows people to communicate information not available in the mainstream media. It allows people to organize across large geographical areas, like Canada for example, and to share information with each other, to network and to get their messages out. And although the internet has become synonymous with the young online gamer, seniors have taken to this medium like ducks to water, and are using it to drive email campaigns and political pressure.

At CAITI, we receive thousands of emails from members. They write to tell us of the hardships they're already feeling from the Conservatives' draconian policy towards income trusts. They write for information, they write to tell us that they're spreading the word, and they copy us on letters they've sent to their MPs, Mr Harper, Mr Flaherty and even to some of the industry players.

Far from being over the hill, or too old to grasp the finer points, these seniors are sharp, intelligent and articulate. Here is one such letter written to Siim Vanaselja and Robert McFarlane CFO's of BCE and Telus, that shows all these characteristics. With Jean's kind permission, we'd like to share it with you.

From: Jean Miller
To: robert.mcfarlane@telus.com
Cc: siim.vanaselja@bell.ca
Subject: Income Trusts

Gentlemen: I have been as active as an 85-year old widow can be, attempting to forward the cause of income trusts ever since my income, which was largely dependent upon income from trusts, was dangerously reduced, and my net worth was similarly damaged by the government's attack upon the trusts. I remember that that attack was precipitated by Telus' announcement that it was considering turning itself into an income trust. Recently, I have read a suggestion that BCE, operating as an income trust, would be able to provide a steady, dependable stream of income to its shareholders. There is also a proposal current that BCE and Telus merge and create a strong, viable telecommunication system for Canada. May I ask you to consider making a public announcement of your individual or cooperative intent to become income trusts just as soon as the government lifts its ban on the initiation of new income trusts? I believe such an announcement would put a stop to all the problems you are presently facing with respect to mergers and acquisitions, and would provide a powerful incentive for the government to consider favorably the moderate course of action proposed by some members of Parliament; that is, to tax the trusts at no more than ten per cent. The forces acting to persuade the government to accept this alternative could be expected to be provided by the public's enthusiasm at the prospect of receiving the income that your two stable enterprises could provide.

Forgive me for making so bold a proposal, but the idea seems to make sense and solves a number of the problems you and the Canadian economy are facing because of the ill-considered government policies with respect to income trusts, which I have always considered one of the better developments to come along in this country--good for businesses and industries, good for those who live off income, and good for government as a source of taxes, contrary to the fallacious arguments advanced by those who benefit from the destruction of the income trusts.

I am grateful for your attention to this letter and for your careful consideration of the merits of the proposal presented here.

Wednesday, May 2, 2007

Dodge frets, while Canada crumbles

David Dodge needs to get his supply/demand terminology straight. Rather than fretting over the “inexhaustible supply of debt” to finance the takeout of public Canadian companies, perhaps he should take the time to realize that this is actually the demand side of the equation, not the supply side. Private equity has demand for investments. Canadians have demand for investments. The demand for investments on the part of Canadians is most acute for those 70% of Canadians who are not members of pension plans. This distinguishes them from virtually every occupant of Ottawa, David Dodge included. Flaherty’s policies grossly favour foreign investment demand at the expense of domestic investment demand. Fret that outcome for a moment if you will.

Rather than fretting over the wrong side of the supply/demand equation, over which he and all of Ottawa have zero control (i.e. pools of private equity), perhaps he and his office would be better served by acknowledging the true “supply side” of this equation, namely the income trust market and near income trust companies like BCE and Telus that our “its not my fault” Minister of Finance, The Honourable Jim Flaherty has fattened up for slaughter. By this, I am referring to Flaherty’s foreign private equity friendly measures, whereby he:

(1) cratered the value of the $200 billion income trust market, by imposing a tax of 31.5% on every public income trust, yet there is no such tax on the myriad number of other tax flow through entities in Canada, including private income trusts owned by pension plans.

(2) imposed central planning style growth restrictions on income trusts while in the hands of average Canadians, but no such growth restrictions when transferred to the hands of foreign private equity or any other ownership arrangement.

(3) eliminated the 15% withholding tax that would otherwise be paid by the largest pools of leveraged buyout loans, namely foreign lenders and foreign capital providers.

Despite his intellectually vacuous argument “it’s not my fault”, these three measures of Flaherty’s are certain to triangulate a most undesirable result: a vastly increased supply of now highly vulnerable Canadian companies ripe for the pickings.

Yes that’s the supply side of the equation, whereas foreign private equity is the demand side of the equation.

Fretting is one stop shy of “it’s not my fault”. Time for the supposed straight-talking David Dodge to get his facts straight and speak the truth. Flaherty is grossly incompetent and his actions on all fronts are undermining the economic sovereignty of our country.

Does that fall within the Bank of Canada’s mandate?

One last question. How many Canadians does an association have to represent before they get an audience with the Governor of the Bank of Canada?

Is one million plus sufficient?

Tuesday, May 1, 2007

"Hardly an epic betrayal"

Now that the pigeons have come home to roost on the unintended and yet infinitely foreseeable consequences of the Tax Fairness Plan, namely the hollowing out of a once vibrant and growing sector of the Canadian economy and the consequent destruction of Canada’s tax base as a result of the leveraged buyout of these businesses with the end result that taxes to the tune of $5 to 6 billion a year will be lost, rather than preserved, it is interesting to see the rationalizations du jour that were being advanced back in November. I looked far and wide to locate that most memorable of comments by Stephen Harper that went to the effect that: “he did not want to be the First Prime Minister to see BCE and Telus not pay taxes”.

That most memorable of quotes surely is deserving of being filed under “be careful of what you wish for”, since that is exactly what the private equity takeout of BCE will assure him of now that he (for reasons only known to himself) stood in the way of BCE’s becoming an income trust. A couple of facts would have served Stephen well on this decision. First, BCE doesn’t pay taxes as a corporation, at least not for the next four years according to their own forward looking financial statements. As a private equity owned entity that it is well on the road to becoming, BCE’s tax “holiday” will extend long beyond four years. Meanwhile as a public income trust, BCE would have paid distributions to average Canadians seeking retirement income who would have gladly paid the government $800 million in taxes per annum. I guess the government doesn’t like the colour of retired Canadian’s money. They musn’t like the colour of private equity money either, since they are assured of not seeing any of that either, at least not in the form of taxes paid to the Canadian government.

Unfortunately, I was unable to locate this exact quote of Stephen Harper’s and I do not want to be guilty of misquoting our Prime Minister. Therefore I had to settle for the wise words of his Chief of Staff, Ian Brodie, who was able to rationalize events as follows:

This would be a more compelling analysis if the government weren’t already in the midst of a steady program of cutting tax rates, including corporate taxes, across the board. The alternative to breaking the election promise and taxing trusts was to abandon all other tax cut plans as the corporate tax base quickly disappeared. Instead, Flaherty acted quickly, in the face of rapidly changing conditions, to break the trusts promise and save the rest of the government’s promises. Not a pretty choice, to be sure, but hardly an epic betrayal either.

Ian Brodie
Chief of Staff / Chef de cabinet
Office of the Prime Minister / Cabinet du Premier ministre
Ottawa, Canada, K1A 0A2
Office / bureau : 613.992.4211

The key words of this wise missive are “as the corporate tax base quickly disappeared”. There it is again, that bugaboo assumption about tax leakage. Does anyone in Ottawa ever challenge assumptions or do they simply throw more fuel to the fire called tax leakage? Or perhaps the speed at which these wise individuals thought that the corporate tax base was disappearing wasn’t fast enough, so they thought that they would accelerate this outcome by Flaherty’s collection of three” not my fault” provisions:

(1) tax public income trusts, but no other tax flow through entity, including private income trusts held by pension plans,
(2) limit the growth of public income trusts while in the hands of average Canadians, but under no other business ownership arrangement, and
(3) eliminate the 15% withholding tax paid on leverage buyout loans, previously paid by foreigners.

As to whether this was a betrayal of epic proportions remains to be seen. Is not being re-elected considered epic? However, for many that possibility will be viewed as a pretty choice indeed.