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.

2 comments:

Anonymous said...

I think Harper is the Sheriff and Flaherty is the Deputy Sheriff....Barney Fife comes to mind.....bungling idiot........actually that's unfair to Barney as he actually made an effort to be competent, whereas Flaherty prefers his bone headed bombastic approach to the nations finances.

I am a middle class conservative said...

What I don't understand is how the Canadian government thinks that by taxing these trusts will give them more revenue in the long run. For example, just out here in the US last month, April saw the highest government revenue take in history ! How did that happen? Could it have from the tax cuts that were past last year? OF COURSE IT IS. It is a well know fact, but not printed enough that tax cuts always promote spending from the middle and upper (and somewhatlower)classes. It also promotes the big companies to invest in machinery or whatever their capitalization is. It works every time. If people don't have the money to spend they don't spend it ! ! ! What is so hard to understand? In the long run, then, these taxes thrown on the CRT's and on the common trust owners will take its toll at the consumer box office - SPENDING - and so in the long run the Canadian government will derive LESS not more revenue because of less sales tax (from less spending) and people not paying "unearned income tax"....because that will also be less.