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 ( 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.


Anonymous said...

Brent Fullard is wrong. Jack Layton isn't an enigma wrapped inside of a riddle. Jack Layton is a moron wrapped inside of a hypocrite. As such the NDP is the Newly Duped Party of Canada, where ATM fees trump every other economic and social issue of the day. Question for Jack: Can O avoid the 31.5% double taxation of my retirement income if I walk an extra block to my local branch?

Kephalos said...

On May 16, 2007, Mr. Pat Martin, NDP MP from Winnipeg said to the House of Commons “Income trusts are corporate greed gone wild. They are a corporate wet dream. No business likes to pay taxes, so these guys have discovered a way to pay none, not just lower taxes but no taxes. The guy who developed this got a promotion. Some young Turk somewhere on Bay Street or Wall Street got a bonus that year after inventing this. I cannot get over how we have allowed this disastrous policy to percolate and incubate until it has reached the magnitude that it has. The NDP spoke out as soon as it noticed it. I took note when the Yellow Pages converted to an income trust. It was a good number of years ago.”

Mr. Martin is factually incorrect on one key point. There is no corporate greed involved. In a study prepared by Gordon Tait regarding 125 businesses that were converted from corporations to trusts between 2002 and 2005, the trust investors paid 2.2 more taxes than was paid by the previous corporations. So, the complaint must be that the trusts themselves did not write the tax payment cheques. Or, is it something else that Mr. Martin does not understand? In any case, trust investors pay more taxes than did the predecessor corporations.

What’s a corporate wet dream? Can somebody help a naïve, older Canadian with that one? Is that drool on an annual report?

Mr Martin suggests “the guy who developed this got a promotion.” No, Marcel Tremblay created the trust model against all odds at a time when the oil industry was in a terrible slump. When? In 1989; since then, energy trusts have grown and repatriated about 16% of the oil industry in Canada, and put income into the bank accounts of thousands of small investors. Trusts have been around for almost 20 years, and the Department of Finance has had a lot of time to check under the hood on the trust folks-wagon. I haven’t searched Hansard to find the first time the NDP spoke against trusts but I’m sure Mr. Martin knows of what he speaks.

Yellow Pages converted to a trust in September 2003—not even four years ago. In that time, the trust has paid investors $1.4 billion in distributions, and the investors have paid or will pay about $300 million (21%) in federal taxes and $150 million (11%) in provincial taxes. What would Yellow Pages have paid in combined federal and provincial taxes, if it had been Yellow Pages Inc? Perhaps $200 million, but perhaps nothing if the phone company owner had decided to reinvest Yellow Pages income into wireless expansion.

As I understand, Mr. Martin is a professionally trained carpenter. So he’ll appreciate that the good politician measures his facts twice and makes his speech once. There may be some income trust investors in Winnipeg who want him to re-measure the speech he gave to the Commons on May 16, 2007.

Anonymous said...

Who can honestly figure out where the NDP are coming from on this issue?

The people most hurt by this policy are Seniors who are trying to boost thier retirement income and yet Layton destroys these peoples wealth.

Why? I think personal ambition is more important to Jack than coherent policy. I've never seen a leader chase polling and grab sound-bites like Layton.

The NDP are completely wrong on this issue and Jack sails along and hopes nobody notice.

Watch this guy for awhile and he will vote whichever it takes to hold onto power.

Look at Jack Layton the ethical vacuum.

Anonymous said...

At the NDP web site, on the page for Seniors, it says "Dignity and security for seniors: Protect hard-earned pensions by ending employer underfunding of pension plans, securing pensions when employers go bankrupt, launching pension insurance and other measures."

Obviously, the NDP is only interested in protecting the retirement income of the 30% of Canadians who have employment pensions. The NDP has supported the Tory trust tax lie made against many thousands of seniors who invested in their retirement savings into income trusts. As we can see from the Thunder Energy takeover, the NDP wants the trust assets to be bought for cheap by the under-funded employer pension plans.

In my case, the NDP approved fraud against retirement savings outside of employer pension plans will cost me $12,000 a year when my income trusts units are forced off the markets, and I am forced to invest in lower yield corporate debentures.

So, Mr. Layton, I’m one of the 70% of Canadians that the NDP does not care about.

nineofiveland said...

These people have no clue .. when BCE announced it was going to convert to an Income Trust, I sold my open holdings because I didn't want to pay a big tax hit on distributions .. does that sound like tax leakage to you?

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