Incriminating Serge Nadeau sighting

Serge Nadeau is the Director General of Tax Policy in the Department of Finance that was charged by the RCMP with alleged insider trading in connection with the purchase of income trusts in advance of a favourable tax treatment announcement by the Government in 2005. No Finance Minister can be held responsible for the alleged illegal activities of his department's staff. That said, Jim Flaherty went to some lengths at the time of Nadeau's arrest to assure Canadians that Serge Nadeau, who was actively involved in the 2005 income trust tax policy review, had no role whatsoever in the policy review of October 2006.

Attached is the memo that Steven Chase based his Globe and Mail article of yesterday on, entitled Trust tax linked to private equity buyouts. This memo was dated October 30, 2006 and was addressed to Bob Hamilton who is senior assistant deputy minister of tax policy at the Finance Department. This memo dealt with the positive impact that income trusts had in thwarting foreign private equity takeouts. The memo was copied to two individuals, one of whom is Serge Nadeau. If we are to believe Jim Flaherty's claim that Serge Nadeau had no role in the formulation of the October 2006 income trust tax, why then is it that he is one of only three people in the Department of Finance to receive this memo dated October 30, 2006? Bob Hamilton is the ADM of Tax Policy, Serge Nadeau is the Director General of Tax Policy. Clearly both were involved, as one would normally expect given their titles and area of focus, namely tax policy.

The sanitized /blacked out version of the memo contains some very disturbing information, not all of which was covered by Steven's excellent article, and touches not only on the foreign takeover vulnerability associated with the income trust tax but also the negative income tax collection consequences of what the policy would induce. This is contained in the second of the three summary findings of the memo. The more incriminating third point is blacked out.

Summary observation two reads:

"Second, the factors that have been driving the increased presence of foreigners in the Canadian private equity market are not cyclical, which suggests that foreigners will remain active players in Canada. These factors include the availability of favourable tax structures that can reduce Canadian tax liability."

Elsewhere in the memo it reads: "Canada is very attractive for foreign buyout firms because of the highly efficient tax structures they can use to finance their acquisitions."

Elsewhere it states: "private equity firms consider income trusts as a serious competitor and an attractive option for the managers of targeted firms."

So what does Flaherty do with this input? Does he redress the measures that make things attractive for foreign private equity takeovers. No, he does the exact opposite. He taxes trusts, thereby making them highly vulnerable to foreign private equity takeover with the knowledge that private equity owners will reduce the Canadian taxes paid. For extra good measure he also then takes a situation that is already highly tax efficient for foreign private equity to buy Canadian businesses and makes it even more efficient by eliminating the 15% withholding tax on leveraged buyout debt as part of Budget 2007.

Therefore his plea of "it's not my fault" rings hollow. Literally. It was Flaherty's fault. It was premeditated. It was with full knowledge of the negative consequences to Canada's tax base and Canada's economic sovereignty. Truly a disgrace.





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