Friday, July 27, 2007

A balanced and measured approach?

Let’s suspend disbelief for a moment and accept that everything Jim Flaherty has said about income trusts and his policy goals to be true. Entering this twilight zone is a very easy thing to do since it only requires you to believe his true intent is to level the playing field between trusts and corporations, and to accept the notion that RRSP withdrawals are never subject to taxation. Keep in mind that for the latter to be true would mean that the government would forfeit $9 billion in taxes annually from the taxation of just such RRSP and pension withdrawals.

As recently as this week , Flaherty would have us believe that income trusts cost the government $3 billion in lost taxes. This is based on Flaherty’s own assertion that six years of losses at $500 million a year equates to $3 billion. Therefore to achieve the goals of leveling the playing field and stemming this loss of taxes, he has introduced a 31.5% tax on income trust distributions, that is non refundable to RRSP investors and foreign investors who make up 38% and 16%, respectively of all income trust investors, according to the government itself. Again, according to the government, the $200 billion income trust market pays out $16 billion in annual distributions, which are fully taxable in the hands of investors. The new additional tax burden will mean that the government will now receive an additional $2.7 billion in annual taxes to counteract an alleged loss of $500 million in taxes. Talk about belt and suspenders overkill to the extreme by a factor of no less than 5.4 times. Even assuming this $500 million tax loss to be real, which we all know it isn’t, the required level of taxation needed to stem tax leakage and to create the much vaunted level playing field would only be a 5.58% tax, but then whose counting?

The astonishing thing is that we don’t even need the details behind the 18 pages of blacked out documents to figure this out. Maybe that’s why Flaherty and his wise counselors in the Department of Fraud now want them back as they don’t exactly paint a picture of fiscal probity or a balanced and measured approach to what Flaherty himself calls a “clear and present danger to tax fairness.”. More like a case of fanning the flames and cooking the books.

Can the case against Flaherty be made any simpler? Can tax fairness get any fairer than this? No doubt we will all learn the answer to that in Flaherty’s next budget, or whomever Harper’s new Minister of Fraud will be.

Wednesday, July 25, 2007

The smokescreen called tax leakage

Apart from Jack and Judy of the NDP, who does Flaherty and his desk jockeys in Ottawa think they’re fooling with this nonsensical argument of tax leakage? Income trusts are a closed system of taxation. It’s impossible to avoid paying taxes on income trust distributions, unless you want to start falsifying your personal tax returns. Meanwhile corporations are an open system of tax, where there are a litany of inefficiencies rampant in the system that allow for (yes) considerable tax leakage. For example, why do shareholders of BCE pay reduced dividend rates of taxation on the earnings of BCE that have never been taxed in the first place? Why are BCE’s interest payments taxed as interest and its dividends taxed as dividends when both are being serviced with BCE’s pre tax cash flow? This situation could never exist under the income trust model, but is rampant throughout the corporate world. Want another example: Telus.

Yes, Mrs. Smith, the income trust issue has nothing to do with stemming the loss of taxes. Tax leakage is an outright falsehood being perpetrated by those with a grander vision and more devious purpose in mind. These purposes are being aided and abetted by many in Canada’s corporately owned media. The grander vision at play is controlling people’s capital. This is a struggle over who owns the cash flow of Canadian companies, the shareholders or the managers (CEOs and Boards of Directors). These folks would prefer to see all Canadian investors own common shares, since common shares are only a surrogate form of ownership that entitles the holder to virtually nothing in the way of direct economic entitlement and creates nothing in the way of enforceable obligations on the part of the issuer. The shareholders own a stock certificate of a given company, not its cash flow. That’s why private equity has abounded, since private equity acquires undervalued stock certificates in sufficiently large numbers, that it is entitled to the company’s cash flow, whereupon the managers of the company run it as if they were shareholders. And to think this all happens without the need for stock options or the favourable tax treatment (50% off) of stock option gains that Canada’s tax code has lavished on the employment income of the least entitled (as if they had capital at risk).

This access to cash flow on the part of the average Canadian investor is the insidious and pernicious thing about income trusts that Canada’s New Government was so intent on correcting for the benefit of the uber powerful, that they were prepared to lie to an entire nation to do so. They then attempted to justify the original lie by lying about the pretense for having lied in the first place by suggesting that the conversion of BCE and Telus would result in a loss of corporate taxes, and yet neither BCE or Telus were paying corporate taxes at the time, not to mention the future. God forbid that investors should feel that they are entitled to monthly distributions and the distribution of 95% (after capital expenditures to ensure the ongoing viability and strength of the company) of the companies cash flow that they “own”, in the truest sense of the word. Who do these average Canadians think they are, Cerberus, KKR. Ontario Teachers? We’ll teach them a thing or two, as we control their money, not them.

Let’s be honest, these uber powerful people built this country, or so they would have themselves believe. They learned marketing from Henry Ford who proclaimed that you can have a Ford car in any colour you want, provided it’s black. So too with this generation of corporate handlers, you can invest in the Canadian equity markets, provided it’s common shares. How long do you suppose it was after Henry Ford made that proud proclamation about the vast array of colours that his product was available in before he actually offered his cars in a kaleidoscope of colours? That’s right, two years and two and a half months. And why do you suppose he did it. Goodness of heart? No he did it because he came to the late realization that by not doing so he was losing sales to the upstart Chevrolet and Dodge Brothers. As a result, Henry Ford built the “big three”. Henry Ford got a rude lesson in competition and realized that consumers have choices and that he could not impose his narrow minded will onto the market place, as consumers will seek other alternatives from further afield.

So too with the investment preferences of Canadians. We certainly don’t need our government condemning our natural and prudent investment preferences by calling us a nation of coupon clippers. Do you suppose Flaherty accused John Snow (Chairman of Cerberus) in his private meeting with Snow in advance of Cerberus’ bid for BCE of being a coupon clipper? Among the many things that Flaherty just doesn’t get is that income trusts are the best thing that’s happened in the Canadian capital markets for a very long time. What could possibly be wrong with a new development that allowed Canadian companies of all sizes that are headquartered in Canada and run by Canadians to access a low cost of capital from Canadian investors to fund their expansion and growth at home and abroad? In fact the demand for this form of investment was so great that foreign investors were investing large sums into our market to further enhance the benefits to Canadians and all the while every last cent of pre tax corporate earnings of these companies was being taxed either through personal income tax or withholding tax in such an efficient manner that it drove a series of “strange and unexplained surges” in Canada’s overall tax collection. So let’s kill the golden goose. Meanwhile the 70% of Canadians without pensions had a hope of a decent retirement lifestyle in today’s protracted low interest rate market. Now that they have been totally frustrated in their attempts to get a decent stream of income by investing in the Canadian market and hampered by the loss of $35 billion in market value of their life savings, what do you suppose these people are now going to do to replace their lost source of income:

(1) buy Manulife’s Income Plus
(2) buy Great West Life’s deferred life annuity
(3) day trade in the Canadian stock market
(4) invest in the US High Yield market
(5) invest in the US Master Limited Partnership market
(6) vote Conservative/NDP in the next election

Tough choices. However I am certain the Canadian public is up to the task.

Monday, July 23, 2007

Every Canadian

Halloween 2007 will mark the first anniversary of that day that will live in in fiscal infamy when the country’s Finance Minister was misled into believing the double taxation of income trusts in RRSPs would solve all the country’s problems of presumed tax loss and low productivity and capital reinvestment. As we all now know, the reverse is true and Jim Flaherty’s actions and those of Canada’s Novice Government on this file will be detrimental to every Canadian, on at least one level.

As has been made abundantly clear since Halloween 2006, the world is a more complex place than that which Flaherty beholds when he gazes out from the prism of his sixteen year old childrens’ eyes (Flaherty’s self admitted mindset, behind the income trust tax). Let’s see what others have learned since that fateful Halloween, when Flaherty justified his tax by saying:

“You have to either leave it alone or fix it,” Mr. Flaherty shrugged Wednesday. “We were going to see the two largest telecommunications companies in the country not pay corporate taxes. That's a clear and present danger to fairness in the Canadian tax system. I thought we had to act.”

Perhaps the best advice I can provide decisive Jim Flaherty is that next time he should think before acting or to follow the old adage that “if it ain’t broke don’t fix it”. But fix it he did. Had he followed such wise counsel, we wouldn’t be reading stories like this:

Bell-Teachers deal good for Canada?
Paul Vieira
Financial Post
July 3, 2007

“It is estimated Ottawa stands to lose over $1-billion in annual tax revenue should Bell Canada be privatized. Mr. Flaherty played down those worries, noting the federal government stands to reap a one-time windfall through capital gains taxes”

So lets take a toll of the damage that Flaherty’s policy has inflicted on every Canadian. Someone has to come up with the potential loss of $7.5 billion in annual taxes that will shortly ensue from this policy. What choice do you think a sixteen year old would make? Reduce spending by $7.5 billion? Raise taxes by $7.5 billion? Raise the GST by 1.5%? Sell some government assets for $7.5 billion, this year, next year, ad infinitum? Or just run it up on dad’s tab and increase the federal debt by $7.5 billion a year.? Tough choices for some, but I am sure Jim is up to the task, since he can bring his experience on all possible outcomes from his laudatory days as Ontario’s Finance Minister where he adroitly masked the deficit he created through a host of asset sales at 50 cents on the dollar (read 407, Bruce Power, etc., etc.)

Unfortunately the damage doesn’t end there. Other Canadians are negatively affected on multiple levels. How about the 70% of Canadians who don’t have pension plans who just lost an important investment choice that will leave them more captive to the limited choices out there, as we transition from a “nation of coupon clippers” to a “nation of day traders and stock speculators”. How about the 2.5 million Canadian who sustained a permanent loss in value of their life savings of $35 billion. How about those people for whom a loss of income of some 50% won’t be defined in terms of “under funded pension liability” but rather a dramatically reduced standard of living and confidence in their financial future in old age?

No doubt this array of choices goes way beyond the prism of insight afforded by a 16 year old’s perspective. So what did Flaherty mean when he said that? Did he mean he thought his children would have a better future in what he erroneously thought would be a more economically viable Canada? Or did he simply mean he was hoping to get them summer internships working for some US investment dealer or private equity manager on Wall Street all of whom are the direct beneficiaries of this tax scheme of his? Hard not to be cynical about such unprecedented incompetence on the part of a Finance Minister of an industrialized nation.

We have all become prisoners to Flaherty’s childlike prism mindset.

Did I mention interest deductibility on foreign acquisition debt? Did I mention asymmetric takeover rules? Did I mention bloated budget spending? Did I mention no broad based tax cuts, as distinct from targeted vote motivated tax cuts? Did I mention not honouring written commitments?

Did I mention that it’s time for Canada’s New Government to be as thing of the past before we have nothing left of the future?

Saturday, July 21, 2007

Tax Fairness: lofty goal or political deceit?

Tax fairness. Many would argue that this term is itself an oxymoron. Without exploring that particular interpretation of the term, I will simply examine whether tax fairness, as embodied by Jim Flaherty’s Tax Fairness Plan is a lofty goal or political deceit. By its very choice of words, the term tax fairness is a subjectively determined result. That is true at certain levels, however an even more basic test of the fairness inherent in the Tax Fairness Plan can be determined without resort to subjective tests. One need only start by understanding the dictionary definition of the word fairness. The Oxford dictionary defines fairness as: 1 treating people equally 2 just and reasonable in the circumstances 3 considerable in size and amount 4 moderately good 5 in a just and reasonable way.

Flaherty’s Tax Fairness Plan (TFP) has several aspects to it. The first is to tax income trusts at the rate of 31.5% staring in 2011. The scope of this tax applies only to publicly traded income trusts, and no other trusts or tax flow through entities. The plan also provides for pension income splitting for seniors, billed as a form of “offset” for the financial harm inflicted by the tax on income trusts and in light of the fact that this government promised never to tax income trusts. Let eaxamine how well the Tax Fairness Plan hold up to Oxford’s definition of fairness:

1) treating people equally: The TFP fails this test of fairness as it allows people who are members of pension plans to own income trusts free of the new tax, whereas people who are not members of pension plans and who save via a registered retirement savings plan are taxed under the plan. For example. Thunder Energy Trust was recently acquired by the Public Sector Pension Plan and taken private, whereby it will pay no income trust tax under TFP, whereas as a public trust held by average Canadians it would have been subject to the tax. This very inequity creates an artificial tax arbitrage between these two distinct classes of people. Furthermore the income splitting provision only applies to those with “pension income”, namely those with formal pensions and not RRSPs. Again this provision of the TFP favours one group of people to the exclusion of others. This income splitting provision was advertised as “ameliorating” the effects of the income trust tax, whereas in reality it simply exacerbates the level of unfairness to the benefit of those who weren’t aggrieved in the first place. Conclusion: Political deceit.

2) just and reasonable under the circumstances: The circumstance that were used to justify the introduction of this new tax was that income trusts cause “tax leakage”, and that the playing field was not level between trusts and corporations. To date there has been no evidence whatsoever provided by the government to support its allegation of tax leakage. The numbers that the government cites to support this false notion are based on the false premise that RRSPs are “tax exempt” which assumes the government never collects any taxes whatsoever. The facts are otherwise, which is why Flaherty is only willing to provide evidence of his tax leakage analysis under the cloak of blacked out documents. Such a form of disclosure on an issue of tax fairness, fails itself to meet the teat of fairness or reasonableness. Such diclosure can hardly be considered just in light of the circumstances which was the resultant loss of $35 billion in Canadians’ life savings and the loss of an important investment choice and the attendant loss of income following the abrupt reversal of a solemn election promise to do otherwise. Conclusion: Political deceit.

3) considerable in size and amount: The tax on income trusts will be 31.5%. Assuming the intention was truly to “level the playing field between trusts and corporations”, then why was the rate of 31.5% applied when the Department of Finance knows full well (see DoF Consultative Paper of September 2005) that the apples to apples comparative level of taxation paid by Canadian corporations is 6.2%? How is taxing trusts at 5 time the level of corporations be considered as fair in size and amount in the context of the stated goal of leveling the playing field? Such a gross disparity in size and amount can only be intended to eliminate trusts as a viable public markets alternative for investment by average Canadians. Conclusion: Political deceit

4) moderately good. How can something that emanated from a broken election promise which resulted in the loss of $35 billion in Canadians’ life savings be considered moderately good? How can a tax that left an entire sector of the economy vulnerable to foreign private takeover be considered moderately good? How can the loss of $793 million in taxes that BCE would have paid as a trust relative to the virtual zero it will pay in taxes to Ottawa as a private equity entity held by Teachers/Providence?Madison Dearborn be considered moderately good when that very outcome was the result of the tax and the motivation to acquire BCE was tax driven, as these buyers will avert taxes? Taken as a whole this policy has the potential to decrease Ottawa’s tax collectiuon base by $7.5 billion a year with no offsetting good. That ‘s the equivalent of a 1.5% increase in the GST rate. Conclusion: Political deceit

5) in a just and reasonable way. Let’s assume that the Tax Fairness Plan met every one of the other 4 tests of fairness, which it most profoundly does not. Even under those assumed circumstance it still would have miserably failed this final test of being implemented in a just and reasonable way. Keep in mind this particular government was ushered into minority office on their own solemn pledge to never tax income trusts and after widely extolling the importance of this savings instrument to seniors and those saving for retirement. All of that was quickly forgotten as Canada’s New Government and its novice leadership found itself in the heady atmosphere of Corporate Canada and their fear tactics of cataclysmic outcomes associated with this pernicious democratization of the capital markets to meet the investment preferences of Canadians saving prudently for retirement. There was nothing just or reasonable in how this government reversed its stated course. It did not consult whatsoever with the public. It strenuously fought against holding public hearings on the matter. It provided no studies or analyses to support its many unproven claims and false assertions. It badgered and cajoled witnesses at the Public Hearings. It did not see any benefit in grandfathering the existing universe of trusts. It did not adopt any of the recommendations of the Finance Committee. Nothing this government had done on this file since the day that Stephen Harper first declared that the Conservatives would never tax income trusts can be considered just and reasonable.

Conclusion: Political deceit.

So there you have it. The Tax Fairness Plan fails every one of the five tests of fairness. Guilty on all five counts. As a result, either the policy has to be changed to suit the name or the name has to be changed to suit the policy. Or perhaps the conniving architects of this grand tax charade had a different use of the word “fair” in mind when they named this policy:

Fair: 1. an event at which sideshows and rides are set up for public entertainment. 2. An event held to promote or sell goods

Thursday, July 12, 2007

Ian Brodie on Broken Promises and Epic Betrayals

Below is an e-mail is from Harper’s Chief of Staff, Ian Brodie, which comes from from the heady idealistic days of November 13, 2006. In Brodie’s supreme opinion it was okay to break the income trust promise on the basis that “the alternative was to abandon all other tax cut plans as the corporate tax base quickly disappeared”.

Perhaps someone could provide Ian Brodie with a real world update, as his nifty boss engineered the worst of both worlds. There have been no tax cuts instituted by this government (apart from those subsidized by the federal government at the expense of all Canadians for the exclusive benefit of Quebeckers), and we are now also witnessing the rapid disappearance of the corporate tax base, as most abundantly evidenced by BCE, whose purchase by private equity was induced by the income trust tax which will result in the loss of $793 million a year in taxes to Ottawa. Meanwhile the betrayal (his word) on income trusts back in November was just the beginning of a long litany of subsequent betrayals by this government. As to his point about certain choices not being pretty, I can say one thing. Come the next election, Canada’s New Government has certainly made Canadians’ election choices very easy indeed.

That said, would Ian Brodie consider the fall of Canada’s New Government (TM) to be an epic event, or just an epidemic event brought on by a bad case of ubiquitous betrayal?

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

Wednesday, July 11, 2007

Flaherty moves decisively to compensate victims of theft

In a decisive act of patriotism and compassion, Jim Flaherty recently provided one of his constituents, Robert Stone, with a new Canadian flag to replace the one that had been stolen from his home in Whitby, Ontario. Please note, it was also an act of great frugality, as every MP receives 100 free 3’ by 6” flags to hand out at will. The fact that this act of great generosity made it into the papers was probably the furthest thing from Jim Flaherty’s mind (see below). Just think of it as the unintended consequence of kindness.

Now that we have witnessed this softer and more compassionate side of Jim, perhaps he may wish to revisit the wisdom of an earlier decisive move on his part to tax income trusts. It’s becoming apparent that this blatant act of theft on the part of Canada’s New Government taking the form of the loss of $35 billion in Canadian’s life savings and the loss of an important investment choice to the 70% of Canadians without pensions isn’t perhaps the most frugal or patriotic tax policy that could have been devised. The recently announced sale of BCE has brought this into sharp focus, not to mention the 20 income trusts acquired in the recent few months. These events have two things in common. First, these Canadian businesses are being acquired predominantly by foreign capital. Foreign financial capital for whom there is no underlying business combination or strategic rationale. Second, as a direct consequence of these purchases by these financial players and Flaherty’s elimination of the 15% withholding tax paid by foreigner investors on interest for leverage buyout loans, there will be a dramatic loss of revenues to the government of Canada. In the case of BCE alone, many in the press have reported the loss will be $1 billion in lost taxes per year. We calculate $793 million a year. Taken as whole, this policy has the very likely potential to decrease Ottawa’s tax base by $7.5 billion a year, in perpetuity. But that’s just the revenue side of the equation. Who knows what the impact will be on spending, as many retirees will no longer be able to sustain themselves with the returns associated with other retirement investments, whose yields are generally half the level of income trusts. Call this the hidden underfunded pension liability that you never read about in the paper, since it only affects the 70% of Canadians without pensions and is not something that can be calculated, however it can be observed in the form of materially reduced standard of living for these affected individuals. The compassion voiced by members of the Conservative party on this matter: “get a life” or “it’s not my fault”. And to think one of the false propositions in the Ways and Means motion fraudulently read: “strengthening Canada’s social security system for pensioners and seniors”. Go figure, as Flaherty obviously did not.

Perhaps. Jim Flaherty can learn a lesson from his Whitby constituent, Robert Stone. Nest time you decide to implement an ill thought through tax policy that represents the reversal of an explicit election promise, perhaps it would be wise to run it up the flag pole first, and see how many people salute it.

Meanwhile, good luck ever replacing these businesses lost to foreign capital and the associated loss of taxes. This may end up costing Flaherty where it hurts him most. No more free flags to hand out in acts of false patriotism and compassion. These trivial acts of kindness have been superceded by his innate incompetence and “need for speed” decisiveness. And to think, they called one of Canada’s most accomplished Finance Ministers, Mr. Dithers.

Flaherty to replace stolen flag


There will be a new flag in front of Robert Stone's house.

Although it may not be his father's burial flag, he said it will still fly in remembrance of him and all other veterans.

Last Monday, Robert Stone's mother, Mary, discovered her husband's burial flag had been stolen from the front of their Whitby home. Lieut. Robert Charles Stone died this year at the age of 80.

When Finance Minister Jim Flaherty heard about the theft, he decided to present the family with a new one at their home today.


"I was very, very touched," Stone said.

Flaherty's press secretary, Chisholm Pothier, saw Stone's story and sympathizedy. Pothier said the minister felt bad that somebody could disrespect a veteran's family and his office contacted Stone Wednesday night.

"The minister ... ordered a new flag and will present it to them," Pothier said.

Stone said he's learned a valuable lesson and will raise the new flag every morning and take it down every night.

"We're a quiet people, we don't make a big thing about nationalism," he said. "But when I think about that flag, it wasn't just for my father, it was for every veteran or for anyone who has a relative who died recently for this country.

original story

Sunday, July 8, 2007

Simple to the extreme

The entire income trust fiasco turns on one very simple point, so too the does the broken promise to never tax income trusts and the loss of $35 billion in Canadian’s life savings and the loss of an important investment choice that provides the 70% of Canadians without pensions with a chance for decent retirement income in today’s protracted low interest rate environment.

The simple point at issue is whether pension funds and RRSPs are tax exempt or tax deferred. Jim Flaherty’s tax leakage analysis treats the 38% of income trusts that are held in RRSPs and pension plans as if there are never any taxes paid on these income trusts’ distributions, not today, not tomorrow, but simply never. Even Jack Mintz acknowledges this methodological flaw in correspondence with me that states “I do want to point out that there is a serious flaw in some analyses especially on the taxation of pension and RRSP accounts. Finance was not right to treat the impact as zero”.

There is no mystery to any of this for those who are receptive to the truth. The 18 pages of blacked out documents provided to Gordon Tait under the Access to Information Act prove it categorically. That’s why Flaherty has requested in writing that all these documents be returned. As if the were even possible after their publication in newspapers and billboards across the nation. What these documents reveal is available here under the heading: Public Hearing Support Documentation: Deconstructing Tax Fairness. You owe it to yourself to review these documents, lest their be any doubt in your mind.

Here we take one of the 18 blacked out documents and reveal the analytical deception that is going on. We know irrefutably what is going on since Dennis Bruce of HLB Decision Economics worked collaboratively with the Department of Finance during the Goodale public consultative round to develop the tax “leakage” model. Dennis knows first hand precisely what they are doing, and what they are doing wrong. The gross methodological error occurs on line G entitled Future Tax Revenues (Tax Exempt)(7). This is where the Department of Finance chooses to ignore the 38% of taxes paid on all outstanding income trusts by treating RRSPs as Tax Exempt, rather than tax deferred by not adding these taxes in their analysis. This is the epicenter of the income trust fiasco and the bureaucratic deception and policy driven sleight of hand.

To resolve this analytical difference of opinion between the Department of Finance and the realities of Finance 101 and Canadian tax laws, we simply need to turn to the Minister of Finance himself, who was commenting on the recently announced purchase of BCE by Teachers’ pension plan and foreign private equity, whose purchase many in the media have said will result in the loss of $1 billion in taxes to Ottawa per year. This is a sale Mr Flaherty has endorsed, by saying which of the following:

(1) "The purpose of the pension funds, ultimately, is to ensure they can honour their pension obligations. And there is taxation, of course, when pensions are paid out."

(2) "The purpose of RRSPs, ultimately, is to ensure they can honour their retiree’s obligations. And there is no taxation, of course, when savings are paid out."

The entire income trust situation turns on this very simple and central point. Many believed that the damage associated with this policy nightmare was limited to a handful (2.5 million) of Canadians, however it is now becoming obvious to all from the recent sale of BCE and the many BCE like companies that are sure to follow, together with the $200 billion income trust market itself, that will fall victim to the voracious appetite of foreign private equity and our own cannibalistic pension funds, that the Tax Fairness Plan to double tax income trusts held in RRSPs is simply a wolf in sheep’s clothing or a Trojan Horse that will result in nothing more than a Deficit Inducing Plan (DIP). The DIP has made possible by the combined actions of the Minister of Finance and most appropriately with the solid support of the NDP, who many refer to as the Dippers. Now I know why. Now you know why, as this whole fraudulent mess is simple to the extreme. Simple is as simple does. That said, it’s never to late to admit an error and take corrective policy action. Every day that we wait, may mean one more BCE, or one more Union Energy Waterheaters.

Since when was it ever intended that Canadians pay their phone bills and utility bills to foreign private equity and cannibalistic domestic pension plans? Think of it as Canada’s New Landlord brought to you by Canada’s New Government.

Thursday, July 5, 2007

Jim Flaherty's logic-free zone

It’s clear that the sale of BCE was the direct result of Flaherty standing in the way of BCE converting to an income trust. Just ask Jim Leech of Teachers. Further it is clear that the income trust market cratered in value because the Tax Fairness Plan introduced a tax of 31.5% on distributions paid on the 38% of income trusts residing in RRSPs and held by foreigners. This double taxation of income trust in RRSPs was made necessary because when Finance concocted their analysis of tax leakage they ignored the taxes paid on RRSP withdrawals. So their solution was to double tax RRSPs and thereby create a policy that was regressive to the 70% of Canadian without pensions. Flaherty thought he could ameliorate this impact by allowing pension splitting for the 30% of Canadians with pensions. Enter the logic free zone of Jim Flaherty. Flaherty also made a big ballyhoo at the Public Hearings complete with multiple visual aids and charts about the enormous loss of tax revenue resulting from the foreign ownership of royalty trusts by primarily US investors, since they only pay 15% withholding tax. Flaherty then saw fit to eliminate the 15% withholding tax that foreigners pay on leveraged buyout loans to acquire Canadian businesses. You are now deep in the logic free zone of Finance Minister Jim Flaherty. For his final act of illogic, Jim Flaherty then applauds the acquisition of BCE by those very self same groups of investors, namely what he called tax exempt pension plans at the hearings and the evil foreign investors who only paid 15% withholding tax and now will pay 0% withholding tax by structuring their investments as leverage buyout loans, For his crowning glory, here is what Jim Flaherty had to say about this outcome:

Re: What was formerly referred to as tax exempt pension plans and RRSPs:

"The purpose of the pension funds, ultimately, is to ensure they can honour their pension obligations. And there is taxation, of course, when pensions are paid out," the Minister said.”

Re: The limitations he is willing to place on foreign investors sheltering pre tax earnings with tax free interest on leverage buyout debt:

"At the end of the day these are business decisions to be made by business people - that is, assessing risk, because leveraging is the creation of risk. And we are not going to substitute our opinion for their opinion in terms of the amount of risk they are prepared to take in these transactions."

The good news is that we are probably reaching the end of that day, as illogic can not be sustained indefinitely, since at the end of the day only logic and fiscal sanity can prevail, whether it be at the polling booth or some other juncture nearer at hand.

Wednesday, July 4, 2007

Flaherty's intellectual inconsistencies and financial naiveté

On the reasons why Flaherty feels it’s appropriate to leave out the 38% of taxes that are paid on income trusts that are held in RRSPs and tax deferred retirement accounts, and by doing so conjures up tax leakage:

“As Minister of Finance, I have a fiduciary obligation to the taxpayers of Canada today, not tomorrow, an obligation to pay for needed social, environmental and economic programs today, not tomorrow. I cannot, and I will not, fund today's programs from tomorrow's revenues”

On the fact that Bell Canada will soon be owned 53% by Teachers, a tax deferred pension plan and 47% by foreign private equity who will pay no taxes in Canada:

"The purpose of the pension funds, ultimately, is to ensure they can honour their pension obligations. And there is taxation, of course, when pensions are paid out," the Minister said.”

Obviously as Finance Minister, Mr Flaherty is keenly interested in the issue of underfunded government spending programs for all Canadians and underfunded pension liabilities for those 30% of Canadians with pensions. However being in support of the Bell Canada sale, simply means Mr Flaherty is in support of DISPLACING a large base of individual Canadian taxable shareholders who are attempting to manage for their own retirement needs in favour of a shareholder group that is dominated by institutional groups managing money for members of defined benefit pension plans that are 53% tax deferred and 47% foreign, the two least desirable investor groups from a tax collection basis, at least according to Mr Flaherty’s flawed logic behind the income trust tax based on this comment of his:

“Income trust distributions are being sent out of the country to a large number of foreign investors who are reaping a financial windfall at the expense of Canadian taxpayers. The only Canadian tax they are required to pay--that is, the foreigners are required to pay--is a 15% withholding tax. That's one five percent. Far less than the taxes paid by trustholders here in Canada.”

Therefore, based on his own testimony before the Finance Committee on January 30, 2007, one could only conclude that tax deferred investors are “bad” and foreign investors are “bad”, and yet here he is on July 3, 2007 defending a sale of Bell Canada to those two very investor groups in a transaction that will take Canada’s most widely held public company into private hands, and he tries to justify his support of such an event based on a one time capital gains tax payment:

"If the present transaction goes forward, there will be a substantial amount of capital gains tax paid by shareholders of BCE,"

Three observations for Mr Flaherty to reflect on. First, Teachers will pay no such capital gains tax. Taxable individuals will, and this fact combined with a very low average cost base amongst the many long standing taxable shareholders of BCE means that they will find it virtually impossible to replicate in the marketplace the income and growth from their investment in BCE with the after tax proceeds of this forced sale to pension funds and foreign private equity. And third is the fact that Mr Flaherty’s interventionist actions against BCE’s plans to convert to an income trust, was the very event that resulted in BCE’s sale to private equity, as supported by this observation from a National Post article entitled: “Teachers VP says trust decision set up Bell deal”: “Shortly after the Ottawa income trust announcement, Teachers learned that other private-equity firms were also stalking Bell.”

The cause and effect of Mr. Flaherty’s ill conceived and ill executed income trust tax are obvious for anyone to see, and yet to date Mr Flaherty’s response has been “it’s not my fault”, a statement that I categorically reject. However I would like to point out where it is I agree with Mr. Flaherty, and that is when he stated in his testimony on January 30, 2007 before that House Standing Committee on Finance:

“This isn't how you build a 21st century economy”

On that point, it would appear that Rotman School of Business Dean Roger Martin and Royal Bank CEO Gordon Nixon also agree. This from their joint article of yesterday entitled: “A prescription for Canada: rethink our tax policy”:

“Canadian policy falls prey to an important categorical fallacy in respect to corporate taxation. Our logic of fairness holds that poor people make little income and should pay little tax; middle class people make moderate income and should pay moderate taxes; rich people earn lots of income and should pay high taxes; and corporations earn huge income and should pay really high taxes. But corporations are a different category altogether; they aren't like rich people only richer. They are legal constructions whose purpose in the modern economy is to invest, innovate and create high-paying jobs. Taxing them highly, as all the socialists have figured out, works against them investing, innovating and creating high-paying jobs. As the socialists have figured out, the way to tax corporate activity is to tax at a personal level the earnings that rich people collect from the ownership of corporations.”