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.