Monday, September 24, 2007

The enemy within


Meet Jim Flaherty, the enemy from within. Canada’s New Government© has been utterly co-opted by the interests of foreign private equity, foreign big oil, corporate Canada, and oh yes, the Government's own pension plan. We said so from the beginning. When will the press acknowledge reality? $2 billion in annual taxes to Ottawa have been lost due to the "unintended consequences" arising from so-called Tax Fairness Plan?

Perhaps some time before we totally concede economic sovereignty of this country and before we incur the full $7.5 billion loss in annual taxes someone in the mainstream media will connect the dots. We can only hope.

We also correctly predicted that TAQA would buy the trusts after it initially set foot in Canada a mere two months ago. Today they announce the $5 billion acquisition of PrimeWest Energy Trust.

Our country is run not by leaders but by misleaders. Harper is nothing but a follower, a shill for offshore economic interests.

We wrote an editorial on this circa March of this year for the National Post in response to an article written by Diane Urquhart in that same paper. She held the opposite view about the potential "gutting out” that would result from Flaherty’s misguided policy. She said we were being alarmists. Well, now that the horse has bolted, and the barn door is still wide open, does it not seem time to sound the alarm?

Interestingly, after agreeing to publish our op-ed piece as a rebuttal, editor Terry Corcoran renegged saying that he had “checked with some people” and that Diane was “more right" than me. Who did he check with, the Department of Finance? That unpublished rebuttal is contained below in a piece entitled “Independent Analyst is unencumbered by the facts.”

In the news today is the following. Another in a long list of takeovers that coincided with the enactment of the Trust Tax Grab. Coincided, but by no mean a coincidence.



September 24, 2007
PrimeWest Energy Trust Agrees to C$5.0 Billion Sale to TAQA Subsidiary
CALGARY, ALBERTA--(Marketwire - Sept. 24, 2007) - PrimeWest Energy Trust (TSX:PWI.UN) (TSX:PWX) (TSX:PWI.DB.A) (TSX:PWI.DB.B) (TSX:PWI.DB.C) (NYSE:PWI) ("PrimeWest" or the "Trust") is pleased to announce that it has entered into an agreement (the "Arrangement Agreement") with 1350849 Alberta Ltd. ("Purchaser") and TAQA North Ltd. ("TAQA North"), both of which are wholly-owned subsidiaries of Abu Dhabi National Energy Company PJSC ("TAQA"). The Arrangement Agreement provides for the acquisition by Purchaser of all of the issued and outstanding trust units of PrimeWest (the "Units") and all of the issued and outstanding exchangeable shares (the "Exchangeable Shares") of PrimeWest Energy Inc. for a cash consideration of C$26.75 per Unit, all pursuant to a plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement"). The cash consideration payable for the Exchangeable Shares will be calculated on the basis of the exchange ratio in effect at the time the transaction is completed.

Using a Canadian to U.S. dollar exchange rate of 1.00, this cash consideration equates to US$26.75 per Unit. The actual U.S. dollar equivalent cash price per Unit will be based upon the Canadian to U.S. dollar exchange rate on the effective date of the Arrangement.

The aggregate value of the Arrangement, including the debt carried by PrimeWest and its subsidiaries, is approximately C$5.0 billion on a fully diluted basis. The consideration per Unit pursuant to the Arrangement Agreement represents a 26.5% premium over the 30 day weighted average trading price of the Units on the Toronto Stock Exchange up to and including September 21, 2007.

----

Too dangerous for the National Post? Here's our op-ed piece that they invited us to write then refused to publish.

Independent analyst is unencumbered by the facts

Yesterday’s opinion piece in this paper featured an article by Diane Urquhart that started by stating: “Brent Fullard of the Canadian Association of Income Trust Investors is wrong to think that Ottawa’s trust tax threatens to sell out Canada.” She then goes on to incorrectly cite various US tax matters to make her flawed argument.

Proof can often be found in the pudding. Here is the pudding that Finance Minister Flaherty is cooking up for Canada as a result of his “hollowing surprise” to tax income trusts at a rate of 31.5%, when he himself acknowledges that the average effective tax rate of Canadian corporations is only 6.2%, and for many like BCE, it is zero, as it has been for some time.

The announcement of Flaherty’s new tax had the effect of reducing the value of the income trust market by $35 billion overnight, an average of $140 million per trust . For those acquainted with capital markets, this created what is commonly known as an “event driven” buying opportunity, where the value of a publicly traded security artificially trades at levels below its true value for reasons unrelated to the business itself. Foreign private equity managers flush with capital are scouring the world looking for such opportunities. Flaherty has handed them a $35 billion bonanza. By simply acquiring these trusts, private equity managers can instantly recapture this lost value by (1) reverting them to corporate form and pay no trust tax, (2) removing the business from Flaherty’s growth limitations, and (3) funding the acquisition with mostly debt, whose interest as a corporation will be tax deductible in Canada and flow totally free of Canadian taxes into foreign tax jurisdictions. This corporate debt leveraging, not income trusts, will lead to immediate tax leakage.

As to the proof, one need not look too far as there have been no less than seven trust takeouts announced in the last two months and six of them involve offshore buyers, mostly private equity buyers with names like Rain and Harbinger and hailing from as far away as Bombay and Switzerland. These six deals amount to $5.5 billion, however they are only a harbinger of what is to come if this legislation is passed into law, as then the torrent of takeovers will freely rain down upon the once vibrant income trust market, leading to the inevitable hollowing out of this important sector of the economy and inducing the very tax leakage outcome the policy was ostensibly intended to avert. Good policy? Unintended consequence? Too late to change?

Concerning Diane Urquhart’s arguments about not having to worry about US takeover interest in the Canadian income trust sector, in particular our energy trusts, her logic is only as good as her knowledge of US tax law. The mistake that she makes is her failure to acknowledge is that certain U.S. IRAs are tax exempt, not tax deferred like RRSPs. That’s why the U.S. taxes income received from MLPs held in otherwise non taxable IRAs. In contrast, the Canadian government does indeed collect taxes from RRSPs and therefore Flaherty’s tax amounts to the double taxation of RRSP accounts holding income trusts.

Diane also neglects to mention that these same tax exempt accounts also cannot claim the “favourable” withholding tax credit that taxable U.S. accounts can claim

With respect to the “special” tax that is paid by IRAs owning U.S. flow through entities, she again only mentions half of the story and ignores the rest. Distributions paid by flow through entities to tax exempt accounts are generally considered unrelated business taxable income (UBTI) and this income is subject to federal income taxes. But there is a $1,000 annual UBTI exemption. And more importantly, U.S. tax amendments in 2004, mean mutual funds can now own flow through entities without penalty. Tax exempt accounts can own shares of a mutual fund without encountering UBTI issues.

Therefore: (1) you can’t compare all IRAs to RRSPs because some have completely different fundamental tax treatment, (2) you can’t say all U.S. investors have favourable tax “incentives” because many of those “incentives” are not available to tax exempt accounts, and (3) you can’t say that tax exempt accounts are treated similarly to RRSPs after the proposed changes because U.S. tax exempts have a $1,000 annual exemption for UBTI and they can own MLPs indirectly through mutual funds.

And finally (4) to the extent that the intricacies of US tax code have any bearing on the decisions Canada makes, I hope Diane Urquhart is not dispensing her advice to any decision makers in Ottawa on this matter which affects Canadian economic sovereignty.

13 comments:

Dr Mike said...

The takeover today of Prime West Energy trust should be the last straw for a government that is pre-occupied with tax leakage.

Their so-called concern with the leakage phenomenon should have them running about in absolute terror that leakage of the sort that will result from todays buy-out can & will occur.

So why are they not saying a word--why is the media sitting on their hands rather than exposing this issue--why are the members of this government not smart enough to see what it is that is happening.

Tax dollars lost a rates like this will have huge consequences--this lost revenue can only lead to 2 things--either , lost services or higher taxes to pay for the services we have now, let alone anything new.

I think eventually the public will wake up to what`s going on in Ottawa--this will occur when the media finally realizes their responsibility to look into this matter for all Canadians.

Dr Mike.

PS--the interest deductability tax ruling sure plays into the hands of private equity to aid them take-over our assets in Canada--Jimmy might as well have given them a glass of Pelee Island Red to go along with the bouquet of flowers he has handed them--that is , if he can still affoord them once the true size of his self-impossed tax leakage coes to light.

Good one Jimmy--Canada thanks you!!!!

Anonymous said...

It's nice to see our government sell out its own countrymen! And where are these buffoons anyway... i mean do they ever address the nation?? they just hide and make up their own rules.. Real Leaders!!

Proud_to_be_Canadian said...

Dr Mike, I wonder which members of government you think are not smart enough? I believe Harper and his tiny troll of a Finance Minister know perfectly well what they are doing.

Remember, these guys subscribe to the Straussian view that the "people" are too stupid to make the important decisions and the elite must make it for them. Then they wrap it all in a palatable spin called the Big Lie.

This is exactly what Harper is engaged in. And the media are, so far, every bit as compliant as the American media was about the Iraq war. Seems the US media is waking up. I wish ours would do the same.

The problem is, too many of them are the same people that wanted trusts killed in the first place.

And so it goes.

Robert Gibbs said...

Amen to all commentators above.

Unfortunately, it's apparent that the seemingly partisan media can only think and report in a one-dimensional manner.

And of course, the CONS are too arrogant and unscrupulous to admit their errors.

But then, Harper, Flaherty and the neo-CONS are obviously out to screw the average Canadian in order to enrich the wealthy and themselves.

Steal from the poor to give to the rich...a reverse Robin Hood endeavour, if you will.

Dr Mike said...

So much for Robin Hood!!

Maybe we should call him "Robber Would"

Bye Bye "ethics" , Bye Bye "accountability" .

Our only solution is Bye Bye Harper--& don`t forget to take Flaherty with you.

Mike

Kephalos said...

People,
In announcing his Tax Foolishness Plan, Jim Flaherty said “If corporations don’t pay their share of taxes, this tax burden will shift onto the shoulders of hardworking individuals and families.” What did he really mean by that? Let’s look at the TAQA takeover of PWI.UN.

TAQA will not pay any corporate tax for three reasons: (a) they’ll do a leveraged buyout and the interest income they earn from the Canadian subsidiary will be removed from Canada tax free; (b) they’ll charge the Canadian subsidiary general & administrative fees that recover their head office costs; and (c) whatever taxable income remains will be drilled away.

In 2006, PWI paid $252 million in distributions, and the individual investors (Canadian and foreign) paid about $70 million in federal and provincial personal income tax. TAQA will pay $Nil.

The Flaherty tax will drive PWI away from being Canadian controlled and majority owned to 100% foreign owned. His tax plan, starting December 2007, will cost Canadian governments $192,000 per day 7/52/365. So let’s see… how many individuals paying extra taxes of $1,000 per year will be needed to replace the lost PWI tax revenue?

Gosh, that’s 70,000 hardworking individuals and their families. Now we know why Jim Flaherty called it “the Tax Foolishness Plan”. Not even a hammer would hit itself in the head.

Anonymous said...

Oh wow! PM Stormie Harper made an Intervention at the UN! Did he wear his Kick-A*s boots with the yellow-button bottoms. I betcha he did, eh?

But don’t tell him that the CO2 sequestering that he was talking about is being done by (Wholly Obedient Sheep!) income trusts. Say nothing or he’ll be crestfallen.

From the Nouveau Government website:
============================

Intervention by the Prime Minister at the United Nations Leaders’ Discussion on Climate Change
24 September 2007
New York

http://www.pm.gc.ca/eng/media.asp?category=3&id=1827

Prime Minister Stephen Harper today issued the following statement, delivered at the United Nations Secretary-General’s High-Level Event on Climate Change. The Prime Minister spoke before world leaders at the session on technology:

“Good day Ladies and Gentlemen,

I’d like to thank Secretary-General Ban Ki-moon for inviting us to this high-level meeting on climate change.

We are building on the dynamic created by the G8 and APEC summits to promote international cooperation in the fight against global warming.

There is an emerging consensus on the need for a new, effective and flexible climate change framework, one that commits all the world’s major emitters to real targets and concrete action against global greenhouse gas emissions.

Among other things, a new international framework must stimulate the development and deployment of clean, low-carbon energy technologies.

In the near-term, the world will continue to rely heavily on fossil fuels. As a major, reliable producer, Canada will play an increasingly important role in global energy security.

We therefore have a responsibility to find cleaner and more efficient ways to convert hydrocarbons into energy.

Canada is working on a variety of strategies, but one of the most exciting is carbon capture and storage.

It holds great potential for major emission reductions at home and abroad.

Pilot projects are underway in western Canada. CO2 is being pumped deep underground into rock formations that have been drained of their oil and gas.

Trapping it there creates a virtuous energy cycle: We take hydrocarbons out, tap their energy, and put the emissions back.

The Government of Canada and the Province of Alberta have established a Carbon Capture and Storage Task Force that will develop practical options for government and industry to work together to implement this technology on a large scale in Canada.

Dr Mike said...

Can Jim Flaherty really be as dumb "as a bag of hammers" or are we , the Canadian people , being conned & sacrificed for another reason altogether.

What concerns me is that we could just be collateral damage of the SPP agenda--just pawns in the implementation of the CEOs NACC directives.

JIm Faherty was hand picked as Finance Minister for a reason--he was a relentless buldog here in Ontario as head of Finance--he was the go to guy if Mike Harris or Ernie Eves needed something nasty done.

In Ontario a few sheep were harmed in the making of Finance budgets--it appears that he has not finished looking for a few more lamb chops to toss on the "Barbie".

All I can say is BAAAAAAAAA to that.

mike.

Anonymous said...

By 2011 there will be no Trusts’ in Canada anyway, change or no change on the TAX UNFAIRENS law.

1- Most of them will be sold for 30 % 40% premium on average of latest months,
But still 10% to 20% lower then their heights of 2006.

2- The rest will convert to USA MLP-s, some have already done so already.

3- The last agreement that the dishonorable FARTY just signed with the US, allows for US based companies to be TAX havens in Canada.

4- US $ investments’ for Canadians will look cheep now that the 1=1 is in place.

TAREWELL TO LAZY INVESTING FOR EVERY ONE

Anonymous said...

Jim Flaherty is not the only enemy within. People, let us not forget that the seed of the income trust deception was sown in Alberta in March 2006 by Shirley McClellan. She said in her Budget that income trusts cause $400 million tax loss to Alberta. But her detailed estimate has never been made public. All she said was that Alberta has 10% of the Canadian population. That’s true but so what. It’s also true that Cochrane is the prettiest place in all the world on a September morn, but what’s that got to do with income tax.

If we knew the hidden details of the McClellan estimate, we’d probably change the loss estimate to $200 million. Alberta has forced a tax change that causes $25 billion of saving losses, so Alberta can fix a $200 million problem. That seems cruel and unusual.

But the Alberta loss is not what it seems. About half, $100 million, goes to the other provinces because they get to tax the individual investor rather than Alberta. Welcome to Confederation Shirley.

The other $100 million goes to foreign investors. Foreign investors are becoming exempted from Canadian tax. Why is this? The reason is ‘tit for tat’. Foreign governments leave Canadian investors alone so that Canada can tax 100% of the income earned by Canadians outside of Canada. Some of those Canadians are Albertans.

We can wonder: did Shirley McClellan stop to think how much found tax she was getting from Albertans who are invested in the US and elsewhere? I bet you she got more than $100 million. Obviously Shirley wanted her tax cake and a full fiscal tummy too.

Dr Mike said...

What burns me so much is that there would have been no need for the so-called levelling of the playing field by taxing the crap out of trusts , if they would have merely removed the double taxation of dividends.

After all is said and done, companies that have made a profit can do one of two things with the excess cash. They can (1) take the money and reinvest it to earn even more money, or (2) take the excess funds and divide them among the company's owners, the shareholders, in the form of a dividend.

If the company decides to pay out dividends, the earnings are taxed twice by the government because of the transfer of the money from the company to the shareholders. The first taxation occurs at the company's year-end when it must pay taxes on its earnings. The second taxation occurs when the shareholders receive the dividends, which come from the company's after-tax earnings. The shareholders pay taxes first as owners of a company that brings in earnings and then again as individuals, who must pay income taxes on their own personal dividend earnings.

BY removing the original level of tax on corporate earnings , this would have brought the yields of corporations in close alignment with trusts.

Of course this is premissed on the belief that corporations would be willing to tighten their squandering ways & produce results that investors demand to stay on board.

The thing is , the playing field has been truly levelled.

At this point , it will be a case of a business selecting the model it wants to,use to maximize shareholder returns & thus keep it`s cost of capital as low as possible & thus remain competitive.

DO I think this will happen under Falherty`s watch--I doubt it.

Mayb if Mr Dion can take a fresh look , something will yet be salvaged.

Mike.

Anonymous said...

It is not just “the enemy within”. It is “the enemies within.” Flaherty is a man on a chain that Harper pulls. But Harper is too. The Canadian press is an enemy of Canadian democracy. The press has not only filtered, even repressed, stories, the press has willingly told falsehoods.

Perhaps the staged drama is starting to tatter. In AB, two weeks ago the Royalty Review criticized the regime that Ralph allowed. The Review panel was appointed by the government for the government. Even so, the Review criticized the government. That seems pretty brave, looking out for the interest of the people, and all that. Yesterday, the Auditor-General of AB, who reports to the Legislative Assembly issued a report confirming problems with the royalty regime. Did the government know what was coming from the AG, and decided that they had to do some stage management?

Are we being played for fools?

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