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 That unpublished rebuttal is contained below in a piece entitled “Independent Analyst is unencumbered by the facts.”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.

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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.