Merry Christmas Dalton McGrinchy

On Christmas Eve, I received a package from the Freedom of Information and Protection of Privacy Office of the Ontario Government’s Ministry of Finance. The package contained the information I had requested concerning the allegation made in a letter dated January 2007 to Jim Flaherty from Greg Sorbara that claimed Ontario was losing tax revenue as a result of income trusts. and Greg Sorbara was voicing Ontario’s support for the Harper government’s income trust tax. Greg Sorbara was one of 10 provincial finance ministers who dutifully and compliantly sent in letters over a three day period immediately prior to the holding of Public Hearings by the Parliament’s Finance Committee

These 340 pages of documents only cost me $193 to retrieve. Evidently freedom of information in Ontario is anything but free.

Most of the 340 pages were simply copies of articles and studies by third parties. There was however one memo written by Brian Lewis, Director of Economic and Revenue Forecasting and Analysis Branch entitled: Net Revenue Impact of Income Trusts. This study has never seen the light of day and nor has it been subject to any outside verification or peer review. I have no intention of attacking any of the assumptions or methodology used in this review, but instead will take everything contained in this analysis as given.

There are several observations worth making. First, this analysis observes that 37.7% of trust investors reside in Ontario. It also assumes that none of the 15% withholding tax paid on distributions made by Ontario based trusts to foreigners is shared by Ottawa with Ontario. The analysis assumes that Corporations pay out 100% of their earnings in the form of dividends each year, in a manner consistent with income trusts. Please show me one corporation that does that. If such a scenario existed, there would be little need for trusts, since trusts primarily exist because investors are seeking the payout model, more so than the tax flow through model per se.

This analysis concludes that Ontario is losing $38 million a year in tax revenues. On this basis the Ontario Government explicitly supported the Harper government’s tax, notwithstanding that the public had never been consulted or the Ontario Government’s analysis vetted. Income trust investors lost $35 billion as result of this policy move supported by Ontario. The 37.7% of trust investors who were Ontario residents would have sustained $13.2 billion of this loss. And for what? So Ontario could recoup an alleged loss of $38 million a year in taxes. $38 million a year in taxes is what the Harper government roughly spends per year in polling. It would take a mere 347 years for this loss experienced by Ontario residents to be recouped by the Ontario Government’s alleged loss.

Thanks a lot Dalton McGuinty. Santa Claus you are not.

There was another document that I was sent that was a qualitative assessment of the income trust market as it relates to Ontario. A few observations made are worth sharing, since they were obviously completely overlooked by the McGuinty government in coming to their "income trusts are bad" policy. The following are direct quotes:

-Provincial actions over the past 20 years may be seen as tacitly/actively supportive of income trusts (e.g. Sale of Teranet, extending limited liability through provincial legislation)

-Ontario’s requests for proposals for new energy from the private sector may be filled by smaller energy income trusts

-The province as co-sponsor of a number of large Ontario public sector pension, could be subject to higher contributions if plan returns are lower due to a change in income trust policy

-Income trusts are a significant part of Canadian capital markets, which are largely centered in Ontario

-The TSX and other capital market participants have cited income trusts as an innovation and competitive advantage for Canada’s capital markets.

I will end by addressing these last two points.

Given that the loss that was sustained by Ontario residents will take 347 years to be recouped by the Ontario government, is the alleged $38 million annual loss not worth it if it means preserving a competitive advantage for the Canadian capital markets that are so beneficial to Ontario? Did the McGuinty government not realize that income trusts were generally responsible for some 50% of new issue activity on Bay Street over the past ten years? Is the McGuinty government not aware of the cause and effect relationship that has seen IPO activity fall by 80% since the trust tax was introduced. Is the McGuinty government unaware of the tax riches that have befallen it from the income trust innovation.

How long do you suppose it would take for Ontario to recoup this alleged $38 million annual loss of taxes from the following underwriting fees earned by Bay Street over the last 10 years. In case Dalton McGuinty doesn’t know it, Bay Street is about three blocks south of Queen’s Park and apparently about a world removed from the myopia of the McGuinty government’s incredibly narrow minded view.

The McGuinty government is actually impairing the competitiveness of one of its key engines of economic success and economic power and leaving Ontario more vulnerable to the Goldman Sachs of the world.

Time for Dalton McGrinchy to reconsider who is being naughty and who is being nice.

CIBC $1,332,250,000
RBC $948,200,000
Scotia $749,900,000
BMO $526,900,000
TD $349,500,000
National $200,600,000

Total $4,107,350,000