If you were to identify one person who played the greatest role in fostering the false belief that income trusts cause tax leakage, it would be Jack Mintz.
Shamefully, Jack Mintz says one thing publicly, i.e., that income trusts cause tax leakage, and quite another thing privately i.e. “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”.
What kind of "academic" does that make Jack Mintz?
Funny how no one in the press has picked up on that utter contradiction in Jack Mintz’s logic. Sorry Jack, you can;t have it both ways. You can’t on the one hand be running around using an analysis that excludes all the taxes paid by income trusts held in RRSPs and the next minute be saying that Finance was wrong not to include them.
This is the crux of the tax leakage hoax being perpetrated on Canadians by Corporate Canada and all their minions like Jack Mintz and John Manley. By conveniently leaving out ALL THE TAXES paid on the 38% of income trusts held in RRSPs, Mark Carney was able to concoct an argument for tax leakage. Such exclusion of these taxes is absurd. In fact Jack Mintz describes just how absurd it is in this week’s edition of Canadian Business.
The article in question in entitled “What’s not to like?” and is a complete cheerleader exercise by Jack Mintz to extol the virtues of Flaherty’s recent Tax Free Savings Account versus an RRSPs. Canadians should be very skeptical about the motives behind the TFSA, because its true intent is to disband RRSPs, so that the greedy government can get its hands on the half trillion of untaxed dollars that reside in RRSPs. But that’s a separate story.
In this article Jack Mintz makes the very telling admission that with respect to RRSPs that:
“The government shares not only the cost of the investment put into an RRSP, but also the risk, since the amount of tax collected from withdrawals will depend on the performance of the plan.”
So there you have it. Mintz is acknowledging two key matters, (both of which incidentally are self evident), namely:
(1) Taxes are collected by Ottawa when withdrawals are made
(2) The government is paid to wait for these taxes, since the value of the taxes increase with the “Performance of the plan”
So the question simple becomes: Does the government receives more taxes if the contributions had been taxed today, or more taxes if the contributions were taxed upon withdrawal.
This is where Jack Mintz can be of no service in answering this question, because it is not a tax question. IN order to answer this question a person will need to have taken Economics 101. Economics 101 teaches that the lowest cost of capital in any economy, by definition, is the federal government. Therefore, by extension, the returns on all other investments in an economy must exceed the federal governments cost of capital. Take an example. If the 10 year borrowing rate for the government of Canada is 3.00%, then the expected return on an equity investment will have to be something in excess of 3.00, let’s assume 6.00%,
As such, $1.00 contributed to an RRSP today would have raised the government $0.38 in taxes, or alternatively, had it been invested in an RRSP for 10 years, it would raise the government $0.68 in taxes (38% of $1.00 compounded for 10 years at 6.00%). IN present value terms, this $0.68 in taxes is worth $0.51 today ($0.68 discounted at 3.00% for 1o years.
As such, there is no cost to the government associated with waiting for these taxes. In fact tha government is economically better off, unless of course Jack MIntz wants to argue that $0.51 is less than $0.38. I wouldn't put it past him, however.
Flaherty himself admitted this hard reality when he defended the sale of BCE to Teachers’ pension plan by stating:
"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."
So if it's okay for Teachers’ pension plan, then why not the 75% of Canadian who don’t have employer pensions and rely on their RRSPs?
This simple, yet insidious, difference in the treatment of income trusts held in RRSPs is the sole basis for the allegation that income trusts cause tax leakage. The government simply chose to arbitrarily and without any economic justification, excluded 38% of all the taxes that income trusts pay.
No wonder they got leakage. This also explains why Canadians only received 18 pages of blacked out documents as proof, and why these 18 pages were demanded be returned.
As for the Canadian news media and their coverage of this story, “you’re doing a good job Brownie”. Let me guess, news reporters in Canada must all belong to the select group of 25% of Canadians who have employer pensions?
Thursday, March 27, 2008
Posted by Fillibluster at 8:41 AM