In many respects the income trust tax situation can be thought of in landlord/tenant terms, in which the income trust investors are the tenant and the government is the landlord.
Jim Flaherty can be thought of as the cranky building superintendent. Unlike most superintendents he doesn't reside in the basement apartment, he's moved himself into the penthouse, with speech writers, communications consultants, chauffeurs and no end to the self-benevolent tax perks of his own creation. He is fawned upon by all those who seek backroom favours, as he did for the insurance industry, foreign private equity and domestic pension funds in the case of the double taxation of public income trusts.
He has just shown up angrily at the door of your apartment in which he claims that you haven’t been paying the rent for the last umpteen years and you will have to move out. After you compose yourself, you ask Flaherty what he possibly means by that. You have been dutifully and willingly paying your taxes on your income trust distributions at the rate of 38% on time, each and every month. In fact you have prepaid the last 15 years rent with the money that’s held in trust at the local bank. This money was set aside to cover the rent in your retirement years. The landlord has a first claim on those monies to cover the rent.
When pressed, Superintendent Jim Flaherty, reluctantly produces his “proof” that you haven’t been keeping up with the regular payments of your rent. This takes the form of 18 pages of blacked out documents. You are rightfully outraged. Later that evening, after you have composed yourself, you start looking at these documents very closely. You realize that page 6 of the package is the rent schedule for the whole building. IT had four columns across the top. Each with their own unique way of calculating rent. The one on the left says “landlord’s version” and the one one the right says “Renters version” You then realize that line item G is entitled “Future rent payments, held in trust.”
It becomes abundantly obvious to you that this is the line that is creating the dispute. The landlord has ignored these future rent payments, when in fact they are as good as money in the bank, since after all, they are money in the bank.
You seek out allies to help you safeguard yourself against eviction. You go the press. Your first stop is the Globe and Mail. Here are some of their responses
John Stackhouse (Editor): November 7, 2006: “Ira [Gluskin] forwarded your piece to me. It's interesting, but I think most of your points have actually been well covered in our pages. And as for the "tax leakage" calculations, it depends greatly on assumptions -- but there is a reasonable range of forecasts that we have, I believe, published.”............Huh?
Andy Willis (Reporter): November 21, 2006 “To paraphrase Maggie Thatcher, we also met with Flaherty, and the gentleman is not for turning. he government isn't going to change. & judging from my e-mails and work by analysts such as your former partner Diane Urquhardt, there's a lot of retired folks who are not loving trusts these days.”..........What?
You then go to the Toronto Star and meet with the Editorial Board who then start to defend the 18 pages of documents as totally appropriate under the circumstances. They threaten to throw you out of the room unless you can come up with a good explanation for why Flaherty would do this.....What me explain? Zero transparency is appropriate?
Later in a moment of weakness, one of them (Carol Goar) admits, but does absolutely nothing about it that: “I didn't explore the possibility that [Flaherty] was lying. Perhaps I should have.” ....well, duh?
You then cross the street and visit the Financial Post and its Editor Terry Corcoran. Here’s his passionate and articulate take of the whole matter: "And when will you guys stop the bullshit about “tax exempt” status. PENSION FUNDS ARE TAX EXCEMPT. THEY DON’T PAY TAXES. STOP. END OF STORY. They pass the money through to pensioners. Pensioners pay the tax. RRSPS ARE TAX EXCEMPT. THEY PAY NO TAX. ONLY WHEN THEY MONEY IS PAID OUT IS TAX PAID BY THE TAXABLE TAXPAYER."
How can someone profess to know all about exempt taxes versus deferred taxes, when they don't even know how to even spell the word? EXCEMPT? This guy's stock and trade is supposed to be words after all. It most certainly isn't numbers or financial concepts, such as the "time value of money" or "discounted cash flows" or "net present value"?
Believing that you must live in some twilight zone where journalist are the problem and not the solution, just as you are leaving the building you bump into Diane Francis who is most interested in your plight. She actually understands of what you speak. The more she hears the more intrigued she becomes. Unlike John Stackhouse of the Globe, she understands there can only be one right answer to a financial question, not three or four. Unlike Andy Willis she is not prepared to cower in the face of “authority” and just became a compliant unquestioning mouthpiece for the government of the day.
Unlike Carol Goar, Diane is actually willing to assume for the moment that Jim Flaherty COULD actually be wrong, and unlike her colleague Terry Corcoran, she knows how to conduct herself in an intellectually rigorous and professional manner. She also knows more than a thing or two about business and finances and that most basic concept called “time value of money” which seems to have completely eluded the Editor of the Financial Post, Terry Corcoran. Editor of The Financial Post? He’s better suited for the sports pages perhaps......or maybe the want ads.
Diane Francis knows full well that a dollar tomorrow is worth a dollar today, provided it is earning a sufficient return as you wait for it. She knows full well that your landlord will be paid in full for the future rent on this apartment, because the money you’ve set aside in the bank is growing at a higher rate than the monthly rent is increasing at.
She knows that it is WRONG for the government to assign ZERO value to the taxes paid on the 38% of income trusts held in RRSPs. She also knows a manufactured argument when she sees one. Unlike all of the aforementioned “journalists” above, she also has the balls and the brains to call a spade a spade. Which leaves us exactly where we were on November 1, 2006: Mr. Jim Flaherty: "Prove the case or drop the tax." to quote Diane Francis.
Just to make the inequity of it all even greater, you then realize that you are going to be evicted so that Flaherty can rent out Canada’s future to foreign private equity and domestic pension plans............rent free for crying out loud!
You are then reminded of (lower case intentional) stephen harper's Big Lie that was contained in his Opinion Editorial, almost one year ago to the day, October 26, 2005 in which he pandered to senior Canadians in his piece entitled
"Questioning income trusts puts seniors at risk" and wrote these pandering words:
"Many seniors feel the government is putting their retirement at risk and have let Ottawa know. In a letter to the Finance Minister, the Canadian Association of Retired Persons said, "Seniors are actually enraged, frightened and panicked about potentially losing retirement savings that they count on for the essentials of daily living."
Income trusts are popular with seniors because they provide regular payments that are used by many to cover the costs of groceries, heating bills and medicine. They also provide tax relief from a government that is addicted to taking too much money from their pockets and spending it without care, and very often without meaningful results.
So one must ask, why is the government clamping down on the retirement savings of seniors and investors?
But it gets worse. Instead of immediately moving to assure markets that income trusts are here to stay, the Liberals are justifying their actions in the coldest political terms. As one government member was quoted in the media as saying about income trust investors, "They have no constituency. They don't count politically."
That kind of arrogance cannot go unanswered. There is just no justification for what amounts to a Liberal government attack on investors, and especially on seniors.
The government continues to overtax Canadians and run multi-billion dollar surpluses, yet their first instinct is to attack an investment vehicle that can make the difference between bare survival and a dignified retirement for millions of Canadians.
The government claims that income trusts enjoy an unfair tax advantage over corporate dividends. If they believe this, then the answer is not to shut down a valuable investment vehicle, but to cut the double taxation of dividends. In short, level the playing field and let the market decide between income trusts and dividend-paying companies.
As my party's finance critic, Monte Solberg, says, the success of income trusts represents a rare triumph for investors over the tax man. Let's not be so naive as to assume that the Liberals will do the right thing to protect taxpayers. We'll need to fight hard to keep what we have, and even harder to gain ground.
It's time to stand up to Paul Martin and stop his attack on seniors and investors."
Thursday, July 24, 2008
Posted by Fillibluster at 7:53 AM