Ned Goodman comments on Flaherty's deficit (fiscal and intellectual)

How tax leakage sank Canada

Tories damaged competitiveness, Dundee chief says

Diane Francis, Financial Post Published: Friday, April 20, 2007

Ned Goodman blasted the Tories for their ignorant economic policies, and took aim at Canada's pension funds, too, while he was at it.

"Income trusts were a competitive advantage for Canadian companies in terms of lower capital cost," he said in a recent interview in his Toronto office. "Now all the income trusts are going to be taken over by pension funds or private equity, neither of which will pay any taxes."

That's what is so disappointing today.

The Tories have joined the long list of federal governments that have failed to make international competitiveness a policy priority, not 50 ways to tax our winners.

Ned sits atop the Dundee Wealth Management conglomerate, which includes Dynamic mutual funds, Dundee Real Estate Investment Trust and the first, wholly owned chartered bank in Canadian history, Dundee Bank of Canada.

Canada's Big Six chartered banks must be widely held by law, but start-ups have been allowed, like Ned's bank, which can be 100% owned by individuals or enterprises until they reach $3- billion in assets. Owners must then divest, as the financial institution grows.

His fledgling bank has $1.5- billion in assets and its customers are thousands of financial advisors across the country with many firms, not the public at large.

He made his first fortune in the 1980s, backing the right side in the huge International Corona legal tussle over ownership of Canada's last world-class gold discovery. Through his companies and family, he still owns stakes in several mining corporations. He's a geologist by training.

Like many other businesspeople in Canada, he was happy when the Tories took over government.

Then, in October, Jim Flaherty, the fledgling Finance Minister, imposed huge taxes on income trusts. More recently, he has proposed removing interest deductibility on loans used for international expansion and also announced a measure that will benefit foreigners by removing any withholding taxes on interest payments they receive from Canada.

What was needed was to level the playing field for Canadians abroad by leaving income trusts alone and eliminating double taxation of dividends.

"You can't build a global company in Canada, because you don't have the advantage of lower-cost capital available," Ned said.

Ottawa said it moved on the income-trust sector, despite a promise to leave it alone, allegedly because of tax leakage.

But a Parliamentary committee concluded there was little leakage because individuals and RRSPs pay income taxes on their income-trust distributions.

The real leakage, said Ned, was the country's huge pension plans, which pay no taxes. (The pensions argue that their distributions are eventually taxed, so that they are not a form of leakage, either.)

But in 2005, the Liberals announced they would ban pension plans from owning income trusts to stem leakage.

"When the Liberals said they would not let pensions own income trusts, the lobby went wild and won the day," he said. "The Liberals buckled."

This time, the pensions were not targeted per se, but the entire sector was hit with a 31.5% tax, which has damaged everyone involved and led to $8-billion worth of takeouts so far by pensions and foreigners.

"The government had other options if they were concerned about the leakage issue [with pensions and foreigners] other than destroying the sector," said Ned. "They could have restricted income-trust ownership to RRSPs and individuals only; lowered the RIF to 65 years of age from 69 to speed up taxation of distributions and limited income trusts to a certain market capitalization size to stop everyone from converting."

Then taxes on dividends should have been scrapped.

"Now it's totally unfair," he said. "For instance, CI [mutual funds] is an income trust for 3.5 more years. I have to compete with it and CI paper is better."

Besides income trusts, there's the "foolishness" involving interest deductibility.

"This is just disastrous and disables all businesses who wish to expand in a foreign jurisdiction, because they cannot borrow money outside and deduct interest on that money," he said. "It means everyone must rearrange their affairs and set up a U.S. subsidiary, which costs more money."

"So [Brazilian mining conglomerate] CVRD buys Inco and borrows money to do it so it can shelter its income from all taxes and goes home with the most prolific mine in the world," he said. "But Inco's not allowed to deduct interest on its foreign expansions."

dfrancis@nationalpost.com