Friday, July 4, 2008

Ottawa: Capital of Benign Neglect and Utter Hypocrisy

It was one year ago today that the following was reported by Paul Vieira in the Financial Post: “It is estimated Ottawa stands to lose over $1-billion in annual tax revenue should Bell Canada be privatized.”

So what has Ottawa done about that prospect in the last 12 months?.....they approved the deal. What?

Based on an Access to Information request it was proven that Jim Prentice's Industry Canada never even performed a “net benefits“ test on this transaction and never turned their blind eye to the lost taxes that will ensue, along with the litany of other adverse consequences to jobs, service costs and overall competitiveness in the Telcom sector, now that BCE will be transformed into a moribund debt-ladened junk bond credit.

How utterly hypocritical is that, given that BCE was the very company whose announced conversion into an income trusts, triggered Flaherty’s ill-conceived income trust policy. What excuse did he proffer at the time? ““You have to either leave it alone or fix it,” Mr. Flaherty shrugged Wednesday. “We were going to see the two largest telecommunications companies in the country not pay corporate taxes. That's a clear and present danger to fairness in the Canadian tax system. I thought we had to act.” Globe and Mail, November 2, 2006.

Well that’s exactly what had now happened. It happened as a direct result of Flaherty’s actions. A policy that was intended to ensure that BCE’s earning continued to be taxes, has no brought about the REVERSE OUTCOME. It doesn’t get dumber than that?

So what are the elected Opposition Parties doing about this outrageous result? What are they doing about the delicious irony in all of this? Basically the sum total of nothing. Do the Liberals not sense an opportunity to point out to Canadians the gross incompetents of the CON government in office? Do the Liberals not care about the loss of $800 million a year in taxes? The income trust tax was implemented with ZERO factual underpinnings. What became of Harper’s much vaunted accountability and transparency

The only party to speak out is the Green Party: “Harper should fund RESP bill by halting BCE sale” at

I would like the three opposition parties to justify for Canadians why this BCE deal is being allowed to proceed, when it clearly is no longer economic and since it never served any interests of Canadians to begin with. Its not as if investors will be asked to forego their investment gains, since the Catalyst recapitalization of BCE will see investors reap a market trading value of between $42.50 and $52.00 relative to Teachers’ unfundable and fully taxable $42.75.

What part of win-win-win-win does Ottawa not seen to understand. BCE is a regulated company under the Telecom Act, The Broadcasting Act, The Radio Telecom Act and the Bell Canada Act. Why is Ottawa not asserting itself on behalf of the millions of affected Canadians? This sale was contingent on CRTC approval and Industry Canada Approval. Where is the oversight? Or was it an oversight?

he Green Party is the only party to speak out on the BCE sale when they pointed out that the $800 million a year in lost taxes from the BCE LBO would be enough to fund the RESP program. The NDP are ghost champions of lowering ATM fees and Pat Day loans, but care nothing about telephone service costs that will go through the roof under a privatized LBO of BCE. Just who does the NDP think is goping to service the interest on $$44 billion? Is the Bloc Quebecois’ idea of attaining sovereignty for its major iconic companies to be owned by ONTARIO Teachers and US private equity and to be turned into junk bond issuers? If so, the Bloc is intellectually bankrupt themselves.....a form of junk bond political party......eager to stand idly by while the sell out occurs under their watch.

Flaherty keen on Bell-Teachers deal

Finance minister sees benefit in greater R&D, infrastructure upgrades
Paul Vieira, Financial Post
Published: Wednesday, July 04 2007

OTTAWA -- The $51.7-billion pension fund-led buyout of Bell Canada Inc. spells good news for the Canadian economy so long as the prospective new owners follow through and invest billions in R&D and upgraded infrastructure, says Finance Minister Jim Flaherty.

"The key in industries such as telecommunications is that the entity has the ability to invest in innovation, and research and development. And that requires substantial amounts of capital. And from what I hear, that is

likely to happen to Bell Canada. And that is good for Canada," Mr. Flaherty said in an interview on Tuesday.

In the interview, the finance minister indicated he was comfortable with the role private equity and pension funds are playing in the economy. As a result, he does not believe Ottawa needs to review either the tax-exempt status of pension funds - which vied to take over Bell Canada - or rules that would apply to leveraged buyouts.

It is estimated Ottawa stands to lose over $1-billion in annual tax revenue should Bell Canada be privatized. Mr. Flaherty played down those worries, noting the federal government stands to reap a one-time windfall through capital gains taxes.

The Finance Minister's comments come days after Bell Canada's board of directors announced it struck a deal to sell the company to a group led by Ontario Teachers Pension Plan Board for $42.75 a share, or $34.8-billion.

With inclusion of debt and preferred shares, the total value of the transaction stands at $51.7-billion.

Canadian investors will own 59% of Bell Canada, formerly known as BCE, with Teachers holding the bulk at 52%. U.S.-based funds Providence Equity Partners and Madison Dearborn Partners will hold 32% and 9%, respectively.

On paper, the transaction could pose some problems for Ottawa due to the possible loss of tax revenue. The Bell Canada transaction will largely be financed with debt, and that greatly reduces the amount of tax paid to

Ottawa. Also, wiping out the Bell Canada shares - the most widely held in the country -means Ottawa is no longer able to tax the dividends that accompany the stock.

But Mr. Flaherty said Ottawa stands to gain in other ways. "If the present transaction goes forward, there will be a substantial amount of capital gains tax paid by shareholders of BCE," he said.

(Under the current scheme, half of the profit generated from an asset sale, such as Bell Canada shares, is subject to a capital gains tax - on average, 21%.)

More important, though, he said that the new owners would likely be able to invest in upgraded technology - such as fibre optic wiring to households or the wireless network - that, in turn, will help increase Canadian productivity. Improved wiring to Canadian homes would allow Bell Canada to deliver faster Internet service to its customers, and allow it to keep pace with their cable company rivals. Bell Canada is said to be years behind its U.S. peers in this type of investment.

Meanwhile, Mr. Flaherty said he envisaged no role for Ottawa in terms of limiting how much debt can be used to finance the transaction. Tax experts have recommended such a move to preserve a federal tax base given the growing role of private equity and leveraged buyouts.

"At the end of the day these are business decisions to be made by business people - that is, assessing risk, because leveraging is the creation of risk. And we are not going to substitute our opinion for their opinion in terms of the amount of risk they are prepared to take in these transactions."

For the time being, he has also ruled out reviewing the tax-exempt status of pension funds. These funds, such as Teachers, can defer taxes owed. As a result, dividends derived from equity holdings flow through without facing a tax hit.

"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," the Minister said.

Financial Post


Polyian said...

Flaherty has abandoned his fiduciary responsibility by claiming a one time capital gain windfall will make up for $1 billion in ongoing lost tax revenue. I suspect he plans to spend the windfall to try an get re-elected. Good for him and bad for Canada. Typical Flaherty move.
And how can Flaherty defend the current policy of zero taxation of private pension plans while introducing double taxation on Income Trusts in RRSPs?. Where is the tax fairness for the average Canadian who does not belong to one of these gold plated pension plans? Why do we not get a dividend tax credit for holdings within an RRSP so we are not double taxed?

Johnathon said...

"Why do we not get a dividend tax credit for holdings within an RRSP so we are not double taxed?"

Because you're a librano.