Wednesday, November 26, 2008

Jim Flaherty: Lunatic fringe

And to think, our lunatic Finance Minister was keen on a deal that would have torched $1 billion in annual tax revenue?

Flaherty keen on Bell-Teachers deal

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

1 comment:

Dr Mike said...

Jim stood to reap a huge one-time windfall from capital gains that would be taxed.

He was willing to give-up about 1 billion per year in lost tax revenue just to make this one-time gain.

We need to start to call him Mr Short-sight or Little Me Me Me.

I just cannot imagine what went thru his pea brain to come up with the notion of the Tax Free Savings Account.

Take a look at that baby in ten years & it is going to leave one nasty mark.

Dr mike Popovich.