Monday, February 23, 2009

WOW! The Globe of all papers, is advocating financial literacy?

On page 2 of today’s Globe, in the spot normally reserved for articles by the likes of Derek DeCloet, appears an article entitled “Schools have failed on the financial literacy front”. The same can be said about the Globe and Mail and all of its business writers, as they have proven themselves to be anything but financially literate. But then again, none of these people took business at school in the first place. Not Derek DeCloet. Not Eric Reguly. Not Andy Willis. Not Amanda Lang, etc etc. However, that is no excuse for being financially illiterate. Financial literacy is based on Grade 4 Math and a few simple to comprehend concepts.

The article highlights five essential concepts that the authors (Hamza and Bates) believe must be understood in order to consider oneself financially literate, and to protect oneself from being scammed. The second concept of which is: “know how compound interest works”. Knowing how compound interest works means understanding the concept of “the time value of money”.

Not surprisingly then, that anyone who thinks that income trusts cause tax leakage, does not understand, by definition, the simple rudimentary concept of the time value of money. This would include Mark Carney, the Governor of the Bank of Canada, Kevin Lynch, Clerk of the Privy Council, Stephen Harper, hack economist, and Jim Flaherty, supposed Minister of Finance as well as Judy Wasylycia-Leis, labour organizer and one time Finance Critic for the Newly Duped Party of Canada.

It would also include a plethora of so called business writers, including Terry Corcoran of the Financial Post, and curiously enough Derek DeCloet of the Globe and Mail. I have first hand knowledge of these persons’ complete absence of understanding of this most rudimentary concept of finance, known as the time value of money. I had to explain the concept to Derek DeCloet, in a meeting I had with him in the fall of 2007. I still have the pictures I drew to explain the concept to him, as I drew them on the back side of my copy of 18 pages of blacked out documents that constitutes Flaherty’s “proof” of tax leakage. The 18 pages that Flaherty, strangely demanded be returned?

Terry Corcoran’s complete non comprehension of this rudimentary concept of finance can be garnered from this high brow comment of his:

"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.

Those who are truly financially literate are the ones who have opposed the income trust tax from the very outset, for the simple reason that the premise on which this policy has been advanced is a complete crock, namely the totally bogus argument that income trusts cause tax leakage. Basing a policy on a known lie serves no one’s interests. Basing a policy on a known lie, that caused investors to lose $35 billion, meets the dictionary definition of fraud, spelt F R A U D.

Mark Carney’s fraudulent argument of alleged tax leakage, repeated by the press with gay abandon at every known opportunity, assigns ZERO value to the taxes that Ottawa collects from the 38% of income trusts held in RRSPs. Meanwhile, the proper inclusion of these taxes would result in the conclusion that income trusts are tax neutral to tax positive. RRSPs are meant to be the means by which the 75% of Canadians without pensions can replicate the tax benefits that accrue to the 25% of Canadians with pensions. The income trust tax is an affront to that basic proposition, since the income trust tax fails to acknowledge the taxes that RRSPs pay, and in turn , uses that false premise as the justification to double tax RRSPs at a rate as high as 64.3%.

Here is where basic rudimentary financial literacy comes into play and the application of the concept known as the time value of money:

If an RRSP holds an income trust, the income trust distributions are received tax free by the RRSP, as opposed to being taxed immediately, if they were held outside an RRSP. These distributions therefore accrue/compound over time, in what the Globe article refers to as “know how compound interest works”. The government is being asked to wait for the taxes on these distributions, which after all is the entire policy premise of why RRSPs exist, and is the only benefit that an RRSP represents for Canadians saving for retirement. Failing which, why have RRSPs in the first place? To deny that benefit, is to deny RRSPs' reason to exist. As it turns out, the rate at which these income trust distributions are accruing/compounding in value within RRSPs (in toto) , is HIGHER than the government’s cost of waiting.

Knowing this to be true, requires only a rudimentary understanding of macroeconomics, which teaches that the lowest cost of capital in ANY ECONOMY, is BY DEFINITION, the federal government within any given economy. As such, the rate at which these income trust distribution that have gone untaxed within an RRSP are growing. is at a rate HIGHER than the government’s cost of borrowing. Therefore, nothing is lost in terms of taxes, since these distributions are taxed upon withdrawal from the RRSP, and for the government to be asked to wait for its taxation of an income trust distribution WITHIN and RRSP as opposed to OUTSIDE an RRSP, will cost the government the sum total of NOTHING.

As such the government’s assertion that income trusts cause tax leakage is a total crock and a fabrication. Why do you think myself and others have been pursuing this issue for over two years? Canadians are being lied to. That lie is obvious to anyone with even a modicum of financial literacy. The media need to acknowledge their profound mistake and admit to Canadians their utter lack of financial literacy. Failing which Canada’s financially illiterate media are complicit in the fraudulent crime of Canadians losing $35 billion of their life savings. Being financially illiterate is one thing. Being complicit in fraud, is quite another. With the exception of Diane Francis and a handful of others who have performed their role as journalists, you have an obligation to correct the false record that you have created in the minds of Canadians that income trust cause tax leakage.......fraudulently so.

Brent Fullard
President and CEO
Canadian Association of Income Trust Investors

647 505-2224 (cell)

1 comment:

Dr Mike said...

Can anyone imagine trying to explain the concept of the "time value of money" to a politician.

These clowns do not care how tax money gets there or why.

If there is an excess of cash , they figure lucky us so let`s spend ; if there is a lack of cash , then let`s borrow more & then let`s spend.

They completely miss the fact that money stored within a RRSP is money banked for the future--this cash is going no-where & is compounding better than in a bank becoming a huge cash cow for the future.

Shortsighted people like Flaherty are a dime a dozen--he has ripped the life-blood from a cash line that would fund him down the road at minimal cost to his gov`t..

He has ripped the life-blood out of seniors incomes which will result in a further draw on already depleted gov`t resources.

As I say short-sighted.

Dr Mike.