Why the income trust issue REFUSES to go away...

Why the income trust issue REFUSES to go away...
Canadians refuse to accept a policy whose premises are all false, whose passage is inherently undemocratic.
Hill Times
April 20, 2009

WHITBY, ONT.—Ironically, Stephen Harper’s Halloween betrayal has also come to haunt him and his own government. Harper’s “trust” issue, refuses to go away, for the simple fact that Canadians refuse to accept a policy whose premises are all false, whose passage is inherently undemocratic, whose outcome is the polar opposite of its stated goals, whose measures are grossly unfair and whose consequences are negative.

False premises

On Halloween 2006, Jim Flaherty acted precipitously and without public consultation, seemingly oblivious to the fact that his assumption of “income trusts cause “tax leakage,” was disproved a year earlier. During Ralph Goodale’s public consultations, HLB Decision Economics (HLB) was tasked to work with the Department of Finance, whereupon HLB published: “The tax revenue implications of income trusts.” This report, available to Flaherty prior to his Halloween haunt, reveals that tax leakage can only be construed, if the taxes from the 38 per cent of trusts held within RRSPs are arbitrarily excluded, which defies rational thinking. Proper inclusion of these taxes, results in the inescapable conclusion that income trusts do not cause tax leakage.

Jack Mintz confirmed Flaherty’s gross error, by stating: “There is a serious flaw on the taxation of pension and RRSP accounts. Finance was not right to treat the impact as zero.” PwC, BMO, RBC, have backed up HLB’s conclusion of no tax leakage. Meanwhile, Jim Flaherty has provided zero proof of his tax leakage claim. Let’s cut to the chase. “Tax leakage” is a canard. A known falsehood, whose purpose is to provide faux justification for Harper’s policy reversal, made at the behest of Canada’s life companies and corporate managers who sought to destroy an outcome (income trusts) that was adverse to their narrow personal self-interests.

Flaherty’s messaging of “levelling the playing field,” actually meant removing the opposing team from the field, in order that the status quo (corporations) could be coddled/perpetuated and competing investment choices eliminated. However,
that outcome is detrimental to Canada’s competitiveness, our capital markets, investors/seniors seeking business investment income, and all Canadian taxpayers.

Undemocratic

Without proof, this tax is undemocratic. The report of the Public Hearings on Income Trusts, implored: “It is imperative that a democratic government be as transparent as possible when levying a new tax so that it can be held to account by its citizens. The Finance Committee, therefore, recommends that the federal government release the data and methodology it used to estimate the amount of federal tax revenue loss caused by the income trust sector.”

The Auditor General professes that Parliamentarians need objective fact-based information on how well the government raises its funds (taxes).” So where is the “information” for Parliamentarians that substantiates “tax leakage” and fulfills accountability? Does Jack Layton know?

Achieved opposite goals

As we predicted, the trust tax triggered a wave of trust takeovers, via structures which eliminate tax collection on these businesses’ earnings, which under the trust structure, are fully taxed. Accounting firm Deloitte, published a study of these takeovers, the title of which reveals their findings: “Lots of takeovers, little tax revenue.”

As we also predicted, many takeovers were by pension funds, like Public Sector Pension (PSP) acquiring Thunder Energy Trust at a significantly reduced price due to Flaherty’s punitive tax. Jim Flaherty’s policy is such that upon taking this trust private, PSP is magially exempted from the 31.5 per cent tax, whereas RRSPs are not. How can such a tax scheme be considered either fair or effective? Flaherty’s policy-borne-of-panic, has induced some $100-billion in related takeovers, causing all taxpayers to lose over $1-billion in annual tax revenue. Entities like Abu Dhabi Energy acquired Prime West Energy Trust via an LBO and pay zero taxes, displacing Canadians paying taxes at average rates of 38 per cent. and foreign investors, paying the full 15 per cent withholding tax.

BCE’s announced conversion to a trust would have seen Ottawa collect $790-million more per year in taxes, than the LBO junk bond basket case that it nearly became, and $550-million more than the corporation that BCE remains today. Ditto, for Telus.

Therefore, in the misguided belief that his policy would remedy tax leakage, a condition that never existed in the first place, Jim Flaherty has now created tax leakage. Can an outcome be further from its intended goal than that? It’s like Jim Flaherty scored the winning goal, but against his own team?

Meanwhile, all the remaining trusts are vulnerable to the same outcome, which would multiply by seven-fold Flaherty’s incompetence and his already $1-billion loss of annual taxes. He shoots, he scores.

Unfair measures

If this tax can be avoided by the mere act of taking a trust private, then what purpose does it serve? Given this giant loophole, what will have been achieved? How do these measures profess to deal with any of Flaherty’s alleged problems concerning trusts? Such inherent contradictions defy rational logic.

These contradictions are further compounded, since only pension plans can exploit Flaherty’s loophole, whereas the average Canadian via their RRSP can not, thereby placing RRSPs at a disadvantage to pension plans, being completely counter to why RRSPs exist.

Combine this inequitable treatment of RRSPs vis-à-vis pensions, with the fact that 75 per cent of Canadians do not have pensions, and one readily concludes that Flaherty’s trust policy represents the ushering in of a two tiered pension system in Canada, that confers benefits on those with pensions, to the exclusion of those without.

This is patently unfair and discriminatory, and again, serves to invalidate the entire policy, especially one masquerading as a “Tax Fairness Plan.”

This inequity is compounded yet further, upon realizing that pension plans are using this “tax arbitrage” to acquire, on a predatory basis, trusts like Thunder Energy that have been significantly devalued within RRSPs and elsewhere, as a sole result of Flaherty’s tax. Is this Flaherty’s underhanded way of dealing with “under-funded” pensions, by expropriating wealth from RRSPs into pension plans, including the very pension, whose plan members concocted this scheme, like Mark Carney, at the time a plan member of the PSP? This is an unconscionable act [of self dealing] for Finance Department bureaucrats to derive financial gain, that is not only being denied of others, but which is derived from others?

Adding further insult to injury, Flaherty also introduced pension income splitting for seniors alongside his 31.5 per cent tax, to assist in “selling” the trust policy. Again, this measure only benefits the 25 per cent subset of Canadians with pensions, adding a further dimension to Flaherty’s stealth introduction of a two-tiered Canadian pension system.

Negative consequences

This policy’s negative consequences could fill a book. Instead I refer you to the Liberals’ website, onProbation.ca and the “Ask the PM a question” section, where the No. 1 question that Canadians have for Harper, is for him to justify this policy or repeal it. [There you can also read the many insightful comments from voters who, over 2.5 years, have grown in their understanding of the fraud and injustice this policy represents.]

Meanwhile Jim Flaherty’s responsibilities as minister of Finance remain as fundamentally unfulfilled today as from the outset, given his failure to either “prove the case or drop the tax.”

Continued failure to do so will simply prolong the agony for its enablers, the Conservative and NDP parties, since this issue will only go away once Flaherty’s falsehoods have been extinguished by the truth, or the election of a Liberal government, whose stated policy is to repeal this tax and replace it with a 10 per cent tax, refundable to all Canadians. This position was confirmed to me by Liberal Leader Michael Ignatieff, in response to an email I sent him, asking: “What is the Liberal policy position in response to the March 29, 2009 Maclean’s article entitled, ‘Retiring into the unknown’?”

And to think, there are still members of the Conservatives and NDP caucuses asking, plaintively: “Why does this trust issue refuse to go away?”

By: Brent Fullard

Brent Fullard is President of the Canadian Association of Income Trust Investors/Taxpayers
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