Gordon Pape: Flaherty's apologist.

....and media foil on behalf of CARP's advertisers?

On May 2, 2009, Gordon Pape writes in “Confidence Needed” “No one knew exactly what the impact of the [income trust] tax would be."

This is simply more apologist crap written by Pape at the behest of CARP, who constantly bombard their seniors with this type of misleading feel good propaganda nonsense.......for obvious commercial reasons. Remember Gordon Pape was the one who heavily promoted reverse mortgages to seniors as the means to sell their homes for less than 40 cents on the dollar. The type of advocacy practised on the part of grossly commercially conflicted CARP should be banned and outlawed and subject to major fines and penalties.

Gordon Pape writes extensively for CARP. CARP is in bed with Power Corp via their CARP Certified Investment Planning Council Representatives. IPC is owned by Power. Meanwhile just WTF is a CARP Certified IPC Representative?

Therefore I would argue that Pape is either financially illiterate and out to lunch or is simply trying to absolve Flaherty (on behalf of Power et al?) for whom this act of vandalism (Ignatieff’s word) took place, as evidenced by this Globe quote: “Paul Desmarais Jr., the well-connected chairman of Power Corp. of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico.”

Meanwhile the argument advanced by Pape is both ludicrous and naïve. It also contradicts what Flaherty himself, and ALL the finance officials, admitted to at the Public Hearings about his foreknowledge of the damage his actions would surely cause, for example:

Flaherty: “ I want to say from the outset that it is regrettable that some investors suffered financial losses. Although it was a very difficult decision, it was an absolutely necessary decision for our country and for future generations of Canadians, for our children, and for our grandchildren, and for our prosperity in the future.”

Flaherty: “ Our tax fairness plan recognizes that investors, may of whom were seniors, have been affected’

Or this totally ludicrous argument about the “proof” for alleged tax leakage. Would your home react any differently if it were taxed at 31.5%? Would that prove that your home causes tax leakage?

Flaherty: “The market reaction to a policy that levels the playing field between income trusts and corporations, that makes them equal, not worse, shows that a built-in tax advantage existed. Otherwise, the investors would not have reacted the way they did. There would have been no market correction.”

Or this highly evasive exchange by Flaherty in response the the direct question put to Flaherty on whether the Finance Minister of Canada had expected losses to be inflicted on innocent taxpaying Canadians, to which the weasel finally admitted “yes”.

Hon. John McCallum (Markham—Unionville, Lib.): Thank you, Mr. Chair.

I think we have good news and bad news today. The good news is that at least these hearings have demonstrated their value by forcing the Department of Finance to produce numbers instead of these blocked-out highly censored documents that we have had to date. So congratulations on that.

The bad news is that these numbers from finance have been all over the map. There have been four sets of numbers. These are hugely complex issues. We can't respond immediately when we're presented with numbers on the spur of the moment. So it'll be my proposition that after we have heard from the witnesses, and some of these experts will question finance. Finance says now “900 million”. Some of our witnesses say “zero”. This is an important subject. We will hear the witnesses and then we will propose to invite the minister back in the light of expert testimony to revisit his estimates after we have heard from the experts.

But I might just say, off the top of my head, looking at two charts, I can think of two good reasons why right away I'm skeptical. He puts a lot of emphasis on BCE and TELUS, and at the time he said that if BCE and TELUS had converted there would be $300 million of lost revenue. But since that time, BCE and TELUS have both revealed they will be paying essentially no corporate income tax. So as one of our experts will testify, in fact by not converting to income trust, BCE and TELUS will be paying less tax because they will be paying essentially no corporate tax over the coming years.

The second example, his other chart here, about the foreign energy trusts and the 15% withholding tax, if those companies were corporations they'd presumably be paying the average effective corporate tax rate in the energy sector, which is approximately 7%, and 7% is less than 15%.

So those are just two examples, which I won't elaborate on further, as to potential flaws. We have to hear the witnesses at this point. At that point, we will seek to call the minister back after we have had time to digest all of these numbers.

My question for the minister: Before your announcement, did you receive studies on the impact of your announcement on investors? If so, what did those studies tell you?

Hon. Jim Flaherty: As you know, your government put out a consultation paper in 2005 and there were a large number of responses to that.

I'm pleased, Mr. McCallum, that you have said, and I quote, “What we did was absolutely the right thing and we had started on this track to protect the tax base--”

Hon. John McCallum: Mr. Minister, my time is limited.

Á (1140)

Hon. Jim Flaherty: “--to ensure tax fairness and to work for the productivity of the nation.” I am glad that you approve of the policy decision that I made.

Hon. John McCallum: Mr. Minister, as a humble member of Parliament, I only have five minutes, but it is my five minutes, so I would ask you to answer the question--

Hon. Jim Flaherty: I was going to answer your question.

Hon. John McCallum: --and my question has nothing to do with that out-of-context statement of mine. My question is a very simple one. Before you made your announcement--

Hon. Jim Flaherty: Was it the right policy or not? You said it was.

Hon. John McCallum: Mr. Minister, I am asking a very straightforward question. Before you made your announcement, did you receive studies on the impact on investors? For example, did you have any estimates or information or studies from your department as to the likely impact on the stock market in terms of the market value of income trusts? Did you have any studies or reports on that subject?

Hon. Jim Flaherty: Obviously, Mr. McCallum, as I said in my opening remarks, the reason why the income trust sector, particularly the energy trust sector, argues so vociferously for the maintenance of the status quo--

Hon. John McCallum: Mr. Minister, did you, or did you not have any such reports?

Hon. Jim Flaherty: The reason why the income--

An hon. member: Come on.

Mr. Mike Wallace: On a point of order--

Hon. Jim Flaherty: Are you going to let me answer, or do you just want to keep going? If you want to keep going, it's okay. I've made the important points I wanted to make, and if you don't want me to reply, I won't.

A Voice: You've had 30 minutes.

Hon. John McCallum: You have had 30 minutes. I simply want to know: Did you receive any reports from your department as to the likely impact on the market value of income trusts before your announcement?

A Voice: Did you know?

Hon. Jim Flaherty: Do you want me to answer?

Hon. John McCallum: Yes.

A Voice: Yes, sir.

Hon. Jim Flaherty: I'll answer the question if you give me a moment. I'd be happy to.

Hon. John McCallum: If it is an answer to the question--

Hon. Jim Flaherty: I should mention, Mr. McCallum, the little speech you gave. The $500 million figure I used today is the same figure I used on--

Hon. John McCallum: I know, but that is not the question. I take it the answer is no or else you would have said yes. Did you have any reports? Did you have any sense as to the loss to those hardworking Canadians who had invested in income trusts, taking the Prime Minister at his word? Did you have any sense whether the loss they would experience the day after your announcement would be $30 billion or $30 million or $30,000? Did you have any advance estimate or information from your department as to the likely impact on Canadians of that announcement of yours?

That is my question.

Hon. Jim Flaherty: Do you want me to answer?

Hon. John McCallum: I do.

Hon. Jim Flaherty: Will you let me answer?

Hon. John McCallum: If you answer that question--

Hon. Jim Flaherty: No, you want me to answer what you want me to say.

An hon. member: Exactly. That's why the question is--

Hon. Jim Flaherty: How about if I say what I want to say in response to your question? Will you let me answer or not?

Hon. John McCallum: I'd like you to answer my question. Please proceed.

Hon. Jim Flaherty: Good. Thank you.

The estimate of the tax loss was $500 million on October 31--

Hon. John McCallum: That's not the question.

Hon. Jim Flaherty: --and it is today the same--

The Chair: Mr. McCallum, your time is up, but I'll give a little bit of time for the minister to respond if he'd like to just have 20 seconds.

Hon. Jim Flaherty: The answer, of course, Mr. McCallum, just as your government knew if it had acted that there would have been a negative impact on the market, as you knew in 2005 and you didn't have the courage to act--you had courage to leak but not to act--we knew that there would be an impact on the markets, to which I did not look forward. That was a sad effect on people in Canada, on a significant number of investors. I met with one yesterday. It gives me no happiness to see that kind of impact on people, but we have to act in the interests of the whole country, of all Canadians, and do the right thing, which we did and your government didn't.






"No one knew exactly what the impact of the tax would be."
Confidence needed
Article By: Gordon Pape
May 2, 2009

With the new income trust tax less than two years away, uncertainty continues to overhang the entire sector. But two trusts have made commitments that should keep their investors happy.

Ever since Finance Minister Jim Flaherty announced the introduction of a tax on income trusts back on Halloween night, 2006, the entire sector has had a sword hanging over its head.

No one knew exactly what the impact of the tax would be. But everyone figured it would be bad and income trust shares tanked in the weeks immediately following the news. They subsequently rebounded but never regained their pre-tax levels.

The date for implementing the tax is now less than two years away but uncertainty still abounds. There have been mergers and takeovers, with more likely to come. Some trusts have already converted to corporations while others have announced their intention to do so. As contributing editor Gavin Graham pointed out last month, in most cases these conversions have been accompanied by steep distribution cuts or even a complete suspension of all payments.

No wonder investors are reluctant to put new money into trusts at this point, despite some very attractive yields. They know the rug could be pulled out from under them tomorrow. People want reassurance and right now there's not a lot to be had from the trust sector, perhaps because management itself doesn't know how it will all end.

That's why there was such widespread approval at the announcement by Crescent Point Energy Trust (TSX: CPG.UN) that it intends to maintain its payout after converting to corporation in a few months. The shares, which I recommended in the March issue of my Income Investor newsletter at $26.72 closed on April 24 at $28.95. Certainly, recent strength in the price of crude oil played a part in the increase but the fact that investors can now buy Crescent Point with a degree of confidence that was lacking before has certainly helped.

Not many trusts have been in a position to emulate the Crescent Point move but one that has made a similar commitment is Pembina Pipeline Income Fund (TSX: PIF.UN). When the trust announced its year-end results in March, it said that the board of directors has decided to convert to a corporation before the new tax is implemented on Jan. 1, 2011. But even after the conversion takes place, investors will continue to receive the same monthly payment for at least five years.

"B ased on internal projections and certain assumptions, Pembina expects that it will be able to sustain its current distribution objective of $1.56 per trust unit annually over the next five years (in the form of a dividend after corporate conversion)," the statement said. "Pembina's proven business strategy and premium assets, together with well developed growth initiatives, are expected to produce the solid, sustainable results that Pembina projects will support this commitment."

The news attracted little attention at the time and the share price actually drifted lower for a few days, touching a 52-week bottom of $11.68 on March 9. But then people began to understand the implications and the price shot up to the $15 range before settling back a bit. Pembina closed on April 24 at $13.94 which translates into a yield of 11.2 per cent.

Moreover, that yield is going to be worth more in non-registered accounts after the corporate conversion because the payments will then be eligible for the dividend tax credit. For the 2009 tax year, management estimates that as long as the trust status remains about 75 per cent of the Pembina distribution will be fully taxable, with the rest treated as return of capital.

It would be helpful if more trusts would provide investors with a greater degree of certainty in the next few months so that decisions can be made with a higher level of confidence. In the meantime, ask your financial advisor if Crescent Point or Pembina are a good fit for your needs.

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Copyright © 2009 Gordon Pape Enterprises Ltd.

 
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