Knock, knock, knocking on the Liberal's door: Flaherty's trick still no treat. Anybody home?

Flaherty's trick still no treat

William Hanley, Financial Post Published: Saturday, October 31, 2009

The timing was impeccable. Three years ago today, on the spookiest Halloween ever for investors, Jim Flaherty, the Finance Minister, knocked on our collective door and yelled: "Trick or trick." The Harper government's stunning about-face on the taxing of income trusts, a staple investment for 2.5 million Canadians, many of them retirees, was like finding a razor blade in the apple.

Three years on, the announcement still rankles deeply with all those investors who saw the value of their portfolios sink by double digits within a few days, future income flows choked off. And while many executives and other observers supported the move, it is still viewed by many as a complete betrayal by a party that had vowed to protect income trusts, especially now when pricing yield out of low-risk investments is a near-impossible trick and absolutely no treat.

An income trust holds income-producing assets, with the income passed on to investors through monthly or quarterly distributions, which typically are higher than stock dividends and give cash yields of up to 10% a year -- higher for riskier trusts.

Before that fateful Halloween of 2006, investors had enjoyed these hefty payouts from the income trusts, which came into being in 1985, but really caught the public's fancy in the new millennium. Top money managers such as Ira Gluskin of Gluskin Sheff had championed the trusts, which provided clients with great income streams and good underlying capital gains --a magical win-win story.

The beginning of the end for income trusts actually started on Sept. 5, 2005, when the Department of Finance under the Liberals said the trusts had cost Canadian governments hundreds of millions of dollars in lost taxes the preceding year. Too many companies were contemplating the trust route.

On Sept. 19, the department suspended advance tax rulings on future trusts, thereby hurting investor confidence and wiping $9-billion off the trusts' market capitalization. The Liberals later recanted and said the advance rulings would continue. But the trust issue was on the table and under the microscope.

Flaherty's stunning Halloween announcement the following year was basically the nail in the coffin. By 2011, even those trusts formed before the announcement will be subject to the new tax rules.

The Finance Minister did increase the tax credit for those over 65 by $1,000 and introduced new rules to allow senior couples to split pension income to reduce the income tax they pay.

That, though, was seen as a mere sop compared with the income and capital gains provided by the trusts.

Meanwhile, the three years since that infamous Halloween have turned out to be difficult for investors, with the past 18 months especially tough for retirees and those Baby Boomers hoping to retire in the next few years as the stock market crashed and fixed-income returns withered away.

Their current plight is put into stark focus by the Canada Savings Bond campaign that offers investors all of 0.4% interest for the one-year bond. To save all the trouble, the saver may as well park the money in the proverbial mattress.

Along the same line, this week I got a call from my bank informing me that I was such a good customer that I was being offered a special deal on a new kind of account available to only us special clients. I could get an annual quarter per cent on a balance up to $5,000 and -- sharp intake of breath--half a point on anything over that.

I asked if this was some kind of pre-Halloween trick-or-treat prank. The caller replied no, obviously not seeing the irony in this "special" offer.

For history buffs, there is a certain ironic arc between Jim Flaherty's Halloween massacre and today's square-root-of-squat interest rates courtesy of the Bank of Canada (Mark Carney, the Bank's Governor, was widely credited with being the architect of the income-trust strategy when he was at Finance in 2006, the man who designed the policy that led to that infamous about-face.)

Of course, Carney was doing the bidding of his political masters in the Harper government. And today, though he is ostensibly independent of politics, he is charged with steering the right path to economic recovery.

Part of that recovery depends on persuading consumers to spend on SUVs and flat-screen TVs with ultra-low credit rates, and to get buyers into homes with mortgage rates so low they will only be repeated in another financial crisis.

Unfortunately, there are winners and losers in all matters financial. We, the aging savers, are the losers in this equation, just as income-trust investors were in Flaherty's Halloween flip-flop. The winners -- for now -- are the borrowers being treated to the low, low rates provided by us lenders, who will either grimace and bear it or find better returns in riskier investments just as the stock market takes on a spooky tone.