Thursday, December 23, 2010

Why did David Dodge stop speaking truth to power on income trusts?

Published December 20, 2010
The Hill Times

Speaking truth to power is one of the highest ideals of public servants (see Aaron Wildavsky, Speaking Truth to Power, Little Brown, 1979). It is even more important in the case of appointees who have been given a great deal of independence such as officers of Parliament, and the governor of the Bank of Canada.

Prior to Oct. 31, 2006, then-Bank of Canada governor David Dodge's statements about income trusts were carefully circumscribed by the limited research the Bank of Canada had done, and by Dodge's knowledge of other research. Then things changed dramatically. I try to determine why Dodge changed his views on income trusts after the huge tax on certain publicly-traded trusts was announced on Oct. 31, 2006. I omit his testimony before the Senate Banking Committee on Oct. 26, 2005 as much of the same ground was covered a year later.

Standing Senate Committee on Banking, Trade and Commerce, Oct. 25, 2006

Dodge's comments on income trusts are from the Q&A period. I focus on Dodge's statements and omit the questions for reasons of space. Note that he was speaking just five days before the new tax on trusts was announced on Oct. 31.

"[I]ncome trusts...have a risk return characteristic sufficiently different from either equities or bonds to allow investors to achieve portfolio risk-return combinations not otherwise available. ... They made markets more complete and, hence, were a good additional instrument for markets to have."

"[T]wo areas ... need improvement—those related to accounting and those related to corporate governance."

"We have not done work on how income trusts affect overall Canadian economic performance or productivity. We will not be doing that work. Indeed, that work is incredibly difficult to do...."

"Finally, none of the work we have done relates to the appropriateness of all of the tax system as it relates to the incentives to operate either in the form of an income trust or in the form of a corporation....None of what we have done should be taken to say that we think that the current tax system—taken in its entirety—is necessarily ideal."

"Turning to the two more difficult questions, the impact on research and development and the impact on machinery and equipment, we are not competent to talk about those, and in abstract, it is really not possible to talk about them."

"[I]t is true...that tax exempts [sic. trust units in tax deferral accounts ] and foreigners face a rather different set of incentives or net returns than does the individual Canadian investing outside of his or her RRSP. That is an obvious fact, but I cannot comment on what one might do about it."

Dodge Changes His Views

On Nov. 1, 2006, the day after the new high tax on distributions by income trusts was announced, Reuters quotes a statement by Dodge, distributed by email, saying: "The actions that the government took yesterday... would appear to eliminate the tax incentive to use one form of corporate organization over another. Businesses now face a level playing field in choosing the form of corporate organization that allows capital to be allocated to its most efficient use." The Reuters report also cited Dodge's statements on Oct. 25, 2006 quoted above.

Why would the then-governor of the Bank of Canada make any statement regarding the new tax—let alone such a bold and unqualified one? Dodge's Nov. 1, 2006, statement contradicts his October 2005 Senate testimony in which he said: "I think the idea of an income trust was a sensible one to try to have a level playing field." On Oct. 25, 2006, Dodge told the Senate that "none of the work we have done relates to the appropriateness of all the tax system as it relates to the incentives to operate either in the form of an income trust or in the form of a corporation." Dodge made no reference to any research in support of his new position. Gone also were the qualifiers Dodge used in the past such as "limited evidence suggests."

Was Dodge prompted to send out the e-mail as part of the larger effort mounted by the Harper Government to create allies and to undermine potential opponents? And if Dodge was prodded, why did he not assert his independence and refuse?

House of Commons Finance Committee, Feb.1, 2007

Dodge began with a statement to the committee (edited slightly). I have inserted some comments in bold.

"[In] our June 2006 Financial System Review... we noted that limited evidence suggests that income trusts can enhance market completeness in a number of ways. Income trusts can provide diversification benefits to investors because trusts can have different risk-return characteristics than either equities or bonds. Second, the income trust structure appears to allow some firms to improve access to market financing."

"... We note ...two areas... where improvement is clearly needed in standards related to accounting and distribution of revenue, and those related to governance. ..."
" Of course, there are very important public policy questions related to income trusts that fall outside the Bank's mandate. The Bank has done no specific research on how the income trust structure affects economic performance, or would affect future productivity in Canada."

"Based on general economic principles and our understanding of the structure of the Canadian economy, I can say that while the income trust structure may be very appropriate where firms need only to manage existing assets efficiently, it is definitely not appropriate in cases where innovation and new investment are key. [ No research cited, and contradicted by empirical research on trusts and the rate of investment.] To the extent that the system was favouring the use of the income trust structure in these cases, the incentives for innovation and investment were reduced, and the potential for future productivity growth was reduced." [ No research cited, and not supported by available research.]

"[D]ifferent risk-return characteristics of trusts may not enhance market completeness if they arise from differences in tax treatment. Clearly, there has been a very significant tax incentive to use the income trust form of organization in cases where this would not have been an appropriate form of organization from a business efficiency point of view."

"By giving incentives that led to the inappropriate use of the income trust form of organization, the tax system was actually creating inefficiencies in capital markets—inefficiencies that, over time, would lead to lower levels of investment, output, and productivity. [In his Senate testimony on Oct. 25, 2006, Dodge referred to the efficiency promoting nature of trusts, and refused to comment on their effect on investment etc., as the Bank had done no research on these matters.]

"We at the Bank have not done any research on how the rules of the tax system could or should be designed so that they do not give inappropriate incentives. [But on Nov. 1 Dodge endorsed the new tax.] The changes proposed by the government last October would appear to substantially level the playing field. [Contradicts Dodge's Senate testimony on Oct. 25, 2006.] For the income trust sector to deliver the efficiency benefits through its enhancement of market completeness, it is absolutely critical that the tax system provide a level playing field." [Dodge cites no research or studies to demonstrate that would be the actual outcome of new tax.]

In response to a question by the NDP finance critic, Dodge said, he had "reasonable faith, that ... a big chunk of that $20-billion to $25-billion [decline in the TSX trust index] has got to be the present value of tax losses to governments, federal and provincial." [Wrong: see below.]

Conservative MP Diane Ablonczy, then-Parliamentary secretary to the minister of finance, sought to get Dodge to endorse the government's action. After a very long and carefully-qualified response by Dodge, Ablonczy said: "So you're telling the committee that you believe what Mr. Flaherty, the finance minister, did, with this announcement, was the right thing to do."

Dodge said, "I think so, I guess from a strict point of view... the right thing is to have a tax system with low rates and a broad base and that is as neutral as possible..."

When asked to clarify his previous statement, Dodge said, "What I said was that a step was taken to levelling the playing field and it was a step absolutely in the right direction..."

Discussion and Conclusions

Why did Dodge so clearly change his position on the taxation of income trusts after Oct. 31, 2006? In his previous statements on income trusts in October 2005 and October 2006, Dodge emphasized the limited research the Bank of Canada had done, and he refused to make statements beyond its limited confines. In his Nov.1, 2006, and Feb. 1, 2007, statements that were supportive of the new tax, Dodge cited no research in support of his new position. Worse, the available research did not support Dodge's claims.

Dodge said he was using general economic principles and his general knowledge of the Canadian economy. But he then made remarks about the relationship of trusts to innovation, investment and productivity—and cited no evidence in support of his claims.

Worse, Dodge said that " a big chunk" of capital losses suffered by owners of trusts "has got to be the present value of tax losses to governments...." That was an elementary error—inexplicable for the governor of the Bank of Canada. The TD Bank Financial Group (news release, Nov. 1, 2006) explains: "Since the valuation of any stock is a reflection of the discounted present value of the future revenue stream, the imposition of the distribution taxes will lower the market assessment of valuations. And.. markets [being] forward looking and will factor in the changes immediately."

Dodge changed his views dramatically on aspects of the income trust issue for which he had previously said the Bank had done no research. Yet an hour on the internet would have revealed to Dodge the careful studies of consultant Dennis Bruce re: the claims of "tax leakage," and contrary evidence on the reinvestment, growth, and competitiveness argument that were available at the time cited in Stanbury, The Hill Times, Nov. 8, 2010).

During his Feb.1, 2007, testimony, Ablonczy refused to accept Dodge's carefully-framed answers even though they had gone far beyond anything he had said in the past. For all his record of bluntness, it is a mystery why Dodge did not tell Ablonczy to stop trying to put words in his mouth. He had a great deal of experience in testifying before Parliament. He would have won such a "face down," given his status in Ottawa was far greater than hers. But Ablonczy was able to "break the witness" as the lawyers say. Later, the Harper Government played up the fact that the governor of the Bank of Canada had endorsed its new tax, even though his comments only amounted to "I think so, I guess..."

When it really counted, Dodge failed to speak truth to power—which is the central justification of having a position of great independence as a public official.

W.T. Stanbury is professor emeritus, University of British Columbia. This column is drawn from his forthcoming book on income trusts which contains a longer discussion of the change in David Dodge's views.

Wednesday, December 22, 2010

Tories reject call to enhance Canada Pension Plan

Editorial cartoon in today's Calgary Herald

Tuesday, December 21, 2010

Tom Petty to Jim Flaherty: You're jammin' me

You're Jammin' Me

You got me in a corner
You got me against the wall
I got nowhere to go
I got nowhere, but to fall

Take back your insurance
Since nothin's guaranteed
Take back your losin' streak

You're jammin' me, You're jammin' me
Quit jammin' me
Baby you can keep me painted in a corner
You can walk away, but it's not over

Take back your angry slander
Take back your pension plan

Sunday, December 19, 2010

Why Canada can't afford Stephen Harper

By: Daniel D. Veniez
Dec 19th, 2010
Vancouver Observer

It’s a good time to debunk the biggest Stephen Harper myth there is: “We are good economic managers”. Repeating a lie does not make it true.

We need to spend $15 billion on jails because unreported crimes are rising? Don't believe them. We need to stop the long-form census, because the census-takers are going to send you to jail? Don't believe them. We need to kill the long-gun registry, because the police are leading a cult conspiracy to take away everybody's guns? Don't believe them. We awarding a $19 billion untendered contract for new jets because the Russians are coming? Don't believe them. This is a government that is counting on fear, driven by lies, to earn the votes it needs to win again.

Is it true that only a Harper Conservative government can bring sound management to the economy? Don't be fooled. Look at the record.

In recent months, we’ve been treated to more stellar economic and fiscal management, such as a double-digit increase in spending for Harper’s own office, shutting down downtown Toronto for 72 hours for a cost of well over $1 billion, not to mention the ignored Charter rights of Canadians, and triggering an unprovoked conflict with the United Arab Emirates that will cost us at least $300 million.

In their first year in office, the Conservatives blew the $13 billion budget surplus they had inherited. They did that through an old-fashioned combination of massive double-digit spending increases and imprudent tax cuts.

After promising in their written platform not to touch income trusts, Harper did just that and cost investors, many of them retirees, billions. The 2 per cent decrease in GST was a political gimmick that cost the treasury tens of billions with no discernible economic benefit.

Every mainstream economist argued for cutting personal income taxes to improve productivity and standards of living. But to pay for the GST cut, the Conservatives actually raised personal income taxes. This was in comparison to prior Liberal government polices, which favoured multi-year reductions, removing low-income earners from the tax rolls, and helping Canadian families with real measures, including doubling the duration of maternity and parental leave under the employment insurance program and strengthening the Canada Child Tax benefit.

While taking down government revenues just before the recession, Harper was driving annual increases in government spending to double-digits. In the summer and fall of 2008 – in the midst of the most severe and dramatic economic meltdown we’ve ever seen – Harper urged Canadians to seize this “buying opportunity” and buy stocks. During the election campaign that followed, he proclaimed that a Conservative government would never run a deficit. In Harper’s own words just four days before the Oct. 14 vote: “This country will not go into recession next year".

After the general election of 2008, as the world economic system was collapsing, Finance Minister Jim Flaherty tabled an economic statement that all presumed would recognize the unfolding global reality, including the failure of key U.S. financial institutions and unprecedented emergency measures being adopted by the European and U.S. administrations.

Instead of summoning the country to action against the backdrop of an unfolding global financial cataclysm, all the Harper Conservatives could come up with was terminating the right to strike of public sector unions, ending pay equity, and eliminate the subsidy to political parties. Hardly an intelligent response, and well short of the leadership that Canadians were looking for, as confidence dropped like a stone and jobs were lost at a dizzying rate. The denial and rank incompetence was breathtaking.

Real leadership can be seen in the prior Liberal governments' decision not to relax the rules for the Canadian financial services industry and the determination to maintain strong regulatory standards for Canadian banks. Real leadership was in the prior Liberal governments' success in reducing the national debt from more than 70 per cent of GDP to almost 30 per cent of GDP in less than a decade. Harper and the Conservatives have been surfing on the Liberal legacy for almost five years.

After the launch of a stimulus program to protect jobs and the economy, the February 2009 budget unveiled the largest deficit in Canadian history and “Canada’s Economic Action Plan” was born. It soon became painfully clear that Harper had no credible long-term plan to modernize Canada’s crumbling infrastructure. So in the rush to show that it was doing something, it developed the most egregious example of old-style pork-barrel politics the country has ever seen. Since then, federal tax dollars have funded swimming pools, gazebos, tennis courts, curling rinks, nature trails, snowmobile trail equipment, outdoor bathrooms, and hockey arena roofs.

At a time when such huge stimulus investment could have been directed to infrastructure that would have improved Canada's pensions or badly lagging productivity and competitiveness, transforming Canada's ability to meet 21st-century economic challenges and creating real wealth and long-term jobs for Canadians, the Harper stimulus boondoggle proved once again that the Harper Conservatives are more interested in scoring cheap political points than introducing sound public policy. They blew the opportunity of a lifetime, and their legacy is a low-growth economy where productivity is slipping, full-time high-skilled jobs in industry are being replaced with part-time, low-skilled jobs in services, and the Canadian standard of living, especially for the poor and middle income Canadians, is slipping.

To make matters worse, Harper bribed British Columbia and Ontario with the cash incentive for the HST. Whether this is sound long-term policy or not is beside the point. Imposing a tax shift from corporations to the hard-hit consumer in the middle of the worst economic downturn since the Great Depression is dumb economic management.

From a trade perspective, Harper has been patting himself on the back for trade deals with countries like Columbia while spending three years insulting China and ignoring South East Asia and India, Canada’s most important emerging markets.

Harper has started calling us “tax-and-spend Liberals,” stealing yet another line from U.S. Republicans and their radical right-wing cousins in the Tea Party. The problem with that cute line is that Liberals under the Chrétien/Martin regime have a record of over a decade of aggressive debt and deficit reduction, trade expansion, and investment in research and innovation, all the while steadily reducing taxes for both businesses and consumers.

When Harper assumed office, he inherited the healthiest balance sheet and income statement in the industrialized world. He then squandered much of it, ballooning the government and spending recklessly, instead of putting it towards productivity- and competitiveness-enhancing investments to improve the long-term standard of living for all Canadians.

As part of that, Liberals reduced the corporate tax rate to one of the most competitive in the G8. Liberal Leader Michael Ignatieff said that his government would put a pause on further corporate tax cuts until our fiscal house is cleaned up. We don’t believe that borrowing money to fund further corporate tax cuts makes much sense, particularly when the middle class will be have the burden of repaying that debt.

Has Harper really been a strong economic manager?

Hardly. Like so much else in Harperville, the horrendous myth of this government's claim to be fiscally responsible is exactly that – a myth. With our economic future at stake, Canadians cannot afford this “good manager” any more.

Saturday, December 18, 2010

Canadian Bankers Association disputes Flaherty’s claims of tax leakage

In a submission to the Department of Finance dated November 21, 2005, the Canadian Bankers Association wrote:

We do not believe that income trusts have had a significant impact on tax revenues. By the government’s own estimates, anticipated federal corporate tax reductions from 21% to 19% will reduce the estimated annual tax revenue loss from $300 million to $135 million. Further, after accounting for the value of deferred tax on tax-exempt income trust holdings, we believe the government is likely to have a modest gain in tax revenues. The Canadian banks are also of the view that the tax deferral on retirement investments is beneficial to the Canadian economy because the deferred tax will be realized at the same time that there is increased demand on public funds, particularly for retirement and social security programs as well as health care costs, and relatively fewer working Canadians, effectively creating a “revenue match” for this projected increase in government expenditures. Moreover, some experts have argued that our tax-deferred retirement savings system puts Canada in the enviable position of being one of the best equipped among OECD countries to face population aging.

The experience of our member banks is that, in most instances, the average amount of taxes paid post-income trust conversion was significantly higher than the amount paid as a corporate entity due to the higher levels of tax on a larger tax base than corporate investors. In any event, the government’s estimated tax leakage of $300 million in 2004 is relatively insignificant as compared to total annual federal income tax revenue of $122 billion and the $30 billion paid by corporate Canada. Moreover the tax revenue loss must be balanced against the economic benefits of new growth and productivity that arise from increased investment and more efficient Canadian capital markets.

We also believe that the decision to pursue a corporate structure or an income trust structure are legitimate business strategies that should be based on financial and economic factors and not on tax arbitrage considerations. We are of the view that income trusts have contributed in a positive way to the Canadian economy. For example, income trusts have attracted significant investment in Canada, provided access to capital for small and medium-sized companies that would not otherwise have this opportunity, and provided solid investment returns in a relatively low yield investment environment. As well, contrary to popular belief, it is reported that income trusts have reinvested significant amounts (on average, 27% of their annual earnings) in their business operations, largely on growth capital expenditures, in addition to making the necessary capital expenditures to maintain operations at their current levels. It is also reported that income trusts have raised over $10 billion in additional capital in the market thus far in 2005. These offerings demonstrate that income trusts do not inherently inhibit growth, they just involve the markets as well as management in assessing the appropriateness of the strategy. We believe that this type of investment in income growth strategies will ultimately lead to productivity and efficiency gains.

The CBA also believes that both the corporate structure and the income trust structure are effective financing vehicles for certain companies. While the corporate structure may be best suited to growing businesses, income trusts are an effective financing structure for companies in more mature stages of development. The income trust structure widens the pool of investors to these companies and lowers the cost of capital. The income trust structure also provides an alternative to the common share IPO for launching small companies into the public market. We are of the view that both business structures should exist and that similar regulatory obligations should be applied to these entities.

The Canadian banks are opposed to any new tax in income trust distributions. As evidenced by the data from the TSX, the income trust market has contributed significantly to the economic growth in Canada over the past few years. The income trust structure has offered a viable investment vehicle for smaller companies that would not otherwise have access to the capital markets, has attracted US companies to issue in Canada and income trust distributions ($11 billion per annum) have provided significant retirement income returns for Canadians with relatively few investment options given the low interest rate environment. Increasing taxes on income trusts or income trust distributions will reduce investment, increase demands on public retirement and social security programs, particularly in the coming years, and ultimately dampen the overall economic growth of Canada.

The following is a list of banks that are members of the Canadian Bankers Association

Domestic Banks: Schedule I:

BMO Financial Group
The Bank of Nova Scotia
Canadian Tire Bank
Canadian Western Bank
Citizens Bank of Canada
Dundee Bank Canada
Laurentian Bank of Canada
Manulife Bank of Canada
National Bank of Canada
Pacific & Western Bank of Canada
President's Choice Bank
Royal Bank of Canada
TD Bank Financial Group

Friday, December 17, 2010

Flaherty's Pooled Pension Plan idea

The more accurate name for Flaherty’s concept of a Pooled Registered Pension Plan would be a Corralled Registered Pension Plan, in which all Canadians get herded into putting their retirement savings into the hands of the insurance giants in order that the insurance giants can extract a fee stream.

Meanwhile what income guarantees does this plan afford Canadians along the lines that MP's retirement income is guaranteed and free from risk? Answer: None

Flaherty's concept is no substitute for the pension funds like CPP or the privileged public sector pension plans like OMERs or Teachers’, but rather just a chance for Canadians to get corralled by Flaherty for the betterment of others, like those in the insurance industry to get their hands on Canadians' retirement savings. And maybe blow them up, like Manulife has proven itself so adept at doing with its latest failed retirement savings vehicle known as variable rate annuities.

Thursday, December 16, 2010

Once again, Flaherty is fronting for the insurance industry

Jim Flaherty killed income trusts at the behest of the insurance industry, now he's directing Canadian's retirement savings into the laps of the insurance industry....just wait and see who is the greatest beneficiary of this concept of a pooled retirement savings plan. If not the Manulifes and Power Financials of this world, them who?

Flaherty pitches private-sector retirement plan
Bill Curry
Globe and Mail
Thursday, Dec. 16, 2010 10:24AM EST

Finance Minister Jim Flaherty wants to encourage Canadians to save more for retirement – particularly self-employed workers and those who do not currently have a company pension plan.

Billed as Pooled Registered Pension Plans, the scheme is described in a nine page draft report prepared by the federal Finance Department and released Thursday morning. It comes just ahead of a Sunday and Monday gathering of federal, provincial and territorial finance ministers in Kananaskis, Alta.

“With respect to retirement income, I hope we will be able to agree on a framework for Pooled Registered Pension Plans,” Mr. Flaherty writs in a Dec. 15 letter to his counterparts. “This would improve the range of retirement savings options available to Canadians as well as provide low-cost retirement options allowing participation by employees – with or without a participating employer – and the self-employed.”

The plan would be administered by regulated private-sector institutions, according to the policy draft.

The focus on a new private-sector fund is only one of two options that a majority of the finance ministers agreed to when they last met in June in Prince Edward Island. The second option was to bring in “modest” enhancements to contributions and benefits under the existing, mandatory Canada Pension Plan.

Mr. Flaherty’s embrace of that option came as somewhat of a surprise and was embraced by labour unions, including the Canadian Labour Congress, who argue further voluntary options will not address the fact that some Canadians aren’t saving enough for retirement.

Yet Mr. Flaherty’s letter is silent on that option. The minister is scheduled to speak with reporters at 10:55 a.m. Thursday.

Alberta Finance Minister Ted Morton was the most vocal critic of enhancing the CPP. He argued that the private-sector option would better target the problem, which he said is primarily middle-income earners who do not have a workplace pension.

Tuesday, December 14, 2010

Imagine the vibrant economy where managers distributed their business earnings to shareholders

In good times and bad, income trusts were truly the way to organize a vibrant and efficient economy, Why else do you think that Corporate Canada wanted them killed? Since the whole issue was about who controls the excess cash.....the business owners or the business managers:

December 12, 2010
U.S. Companies' $1.93 Trillion Cash Hoard Biggest in 51 Years
By Don Miller, Associate Editor, Money Morning

U.S. corporations are piling up cash at the fastest rate in half a century. But instead of signaling a new wave of spending, that cash pile may mean tough times ahead.

Non-financial companies in the United States had stacked up $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the U.S. Federal Reserve said Thursday. Cash made up 7.4% of the companies' total assets -the largest chunk since 1959.

But capital spending and plans to hire new workers remain subdued, showing the deep concern companies harbor about a painfully slow economic recovery that has failed to put a dent in high unemployment and reignite consumer spending.

With interest rates at or near zero, companies holding huge amounts of cash are suffering from record low returns on their money.  But the huge cash hoard may indicate that managers don't see many opportunities to put their money to work without incurring huge risks.

"The corporate sector is looking at the household sector and saying, this is not the environment where we should expand our business economist Torsten Slok told The Wall Street Journal.

Companies have a number of options when cash becomes a big part of the balance sheet.  They can deploy excess cash to increase dividend payments, acquire other firms, buy back their own shares, reinvest in operations or simply retain the cash in the form of cash or short-term marketable securities.

"There is greater pressure on companies that are either not paying dividends now or are paying below-market yields," Brett Hryb, senior portfolio manager in U.S. equities at MFC Global Investment Management, told The Journal.

But dividend payouts in the United States are trailing many other developed markets, including the United Kingdom, Australia, New Zealand, France, Italy, and Spain. For example, Australia has a dividend yield of about 4% while the current dividend yield on the S&P 500 is about 2%.

In recent months, many companies including Nike Inc., Intel Corp., Baxter International Inc., United Parcel Service Inc., and Johnson Controls Inc. ), have announced dividend raises. But despite those increases, the total level of payouts from U.S. companies remains well under the levels from two years ago.

Among Standard  & Poor's 500 Index companies, 368 are now paying dividends, up from 363 in 2009 but below the 2008 tally of 372.

"It's been a great year, but we are still nowhere near where we were in 2008," Howard Silverblatt, senior index analyst at Standard & Poor's Indices, told The Journal.

But there is a silver lining.  Changes to dividends netted out to a $40.2 billion drop for shareholders in 2009, but companies added back $15.4 billion in payouts through the third quarter, Silverblatt said. 

Companies "are under increasing pressure to use their cash for mergers and acquisitions (M&A) and buybacks, with dividends now on the list," he said.

A flurry of mergers and acquisitions in late November raised hopes that activity would jump in 2011.

Indeed, thanks to low prices for takeover target companies, easier credit terms, and historically high cash balances, the atmosphere for deals in 2011 is as positive as it's been since the credit crisis sent the economy, and M&A activity, into a tailspin.

Global M&A activity is expected to increase 36% next year to $3.04 trillion , driven by a big pick-up in deals in the real estate and financial services industries, according to a report released Monday by Thomson Reuters and Freeman Consulting Services. 

But the survey of over 150 worldwide corporate decision makers also showed that next year's buyers are expected to focus on expanding their core businesses to increase market share.  That could lead to a wave of consolidation instead of a hiring binge.

Moreover, the surge in M&A will be focused in emerging markets, especially Asia, where the average cash balance of companies was almost double that of U.S. companies.

Buying back shares is another use for cash, but those programs are also controversial. 

Companies argue that buybacks reduce float, or the number of shares outstanding, especially when they consider shares to be cheap.  Usually when a buyback program is implemented, it gives a short-term pop to stock prices. But when that happens, executives rush to exercise their options and sell shares.

Also, some investors consider buybacks to be an indication that management is incompetent because they don't know how to grow the company by doing an M&A deal or investing in research and development.

Another objection to buybacks is that companies may overpay. From 1986 through 2002, the old General Motors Co. spent $20 billion on buybacks with money that should have gone to shoring up its finances, William Lazonick, director of the Center for Industrial Competitiveness at the University of Massachusetts Lowell , told Bloomberg News.

In the past decade, Microsoft Corp. has spent more than $103 billion on buybacks, yet its stock trades at about half its 2000 high.

"A lot of companies are just stupid about buybacks.  There should only be one reason you buy back shares: You think they're going up ." Daniel Niles, senior portfolio manager at asset management firm AlphaOne Capital Partners, told Bloomberg.

For the foreseeable future at least, cash looks like it will remain king in the boardrooms of corporate America.

Tax U.S. companies into spending
By Mihir A. Desai
Friday, December 10, 2010
The Washington Post

Recent tax deal-making has relied on conventional instruments of fiscal stimulus. Yet, we live in unconventional times, and more novel approaches suited to the peculiarities of our current economy are required. In particular, the remarkable cash hoards that American corporations have amassed have been a saving grace in ensuring that the financial crisis did not cause further damage to the economy. With traditional monetary and fiscal policy instruments seemingly exhausted, the mobilization of that cash hoard can prove critical to reviving the economy.

The historically exceptional cash holdings - estimates of the amount held by U.S. public corporations easily exceed $1 trillion; several technology companies alone are sitting on cash balances in excess of $20 billion - are thought to result from the absence of investment opportunities or from indecision among corporate executives. Once such indecision becomes widespread, it can quickly become self-reinforcing. Recent record corporate profits will only exacerbate this situation. If chief executives and chief financial officers are goaded into spending that cash, the economy could benefit from a significant stimulus that, unlike stimulus measures relating to government spending, would stem from decentralized actors responding to private information and incentives.

Consider the potential effects of a temporary 2 percent tax on corporations' "excess" cash holdings. With the returns on their cash holdings approximating zero, managers would have to explain to their investors why earning a negative 2 percent return would make sense as opposed to either investing or disgorging that cash to shareholders.

The definition of "excess cash holdings" will be critical. But such levels easily could be defined relative to industry benchmarks from periods that featured more standard corporate savings behavior. Alternatively, a measure of accumulated nondistributed earnings could also serve as the basis for the tax. Accumulated earnings taxes have been used in the past, although sparingly, with particular reference to individuals who incorporate for business purposes.

Implementing such a tax would require measures to prevent some unintended consequences. A large fraction of corporations' excess cash - as much as two-thirds, according to some estimates - is held outside of the United States to avoid the "repatriation taxes" that occur under the U.S. system of worldwide taxation. Simply put, multinational firms currently have an incentive to keep money abroad.

A temporary holiday of the repatriation tax coupled with the tax on excess cash holdings could help ensure that the disgorged cash would be used productively in the United States. A previous repatriation tax holiday in 2004 induced the return of more than $300 billion to this country, and commentators across the political spectrum, including Andy Stern, formerly of the Service Employees International Union, have already begun to call for another repatriation tax holiday.

Coupling these policies provides a carrot and stick for managers to begin to repatriate cash and use it productively at home. The combined revenue effects is likely to be relatively small, given how little revenue is currently collected on unrepatriated earnings and how sensitive corporations are likely to be to facing a negative rate of return on their cash holdings. But the goal would be more to trigger behavior that feeds that economy rather than raising revenue for the government.

Ideally, firms would invest their excess cash funds in new projects in the United States. President Obama's proposal to allow for immediate expensing of investments could help ensure that firms were tilted toward spending that excess cash on new projects within the United States. A reduction in the corporate tax rate that would bring the U.S. rate in line with worldwide norms would also help enormously in directing these cash hoards toward investment. But even cash disgorged through dividends, share repurchases or mergers would have a potentially stimulative effect compared with corporations banking the funds.

It is tempting to pin hopes of an economic recovery on a centralized effort or another significant program by the Federal Reserve. But a remarkably large pool of unmobilized capital is sitting within our firms and managers appear frozen in their decision-making. A gentle nudge to break this coordination failure - through the combination of the fiscal carrot and stick described above - could shake managers out of their indecision and provide a privately-directed, revenue-neutral stimulus that could eclipse the effects of any potential stimulus that could emerge from Washington today.

The writer is a professor of finance at Harvard Business School.

Thursday, December 9, 2010

The facile Fabrice Taylor

Facile: adj, arrived at without due care or effort; lacking depth; "too facile a solution for so complex a problem"

How totally facile for Fabrice Taylor to argue in this month’s Alberta Venture magazine (see below) that income trusts must have caused tax leakage on the basis that their market valuations increased upon their announced conversion to trusts? Rather than confront the government to prove its own case about tax leakage, Fabrice Taylor would prefer to forage around looking for arguments that hold no water. These conversion announcements increased the value of these companies for the simple fact that cash in investor’s hands is worth considerably more than cash residing inside of companies, the evidence of which is everywhere you look. Why would National Bank’s stock price rise on the announced increase in their dividend, was it because of tax leakage? Why did Inco pop when they announced their special $10 dividend, was it because of tax leakage? When these trusts’ values increase upon their announced conversion back to corporations mean that they are causing tax leakage? What about the REAL tax leakage that occurred from the foreign leveraged buyout of Prime West Energy by Abu Dhabi Energy etc etc. Is that what Fabrice Taylor meant by good riddance, that its better for foreigners to own Prime West than taxable Canadians?

And to think, Fabrice calls himself an equity analyst? Clearly he is not. Although In a previous life, I am certain that Fabrice Taylor must have been the Lead Prosecutor at the Salem Witch Trials:

Why you won’t miss the income trust
Goodbye, and Good Riddance 01, 2010
by Fabrice Taylor

Of all the great fibs to roll off the Bay Street assembly line, none is more laughable than the assertion that income trusts didn’t cost the government anything. The claim was usually made – and in fact still is – by the people who sold and ran trusts and funds, even though it’s demonstrably not true.

After all, every time a publicly traded company announced that it was becoming a trust, its stock market value would shoot up 20 to 30 per cent. Where did that extra value come from? Obviously, it represented the government’s share of the company’s cash flow. What the company used to pay to its silent partner in Ottawa it was now paying to investors, who were therefore willing to pay more for the shares.

Now, of course, the shoe is on the other foot. Trusts and funds are converting back into corporations and, inevitably, their stock market values are falling, along with their distributions.
Should investors mourn the loss of income trusts? The knee-jerk answer is yes, especially in a yield-starved environment. But even a cursory analysis shows that while income trusts and funds appeared to create a lot of value, many of them actually managed to destroy it.

Let’s take a look at oil and gas royalty trusts. Invented by the late Marcel Tremblay, the father of Enerplus Resources Fund, in 1986 they caught on slowly at first before exploding in popularity. They became so popular, in fact, that at one point there were more than 200 of them, constituting 20 per cent of the Canadian economy.

These vehicles, on the surface, look like winning investments for much of the asset class’s history. But while there were winners, there were also enough losers to show that this idea is something of an illusion. The fact is that most oil and gas royalty trusts were born at the beginning of a great and long boom in oil and gas prices, which boosted the revenues and profits of even those with the most incompetent management teams. Distributions rose but only because oil and gas prices thrived.

How do we know this? Because almost without exception, the reserves of these trusts fell over time on a per-unit basis. Investors were holding finite assets that had no chance of being around for the long term. Yes, distributions went up, but they wouldn’t have if commodity prices hadn’t gone up. They would have fallen and, given the trend, these trusts would have disappeared.

In some cases, production per unit also fell along with reserves. Again, commodity prices – and in some cases debt – put these investments back on side. Now, of course, the tide has gone out and we can see who’s been skinny-dipping.

Pengrowth Energy Trust, for instance, took on a lot of debt and issued lots of units to buy up assets and grow. It didn’t do so in an accretive way to shareholders but got away with it because of higher energy prices. When these fell, the trust brought in a new CEO who promptly cut distributions and sold a bunch of new units to pay down debt. Investors were not only diluted by new units, but they also lost a big chunk of their income.

What’s more, Pengrowth used to have a contract with an external management team that sucked tens of millions of dollars away from investors for doing little else than riding a wave in commodity prices that the management team had no control over. And yet that contract, along with the desire to be bigger, encouraged the trust, and others, to make large acquisitions at high prices without creating value. In 2000, Pengrowth had three barrels of oil equivalent for every unit. Eight years later it had less than half that.

The oil patch decries the loss of the trust structure, and why not? Exploration and production companies loved them because they could sell them tired old wells at a high price. We know this because of the fact that few trusts could build reserves on a per-unit basis, the benchmark of success in oil and gas. We don’t need to explain why the trust sector itself loved it.

You would have been better off holding Imperial Oil, a big, diversified and conservative oil company, than a basket of oil and gas trusts over the past decade. First, many trusts have large tax pools that they’ll use to shelter income. These will eventually disappear. Second, trusts are not run by people who know how to run an E&P business. Most are run by financial engineers, not reservoir engineers. Many will stumble, and some will fail outright.

As such, there’s no need to mourn the loss of the income trust, especially when you consider that government coffers are going to get a healthy injection that will (one hopes) help pay down deficits and debts. As an investor, you’re probably better off without them anyway.

Fabrice Taylor is the Prairie Trader. He is an award-winning journalist and equity analyst.

Friday, December 3, 2010


Brent, is there any chance that someone would leak the original copies of the blanked out documents on the income Trust fiasco? Wouldn’t it be amazing if written all over them was the influence of Power Corp etc. having the trusts shut down? Mike


That would be great, but most unlikely. Meanwhile we already know from the work of HLB Decision Economics what is behind the blacked out documents, since as you can see from page 6 pf those documents (see above, click on image to enlarge) that HLB’s work is one of the columns (the one on the right). The only difference between the HLB column and the Finance columns is that Finance leaves out the deferred taxes that are collected from the 38% of trusts held in RRSPs and RRIFs. That item appears as line item G titled “Future tax revenue (tax exempts)”. Like the idiots that they are, the government wrongly considers tax deferred accounts to be tax exempt, as if these retirement savings accounts never pay taxes which is patently false. This ONE ITEM concerning deferred taxes is the difference between tax leakage and no tax leakage.

We don’t need Wikileaks to solve our problem, we needed the media and/or the Opposition MPs to solve our problem, but neither were as interested in the truth as we, and both failed us miserably. None more so that the CBC.


Wednesday, December 1, 2010

Flanagan issues Fatwā against Wikileaks' Assange

This incident shows you how much disdain these neo-cons like Flanagan have to transparency and disclosure. Well done CBC....NOT!!!!

'Wikileaks founder Assange should be assassinated'

Jerusalem Post
12/01/2010 17:37

"Obama should use a drone or something" says former adviser to Canadian PM Harper, Tim Flanagan, in interview by CBC.

University of Calgary Professor Tim Flanagan on Wednesday called for the assassination of Wikileaks founder Julian Assange in a television interview with Canadian state broadcaster CBC.

Flanagan helped organize the campaign of Canadian Prime Minister Stephen Harper in 2003. He also served as the Conservative Party's campaign manager in Canada's general elections in 2004 and 2006. He retired in 2006 and became a full-time teacher.

"Well I think Assange should be assassinated actually," Flanagan said about Assange. "I think Obama should put out a contract and maybe use a drone or something," he suggested.

"There is no good coming of this," Flanagan said about the recent release of thousands of top secret diplomatic cables between the US State Department and countries around the world.

After the interviewer called his comments "harsh," Flanagan responded saying, "I am feeling very manly today."

"This is really stuff that should not be out," he continued. Some of the cables have the potential to damage international relations and possibly lead to war, Flanagan added.

"Now the Iranians know what the King of Saudi Arabia supposedly said," the professor said referring to the cables showing that King Abdullah supported a military strike against Teheran.

"I wouldn't feel unhappy if Assange disappeared," concluded the university professor.

Monday, November 29, 2010

Flaherty's policy makes Canada "the last place to invest"!

Two recent examples of the absurdity of Finance Minister Jim Flaherty’s trust policy that is diverting much needed investment dollars OUT of CANADA and into foreign investment, making Canada “the last place to invest”?

Eagle Energy Trust flies using new structure

CTV News
November 24, 2010

For the first time in more than four years, a new trust has launched on Canadian markets with a novel corporate structure that its founders believe can serve as a fresh template for the oil and gas sector.

Eagle Energy Trust has been created to take advantage of an exception in the new rules for trusts that allows them to avoid punitive taxes by holding only foreign assets.


OPTrust, partners create landmark REIT

Boyd Erman
Globe and Mail
Nov. 29, 2010 1

Canada’s OPTrust Private Markets Group, the pension arm of the big Ontario pension fund, is teaming up with four giant partners to create a first-of-its-kind real estate investment trust that will invest in U.S. power infrastructure.


Securing our Retirement Future: Consulting with Ontarians on Canada's Retirement Income System.

November 29, 2010

Ministry of Finance
Retirement Income Security Submission
c/o Communications & Corporate Affairs Branch

Our association’s submission to the Ontario Ministry of Finance on the matter of Retirement Income Security is organized as follows. Please note, we have also posted this submission on the internet for the public’s viewing and discussion.

1. Introduction
2. Flaherty’s public policy train wreck:
3. Looking to Ontario’s Dwight Duncan for leadership and fact based public policy
4. The sobering effects of the global financial meltdown:
5. Like a rising tide, retirement policy must lift all boats
6. The two greatest impediments to securing adequate retirement income
7. It’s about the investment returns, stupid.
8. Suspend what you think you know about income trusts, and instead be guided by the facts
9. A face saving alternative for Jim Flaherty: The Marshall Savings Plan
10. Conclusion and Policy Recommendation

1. Introduction:

Our association is pleased to present its recommendation to the Ontario Government on how it can materially improve Canada’s retirement income system. Our recommendation has its greatest impact on the 75% of Canadians who are without defined benefit pensions, but those with pensions will also benefit. Our recommendation comes at no cost to taxpayers and in facts holds the promise to greatly increase government tax collection while reducing the burden on social programs and increasing Canada’s competitiveness through increased investment activity via an abundant new source of low cost capital provided by Canadians seeking retirement income.

Our recommendation calls for the rescinding of a federal government policy of 2006 that caused Canadians’ saving for retirement to lose $35 billion of their life savings and to lose an investment choice that was/is essential to providing retirement income during a period of protracted low interest rates, namely income trusts. This policy was enacted out of pure panic and myopia about its consequences by Canada’s Minister of Finance, as evidenced by the fact that this sweeping policy was enacted with zero public consultation, no independent studies or reports whatsoever and a departmental tax analysis that was completely incorrect as it ignored the taxes that are paid by RRSPs, that are deferred in nature, but which the Finance Minister wrongly assumed are never paid.

For the federal government to conduct a policy analysis that affects Canadians retirement savings that fails to properly model the world as it exists and to arbitrarily penalize the sole benefit that exists in a savings mechanism (ie tax deferral) that is so core to the retirement savings of Canadians (ie RRSPs) , is to undermine completely the reasons why RRSPs were created in the first place. Actions like this undermine Canadians’ as well as Ontarian’s faith in government, since the government acted in a cavalier and reckless manner that is completely contrary to the social good that is served by allowing Canadians to save for retirement, so that they can be financially self sustaining in retirement and less reliant on government social programs.

Approximately one million Ontario residents were investors in income trusts and their share of the losses that were inflicted by this policy amounted to a loss of retirement savings value of $14 billion, or 40% of the total loss of $35 billion.

More important than the loss of capital, was the loss of an investment choice that was essential to Ontarians in providing retirement income from one’s retirement savings.

This policy also had the effect of extending major tax benefits to the 25% of Canadians who are already privileged to have pensions, (i.e. pension income splitting) that were denied the 75% of Canadians who do not have pensions and therefore little “pension income” to split , further exacerbating and already large entitlement gap that exists between these two groups, the haves and the have-nots. This policy also carved out the ability of pension funds to own trusts on behalf of their beneficiaries and avoid paying the 31.5% tax, whereas the same trust held in an RRSP by the average Ontarian was taxed at the additional rate of 31.5%, which is why we have seen Canadian pensions funds scooping up these undervalues trusts, in what amounts to a government created tax arbitrage. Unlevel investment playing fields like this are grossly discriminatory and inherently unfair to Canadians and Ontarians saving for retirement and are without any social or economic justification. The haves got more under this policy at the expense of the have-nots, who under this policy got considerably less, while subsidizing those who got more. And this was called the Tax Fairness Plan?

It is unimaginable that this assault on Canadians retirements and the loss of an investment option so essential to providing Canadians with retirement income that took place in the heady economic times of 2006 could have taken place in this post global financial meltdown world. The fact that it did and the fact that the priorities of Canadians have now been realigned to the realities of today demands that this policy be reversed to reflect the realities or providing oneself with adequate retirement income and to understand the immense unintended consequences this income trust policy has caused and continues to cause.

2. Flaherty’s public policy train wreck:

This policy needs to be seriously revisited, not on the basis of the false promises that it offered up at the outset, but based on the harsh adverse consequences that it actually delivered. Our association calls upon the Ontario Government and its Minister of Finance to conduct a thorough post mortem on the federal government’s income trust policy, on the basis that 40% of all Canadians reside in the Province of Ontario, and based on the extensive findings of UBC Professor William Stanbury of who has written extensively on this issue, including his September 22, 2008 Hill Times article entitled “Leadership? Top 10 reasons why tax on trusts is a public policy train wreck.” [1]

3. Looking to Ontario’s Dwight Duncan for leadership and fact based public policy:

Our association looks to Ontario’s Minister of Finance, Dwight Duncan, to provide the leadership on this issue that was clearly lacking on this policy from the outset and I quote from a letter to our association from Dwight Duncan dated August 23, 2010, in which he states:

“Thank you for sharing your views on income trusts, the Marshall Savings Plan, and the information from Environics [which shows that 79.6% of Canadians polled by Environics support adoption of the Marshall Savings Plan as the means to preserve income trusts.] I also understand the importance of providing Ontario residents with easy and effective means to save for retirement, and the realities of living without a pension. Please be advised that the Government of Ontario will continue to consider all options available to improve the investment opportunities and retirement savings options for Ontarians.”

With that commitment of open mindedness from Ontario’s Minister of Finance, the balance of this submission will deal with the manner in which the investment options available to Ontarians seeking retirement income can be expanded, in a time proven manner, and without the risks of reinventing the wheel.

4. The sobering effects of the global financial meltdown:

“You only find out who is swimming naked when the tide goes out. ...” Warren Buffet

In many respects we have the events of the global financial meltdown to be grateful for. Had it not been for wake-up call of the global financial meltdown, the looming and otherwise latent issue concerning the inadequacy of Canadians’ retirement savings and the inadequacies of the retirement income system at large would not have come to the forefront of Canadians’ concerns and nor would it have entered the priorities of politicians, many of whom are immune from such concerns.

The global financial meltdown also served to highlight the many strategies of providing for enhanced retirement income retirement that are either inherently flawed and/or outright fraudulent . From the massive Ponzi schemes of those like Bernie Madoff, whose only lure to capture his prey was to offer them a steady 10% annual income on their retirement savings, and Canada’s own Earl Jones’ to the less sensational but equally flawed attempts to enhance the income stream to investors in schemes like Asset Backed Commercial Paper offered by Canada’s big banks that fell like the house of cards that it was and requiring a taxpayer backed bail out, to the variable rate annuity products of Manulife Financial like Income Plus that offered investors the promise of stock market like returns with a guaranteed rate of return that Manulife recklessly failed to hedge in its quest to drive profits at undisclosed risks to its shareholders, that almost brought this pillar of Canada’s financial system crashing to the ground.[3]

All of this is to underscore that there are risks inherent in schemes of providing investors with the surety of enhanced sources of income that are not otherwise available in the market place, but which are synthetic or derivative in nature. The goal of government policy, all things being equal, should be to direct Canadians’ investment savings into direct investments in the Canadian economy like income trusts, and away from synthetic and derivative investment products like Asset Backed Commercial Paper or unhedged products like Manulife’s Income Plus, and the systemic risks that these products have proven to embody.

In the ironies of all ironies, it was groups like Manulife who were very active in lobbying the Stephen Harper government to kill the income trust form of investment, for the sole reasons that it meant groups like Manulife could sell more of their black box investment products like Income Plus, only to have those products almost bring Manulife into financial default on the obligations it had taken on, but imprudently failed to hedge.

These recent failures of ABCP and Manulife’s unhedged investment products serve as a highly cautionary tale and underscore the risks inherent in policy making to politicians and to policy makers, in this area of securing Canadians retirement future and retirement income, as there are enormous pratfalls that await those who act imprudently, as occurred when Jim Flaherty implemented his income trust policy at the behest of those seeking a larger part of the retirement investment pie (i.e. banks and life insurance companies), only to prove themselves incapable of holding the public’s trust with the schemes they had created.

5. Like a rising tide, retirement policy must lift all boats

The goal of any public policy should be to do the greatest good to the greatest number of affected persons. The issue of retirement security, much like health care, affects everybody. Its constituency is all Canadians. The desire of all Canadians during retirement is to sustain as best they can the lifestyle and standard of living they enjoyed during their working years. There is great benefit to the Canadian economy at large if the growing demographic of Canadians in retirement are able to continue contributing to the economy via their historical consumption patterns, or at least lessening the impact to the Canadian economy of this cohort of Canadians reducing their consumption patterns.

In addition there is great benefit to Canada’s overtaxed social system, if this cohort of Canadians in retirement are able to be financially self sustaining, rather than reliant on social programs. For these reasons, it is as desirous for the government to allow an individual whose employment income was Y, to sustain a retirement income as close to Y as possible, as it is for the government to allow an individual whose employment income was X, to sustain that level of income during retirement as well. Certain of the government’s policies revolving around securing retirement income have to be agnostic about what level of income a Canadian is attempting to replicate, whereas other policies, such as enhancing OAS, are income specific. The government needs to have policies that are income specific as well as policies that are income non-specific in order to address the full breadth of the retirement income issue.

In this regard, the policy that our association is recommending is a policy that will do the greatest good to the greatest number of Canadians, and will do so in a manner that is beneficial to all taxpayers and to the competitiveness and overall efficiency of the Canadian economy.

6. The two greatest impediments to securing adequate retirement income

Apart from the issue of having saved adequate sums for retirement, which is the responsibility of the individual, the two greatest impediments to Canadians securing adequate retirement income are (1) the availability of suitable investments (i.e. “asset classes”) and (2) the overall returns that presently prevail in the market place for the available asset classes.

The current edition of Barron’s (November 27, 2010) has a feature entitled “Special Retirement Report” and the investment magazine’s cover story is an article entitled Going With the Flow [4] by Karen Hube whose opening paragraph reads;

“IT USED TO BE SIMPLE. Those who had worked long and hard and had saved and invested prudently could pick up the gold watch, clean out the desk, say goodbye to the office and depend on certificates of deposit and U.S. Treasury securities to provide a substantial part of their post-retirement income. But these days, they need a new game plan. With yields near historic lows, Treasuries simply aren't cutting it as the mainstays of income portfolios, and rates on bank CDs are pitiful. The yield on a standard laddered one- to 10-year Treasury-bond portfolio is a skimpy 1.5%. On a $500,000 investment, that's $7,500, or $4,875 after income taxes at the highest marginal rate. Worse, many folks are sitting in ultra-short Treasuries and money-market funds with sub-1% yields.”

This is the crux of the retirement dilemma facing all Canadians, namely that of low rates of return in the marketplace. A person at age 60 on the verge of retirement can’t magically double the size of his or her retirement savings to compensate for the fact that market levels of returns are now half of what they had traditionally been and what that person saving for retirement had reason to expect they would be. Nor do policies such as the Tax Free Savings Account (TFSA) do anything meaningful for those on the cusp of retirement. Likewise proposals that some are advancing to create a form of supplemental CPP, would leave those on the cusp of retirement with nothing materially different, since only those who are 20 and 30 years away from retirement will realize the compounding effects of those types of changes, since these benefits only accumulate over a longer period of time and will only accrue to those who are younger in age and further from retirement.

The Barron’s article goes on to observe: “Getting an adequate stream of postretirement income these days requires investments that retirees once might have shunned.” This is the statement that Ontario policy makers need to focus on most, since it is both a cautionary observation, as well as a question whose answer draws a stark distinction between the asset classes that are available to Americans seeking retirement income and the asset classes that are available to Canadians seeking retirement income.

The cautionary tale to policy makers is that by arbitrarily restricting the availability of asset classes that generate retirement income, as the Canadian Government did in 2006 with the shut down of the income trust asset class, the government is rendering these investors more susceptible and more captive to other less desirable choices, that offer the promise and false allure of safe retirement income, like the failed ventures concerning products like Asset Backed Commercial Paper or Manulife’s Income Plus, or even making these Canadians more susceptible to out right frauds like the investment Ponzi schemes perpetrated by the likes of Bernie Madoff and Montreal’s Earl Jones.

The expansion of asset classes available to Canadians seeking retirement income is the single greatest policy initiative that the Ontario government can pursue in dealing with this matter of Canadians securing adequate retirement income. Unlike the US, Canada does not have a high yield market place for Canadians seeking retirement income to invest in. Unlike the US, Canada does not have a tax free municipal bond market for Canadians seeking retirement income to invest in. Unlike the US, Canada does not have a Master Limited Partnership market for Canadians seeking retirement income to invest in. However Canada did have the equivalent of the Master Limited Partnership (MLP) asset class to invest in. since MLP’s are exactly the same as income trusts and the argument that Jim Flaherty used back in 2006 that the US shut down income trusts, was just another falsehood in his litany of falsehoods that he used in an attempt to justify his destructive actions of limiting investment choices available to Canadians seeking retirement income.

The effects of a policy that expands the availability of asset classes to Canadians will have major spill over effects in terms of providing an abundant source of capital to Canadian and Ontario businesses looking to expand or to tap the Canadian capital markets. It will create a source of abundant tax revenue for the province, in the manner that existed before income trusts were shut down. See Globe and Mail article of October 27, 2006 entitled Tax cash floods in, leaving experts at a loss [5]

The importance of having an variety of asset classes to invest in, is that each unique asset class has its own unique risk/reward characteristics. The risk/reward characteristics of income trusts are perfectly suited to investors seeking retirement income, as this asset class is able to sustain relatively high rates of return, even during periods of protracted low interest rates, for the simple fact that income trusts are a form of hybrid equity investment and equity investments (unlike debt) carry higher rates of return to investors, and unlike common shares, those return derive from income rather than gains in share trading prices that are susceptible to wild, often unexpected, swings

This all important matter of investment returns is dealt with in the next section

7. It’s about the investment returns, stupid.

Here is a Hill Times article from March of this year written by Sandy McIntyre, Chief Investment Officer for Toronto investment manager Sentry Select that explains the importance of income trusts and the essential role that this asset class plays in providing higher rates of investment returns to Canadians seeking adequate retirement income and as the means to improve Canada’s retirement income system:

Income trusts level the playing field
It’s time to level the investment playing field, and give the average retail investor the same tools as the public service pension plans, by restoring income trusts.

by J.A. McIntyre
The Hill Times
March 1, 2010

TORONTO—In 2005, Statistics Canada found that 85 per cent of public sector workers and only 26 per cent of private sector workers have employer-sponsored pension plans. It is therefore remarkable that the discussion of “pension reform” seems to be preoccupied with the concerns of this relatively small group of Canadians as opposed to the concerns of the vast majority of Canadians.

In this piece, I explain why the major decline in investment returns makes it imperative to preserve the income trusts as an investment vehicle for RRSP investors in order to preserve a level playing field between those workers with pensions
and those without.

The pension problem is exacerbated by declining investment returns. From January 1956 to December 2009 the S&P/TSX Composite Index generated an average annual return of approximately seven per cent plus dividends for a total annual return of 10 per cent. To put this into the proper risk context, equity investors experience annual volatility in excess of 20 per cent to achieve returns of half that level.This type of risk/return is poorly suited to paying a recurring monthly income benefit. As portfolio returns declined following the last serious government review of RRSPs and RRIFs in 1992, the amount of capital required to generate $45,000 in annual income from a balanced portfolio (50 per cent equity, 50 percent fixed income) has increased from approximately $700,000 in mid 1992 to more than $1,300,000 as of December 2009. Declining yields have exposed the under-capitalized funding of both pension and individual investors’ retirement plans.

The individual investor accumulates capital to take care of their retirement in a Registered Retirement Savings Plan (RRSP) and when they need to begin harvesting their savings the capital is transferred into a Registered Retirement Income Fund (RRIF). In a RRIF mandatory withdrawals start at four per cent at age 65 and rapidly rise to 7.38 per cent at age 71. It is very clear that an investment return in a RRIF below four per cent is inadequate as one’s income and capital will decline in absolute terms from age 65 onward. Indeed, the mathematics of an RRIF require a compound annual return of eight per cent to deliver a long term income stream that keeps pace with two per cent inflation; the targeted inflation goal of the Bank of Canada’s monetary policies. This return could be achieved using Government of Canada bonds when the withdrawal rates were set in 1992, but today this return of eight per cent cannot be generated using low risk, fixed income investments.

With the market decline in returns, RRIF holders are forced to expose themselves to equity-like returns and risks. In response, RRIF investors moved some of their money to income trusts because they met a very direct need, and when properly executed, delivered predictable eight per cent or better returns with lower volatility (risk) than the stock market.

Like private equity funds employed by pension funds, income trusts gave individual investors a degree of control over the business’s capital allocation and direction of management that were unavailable in traditional equity investment.

The crux of the issue is clear: if public income trusts are not appropriate then why are private income trusts acceptable to the government? The Finance minister did not object to the taking private of many public income trusts like Teranet and GolfTown by the Ontario Municipal Employees Pension System. OMERS, a pension fund, are benefiting from unfair tax legislation that exempts them from the 31.5 per cent trust tax whereas individual investors’ RRSPs and RRIFs are exposed to this tax

Both groups of investors, pension plans and RRSP/RRIF holders need the returns provided by the income trust structure. Why is it acceptable to Canadian taxpayers that public service pension plans, like OMERS, whose benefits are guaranteed by the tax revenues of either the federal or a provincial government, are allowed to use tax structuring that is denied taxpayers themselves? The “tax leakage” argument so much emphasized by Finance Minister Jim Flaherty was quickly shown to be incorrect by HLB Decision Economics and others like BMO Capital Markets.

Bottom line: Level the investment playing field, and give the average retail investor the same tools as the public service pension plans, by restoring income trusts.

J.A. (Sandy) McIntyre is senior vice-president and chief investment office, Sentry Select, Toronto. The company has managed income trust portfolios since 1997.

8. Suspend what you think you know about income trusts, and instead be guided by the facts

The debate about income trusts amongst policy makers and the media is rife with misinformation and the absence of facts to support the widely held misbeliefs about income trusts. Those, like the insurance companies, who sought to kill this form of competing investment product, were very well served by a “debate” that was driven by mere intuition and not by the facts. The facts about income trusts are abundant and make a very compelling case for preserving this essential form of investment. The arguments about income trusts negatively affecting government tax collection and negatively affecting Canada’s rate of economic growth and competitiveness are mere canards advanced by those with a commercial agenda. The work of many reputable groups have addressed these issues in details and found the arguments made by Jim Flaherty and those for whom he was acting to all be false.

I would recommend that anyone who is serious about wanting to materially improve Canada’s retirement income system will be well advised to temporarily suspend what they think they know about income trusts, and instead allow themslevs be guided by the facts which is the life blood of good versus bad public policy by reading any one of the following papers:

The Tax Revenue Implications of Income Trusts by HLB Economics See:

Income Trusts and the National Economy by HLB Decision Economics See:

The Inconvenient truth about trusts by BMO Capital Markets See:

Income trusts are efficient at investing, growing by PricewaterhouseCoopers

Aesop's Warning Ignored. "Much wants more yet oft loses all!" by RBC Capital Markets See:

Myth: The sky is falling... the tax threat of BCE and Telus converting See:

Income trust buyouts: Lots of activity, little tax revenue by Deloitte See:

Canadian Energy Trusts: An Integral Component of the Canadian Oil and Gas Industry Available by emailing

9. A face saving alternative for Jim Flaherty: The Marshall Savings Plan

In the event that the federal government persists in its erroneous argument that deferred taxes on retirement savings vehicles like RRSPs and RRIFs are never collected by government and therefore are excluded from any policy analysis, which is to the ultimate detriment of any policy that affects savings vehicles as RRSPs, and provided the sole basis on which the federal government was able to manufacture its claim that income trusts cause tax leakage, then a face saving solution exists that would overcome this sticking point. The Marshall Savings Plan (MSP) solution, which has been referred to in the press as “brilliant” (Diane Francis, Financial Post, January 14, 2010) [6], overcomes this problem of deferred taxes by converting these deferred taxes into today’s cash tax revenues for the government. The MSP achieves this by allowing Canadians saving for retirement to transfer their income trust holdings from their RRSP, on which taxes on income trust distributions are tax deferred into an MSP, on which taxes on income trusts distributions received by it in a given tax year are taken into income and taxes are remitted annually to the government.

A full description of the Marshall Savings Plan is available at So too are the comments from over 600 Canadians, many of them Ontario residents, who support the Marshall Savings Plan at

This comment is representative of the comments received: “"The Marshall Savings Plan is a solution to the least thought out policy by a Canadian Government in our lifetime. Losing income trusts is a true hardship for the 75% of us with no pensions."

Environics Research conducted a poll to determine Canadians’ level of support for the Marshall Savings Plan and found that 79.3% of Canadians support the Marshall Savings Plan with strong support across all regions of the country. The full results of the Environics poll are available on the home page at

10. Conclusion and Policy Recommendation

We strongly urge the Ontario government to reinstitute income trusts as an essential asset class for Canadians seeking adequate retirement income in a period of protracted low interest rates by either abolishing the 31.5% trust tax that comes into effect in January 2011, or alternatively institute the Marshall Savings Plan solution.

In either case, such a policy initiative will have enormous secondary benefits apart from dealing with the issue of providing a means of retirement income, since income trusts, will also:

provide an abundant source of tax revenue to all levels of government
make investors less susceptible and less captive to synthetic/derivative investment schemes aimed at retirees, like ABCP and variable rate annuities that are inherently flawed and subject to collapse and systemic risk , and instead direct these investments into Canada’s real economy to foster its growth
create a more level playing field between the 25% of Canadians with pensions and the 75% of Canadians without pensions
make Canadians businesses less susceptible to foreign takeovers and leveraged buyouts, as the income trust model provides the alternative means to maximize shareholder value
provide Ontario and Canadian businesses with an abundant source of domestic low cost of capital, making them more competitive and more able to grow
lessen the reliance of seniors on social programs and income supplements
allow stand alone companies to exist and flourish, rather than corporations whose model is based on hoarding excess cash, leading to increased corporate concentration of businesses in fewer hands, contributing to risks like “too big to fail” (eg Manulife and/or the banks)
reinvigorate the Canadian capital markets and reinstate the Toronto Stock Exchange on an equal footing with its competing US exchanges who list and trade MLPs, which are income trust equivalents in the US, not presently available in Canada

In closing I would like to again quote from Dwight Duncan’s letter of August 23, 2010, in which he states: “I encourage you to continue to engage with the federal government on this matter”, except however at this point we are looking to Dwight Duncan to engage the federal government on this matter on our behalf as well as on behalf of the 40% of Canadians who reside in the Province of Ontario, as the upcoming discussions on this topic will afford him, not us, with the perfect opportunity to do so.

Yours truly,

Brent Fullard
Canadian Association of Income Trust Investors/Taxpayers


[1] Leadership? Top 10 reasons why tax on trusts is a public policy train wreck. See:
[2] The ABCP black box explodes See:
[3] Inside the fortress: Drama behind Manulife's doors See:
[4] Going With the Flow See:
[5] Tax cash floods in, leaving experts at a loss See:

Wednesday, November 24, 2010

Gordon Pape in today's Star

"To this day, a few diehards continue to fight a rear-guard action in the hope that the government might have a last-minute change of heart. It won’t."
~~~~Gordon Pape

Who is Gord Pape to state our reasons for pursuing this matter? He had as much hand in covering up the Government’s lie about tax leakage as anyone, as evidenced by my discussions with him about his writings during this period. No we aren’t looking for any last minute chance of heart, but rather we want the truth about tax leakage to be known by all Canadians, which is that its a total crock of an argument advanced by fraudulent persons in the government (ie Flaherty and Carney) and blindly advanced by morons in the media (too numerous to mention)

Brent Fullard
Canadians Association of Income Trust investors/Taxpayers

Wednesday, November 17, 2010

Classified documents stolen from Bank of Canada Governor Mark Carney’s car

OTTAWA— From Wednesday's Globe and Mail - Article here

Wednesday, Nov. 17, 2010

My comment:

This is great news!

Maybe Canadians will finally learn what was behind those 18 pages of blacked out documents that Mark Carney alleges prove his case that income trusts cause tax leakage.

Maybe Carney's stolen briefcase contains that bogus analysis that leaves out the taxes paid on the 38% of income trusts held in RRSPs that Carney arbitrarily left out of his tax leakage analysis for no good reason, that if included would prove that income trusts DO NOT cause tax leakage.

See for yourself. This is Mark Carney's idea of transparency and accountability....blacked out documents as the basis to destroy $35 billion of Canadians' hard earned life savings and deprive them of investment choice, while causing a wave of foreign takeovers of trusts and the permanent loss of $1 billion+ in annual tax revenue.

This is what you get when bureaucrats like Carney lie to Canadians about matters like tax leakage. See for yourself:

Tuesday, November 16, 2010

Hill Times - Letter to the Editor

November 15, 2010

Prime Minister should look at facts on income trusts: reader

Re: “The false arguments that led to the tax on income trusts,” (The Hill Times, Nov. 8, p. 24). This article points out that our Prime Minister was led by opinion and not by fact. That makes me wonder if that is the way a country should be run. If there is no concrete evidence to back up their decisions what does that leave? The more we delay getting back to the income trust model the more our country will suffer from real tax loss. Income trusts were healthy choices for investors. They were a way for our country to grow.

Now the corporations will take over and the excess funds will go to the corporate leaders instead of the share holders. How will that create new jobs? How will that help Canada? How will that help the investor to support him/herself? Prime Minister Stephen Harper needs to look at the facts. We will respect him for that. Forgiveness is possible. It is his choice.

Robert Bertuzzi
Castlegar, B.C.

Saturday, November 13, 2010

This would be perfect for the remake of Dr. Strangelove

Too bad they aren't making a sequel to the movie Dr. Strangelove. This would be perfect

Thursday, November 11, 2010

Remember. Imagine. Act?

    I served in the Canadian Guards Regiment (1962-63) in Camp Petawawa.  I was willing to give my life for my country.  Now that I need help from my country I get totally ignored.  I have asked the Liberal Government many times to look into the Income Trust fiasco.  Yet, nothing happens.  I get no response.  What would happen if our soldiers were like that?  If they didn't respond the needs of our country what would happen?  I lost a great part of my RRSP because of the decision that was made to double tax Income Trusts.  When will someone do something about it?  Will you look into it? 
Robert B.

----- Original Message -----
From: Roméo Dallaire
To: Robert B.
Sent: Thursday, November 11, 2010 4:24 AM
Subject: Remember. Imagine. Act.

Robert --
Remembering is a duty, but how we remember is a choice.

This duty and these choices mean that as Canadians we face the world with open eyes, whether as individuals, or as a nation.

This Remembrance Day I choose to honour the sacrifice of our men and women in uniform, past and present, and their families, by imagining the world they’ve fought to make possible.

It is a world without child soldiers; where cluster munitions and landmines no longer litter countrysides. It is a world where the threat of nuclear proliferation and future genocides have ceased to exist.

These ideas may seem bold. Even unbelievable. But consider this.
Until 1957, the soldier was known only as an instrument of war. That year, a Canadian, Lester B. Pearson, imagined a soldier could be an instrument of peacekeeping, too.
One bold idea, one cause, and one nation had the power to change how peace is kept.
This Remembrance Day, we can choose to honour our men and women in uniform, and their families, by recognizing their sacrifice. But we can also do more than that.
We can imagine that the world our soldiers fight and die to protect is possible.
And we can build it to honour their sacrifice. Because that, too, is a choice.

To mark this important day, please take a moment to watch this short video message honouring Canada’s soldiers.

LGen the Honourable Roméo Dallaire, (ret’d), Senator (Quebec)