Layton: Preserve power of PM to black out tax leakage analysis

Strip PM of power to prorogue parliament: Layton
By KEVIN CONNOR, QMI Agency

NDP Leader Jack Layton is demanding that prime ministers lose the ability to prorogue parliament.......but is still cool on the PM having the power to lie to Canadians about tax leakage and destroy $35 billion of seniors’ nest eggs in the process.

Michael Ignatieff same as Stephen Harper on key issues

This is the conclusion I have drawn as well, given Michael Ignatieff’s willingness to let Harper lie to all Canadians about tax leakage with impunity. What’s with that? I wouldn’t want to accuse Ignatieff of “just visiting”, but Ignatieff’s total silence on Harper’s $35 billion income trust fraud is deserving of the charge of “just facilitating’? Tell me I am wrong. Better yet, prove it:

Michael Ignatieff same as Stephen Harper on key issues

By Haroon Siddiqui
Editorial Page
Toronto Star
Sun Feb 28 2010

Who would have guessed that there would be such fury across the land over the proroguing of Parliament? Shutting down the House and the Senate proved the proverbial last straw – one arrogant act too many by a Prime Minister who had long been getting away with doing the opposite of what he had promised Canadians.

We're all now familiar with Stephen Harper's sins: ignoring the law on a fixed election date; making 33 appointments to the Senate that he wanted to reform; crushing independent oversight institutions and individuals; imposing unprecedented secrecy; running government by executive diktat; implementing ideological funding cuts, and so on.

His other sins are not all that well known, yet – opting into the gold-plated pensions he and his Reformers used to scoff at; failing to set up a promised independent appointments commission; and making judicial appointments without much public scrutiny, by naming or elevating 311 judges, a third of the nation's federal judiciary, while rendering more than half the country's 17 judicial vetting committees defunct, according Lawyers Weekly.

While most prime ministers centralized power in their office, none did as much as he. His predecessors also prorogued Parliament to suit their partisan purposes but none in as egregious circumstances as he – when faced with a certain defeat in the Commons and when badly cornered by the opposition on the conduct of a war in the middle of that war. Yet he was allowed to get away, scandalously in the first instance, by a Governor General not sure of herself.

On just about every one of the issues listed above, a majority of Canadians have been disapproving of Harper, according to polls. Yet on the one poll that counts – party preference – his Conservatives have not lost much ground. There was some slippage over the proroguing issue but not enough to make a big difference.

That's a killer verdict on Michael Ignatieff.

Explanations/excuses have been proffered – his lack of political antennae due to his long absence from Canada, and his political inexperience, exacerbated, first, by his sudden ascension to the Liberal throne, through backroom machinations against Stéphane Dion and, second, by an amateurish staff (one of whom, Rocco Rossi, having abandoned that ship, now wants to be our mayor).

But Ignatieff's problem is more fundamental.

While many Canadians do not like what Harper stands for, what does Ignatieff stand for? Little or nothing.

Operating on the dictum that the only thing he has to do is to wait for the government to defeat itself is to risk waiting forever. He has yet to articulate a plan for the economy and Canada's place in the world.

But even that does not fully explain his failure.

He may be too compromised by his own record on too many issues of deep concern to Canadians to be an alternative to Harper.

Take the turmoil surrounding the Harperites' ambush of Rights and Democracy.

Its new directors did not like the agency's funding of groups that probed the Israeli record on human rights during the war on Gaza. But Ignatieff is hardly in a position to, say, call for the resignation of the chair, Aurel Braun. It was Braun who escorted Ignatieff on April 13, 2008, to the Holy Blossom Temple, where the Liberal leader had gone to apologize for saying that Israel may have committed a "war crime" in bombing the village of Qana during its 2006 invasion of Lebanon.

Take bigger issues, such as Afghanistan.

Ignatieff was gung-ho about the military mission from Day One, seeing it as part of American Empire Lite. How can he offer an effective critique of the current contradictory American policy of a military surge while at the same time promising to militarily abandon Afghanistan? He may love that policy but it's not any different than Harper's and contradicts majority Canadian sentiment.

Take the Afghan detainee issue. That's about torture, and Canadian complicity in it. Ignatieff, having been for "coercive interrogation," is in no position to offer a moral critique.

Omar Khadr is about torture and about Guantanamo Bay.

Maher Arar was about torture.

The cases of three other Arab Canadians, whose detentions in Syria and Egypt are back in the headlines with the release of parts of the report by former Supreme Court judge Frank Iacobucci, are about torture.

And we have not even mentioned Iraq.

With the return of Parliament Wednesday, Ignatieff needs to find ways to differentiate himself from Harper on those and similar issues of human rights and the rule of law that go to the core of the collective Canadian conscience.

Haroon Siddiqui writes Thursday and Sunday. hsiddiq@thestar.ca

Harper's chances of being right are as good as Flaherty's were: 50%

We have a government who operates with the accuracy and mindset of the flip of a coin, except they never have to bear the consequences. We do.

Today:

Team Canada heading into Sunday's gold-medal match
The Canadian Press
February 27, 2010 ]

“Hockey nut Harper predicts Canadian win:

Yesterday:

Income-trust crackdown: The inside story
Globe and Mail
Nov. 02, 2006

“You have to either leave it alone or fix it,” Mr. Flaherty shrugged Wednesday.

Post script: Any one with half a brain could have told Flaherty his income trust decision would end in disaster. The probability of that was 100%.

How the Liberals (under Dion) used to define democracy

It is over a year now that Michael Ignatieff has been the leader of the Liberal Party. As the former Liberal Candidate for Whitby-Oshawa in the 2008 election I was afforded the unusual opportunity, along with less than 1,000 other Canadians to select the new interim leader of the Liberal Party in early 2009. I readily cast my vote for Michael Ignatieff who then went on to be acclaimed the Leader of the Liberal Party as the only candidate at a convention in May 2009.

I cast my vote in favour of Michael Ignatieff, based on the conversations he and I had when he came to campaign with me for a day during the 2008 election. It was my understanding that Michael Ignatieff believed in the following definition of democracy, as contained in the Finance Committee report of February 2007, as the Finance Committee’s Number One recommendation arising from the Public Hearings on Income Trusts:

RECOMMENDATION 1: It is imperative that a democratic government be as transparent as possible when levying a new tax so that it can be held to account by its citizens. The Committee, therefore, recommends that the federal government release the data and methodology it used to estimate the amount of federal tax revenue loss caused by the income trust sector.

Twelve months have now passed and I have heard nothing from Micahel Ignatieff whatsoever on the matter of Stephen Harper lying to all Canadians about tax leakage from income trusts. Nothing. The only cause of blacked out documents that I ever hear or see Michael Ignatieff champion is the cause of the blacked out documents concerning possible abuse of Afghan detainees. Why would Michael Ignatieff pursue one such case of blacked out documents and not the other? I don’t get it. This should not be interpreted as my suggesting that any one issue is more or less important than the other. The act of government’s lying to its citizens and covering up those lies is what is important. Stephen Harper could be lying to Canadians about something as banal and trivial as whether he has sex with Monica Lewinsky. The subject of the lie is not what determines importance, it is the act of lying that determines the importance as well as the public’s ABSOLUTE right to know to know the real truth from those who are elected to represent their interests, and not somebody else’s interests.

Furthermore, when you have a pattern of lying, then the case against the liar becomes so much easier to expose and heightens the need to know, as we may be dealing with a serial liar. So why is Michael Ignatieff pursuing Harper’s lies about possible Afghan detainee torture, but has gone dead silent on the matter of Harper’s blatant lie about tax leakage? What gives? Are some Harper lies acceptable to Michael Ignatieff and members of the Liberal caucus, whereas others are not? Do the Liberals not see the immense value of connecting the dots between Harper;s apparent lies about Afghan detainees and Harper’s lies about tax leakage, that I connected as long ago as April 26, 2007. See: “Of blackouts and bluster”, at: http://caiti-online.blogspot.com/2007/04/of-blackouts-and-bluster.html

If so, how are these differences defined by the Liberals as between lies that are left unchallenged and those worthy of pursuit? What is the process whereby it is determined that some lies will be pursued with vigour and others allowed to persist? Whose interests are taken into account when making such judgments? Where do Canadians interest come to play, if at all, in making these seemingly arbitrary decisions? Much would be learned about the inner workings of the Liberal Party and who really pulls the strings by knowing the answer to this fascinating question. I suspect knowing the answer would not serve the Liberal party well, so my advice is for them to start doing what is incumbent upon them to do, namely pursue all of Harper’s lies with equal vigour and resourcefulness.

However, this is a question that Michael Ignatieff needs to answer and a decision he soon needs to make, as I am beginning to have my doubts about whether his definition of democracy and leadership differs from mine. My definition of democracy and leadership is determined by the resoluteness with which a person who leads the Liberal Party pursues the following. I have seen nothing to date from Michael Ignatieff to suggest he meets my test, of:

“It is imperative that a democratic government be as transparent as possible when levying a new tax so that it can be held to account by its citizens. The Committee, therefore, recommends that the federal government release the data and methodology it
used to estimate the amount of federal tax revenue loss caused by the income trust sector.”

I look forward to being proven wrong. A good place for the Liberals to start, would be by calling for the implementation of the Marshall Savings Plan in Budget 2010, as it is a win win win for all Canadians and a win win win for the Liberals if they have their heads screwed on straight.

Professor Stanbury on "the notably flawed estimates of Jack Mintz" ergo Mintz colleague Professor Booth

Professor Booth is the person who likes to spout Stephen Harper’s tax leakage dogma on CBC, at the CBC’s behest:

Prof. Laurence D. Booth (Booth@rotman.utoronto.ca)
J. L. Rotman School of Management
University of Toronto
105 St. George Street
Toronto, Ontario
Canada M5S 3E6

Dear Mr. Booth:

You may wish to read this entire evisceration of Jack Mintz’s tax leakage hokum by UBC Professor William Stanbury or simply read the conclusion. The entire evisceration follows the conclusions, here:


5. CONCLUSIONS

Mintz’ much-quoted estimate of tax revenue losses for 2006 assuming that both Telus and BCE converted to income trusts ($1.1 billion) was highly questionable for two reasons. First, that figure was for both federal and provincial governments. Mintz (2006b) stated that his estimate for the federal government was $726 million (compared to Finance’s estimate of $500 million). Second, even that figure was grossly over-estimated because—as noted above-- both BCE and Telus had said publicly that they expected to pay little or no cash taxes over the next few years. Given their size, and the availability of data, an individual calculation should have been used for each company.
Perhaps the best summary response to Mintz’ (2006a) is the testimony of Dennis Bruce before the House of Commons Finance Committee on February 1, 2007. Based on his much superior methodology, Bruce (2007a) told the Committee that the Department of Finance (whose estimate for 2006 was smaller than Mintz’) was “sharply overstating the tax leakage.” He said, “based on our overall analysis, we conclude the following: federal tax leakage for income trusts for 2006 was $164 million, not the almost $0.5 billion [$500 million] stated by the department; and ongoing tax leakage for income trusts post-2010, after taking into account the legislated tax changes, is approximately $32 million a year, about 5% of the department's estimate.”

Note that in a memo dated September 21,2006, Bruce concluded that when deferred taxes and the latest changes in corporate income taxes are taken into account, ”more taxes will be received (on a present value basis) from income trust conversions than would have been received under the corporate form” (HRD/HLB Decision Economics (2006b).

After the Minister of Finance announced further reductions in the corporate income tax in October 2007, Dennis Bruce (2007b) pointed out that had the reductions come a year earlier, they “would have all but eliminated the perceived tax leakage issue without the punitive distribution tax on income trusts.”

It appears that with respect to the estimation of the federal revenue losses claimed to be attributable to income trusts, a sort of Gresham’s Law prevailed. The notably flawed estimates of Jack Mintz were far more influential in the Department of Finance in 2006, and in the newspapers, compared to the professionally far better ones by Dennis Bruce of HDR/HLB Decision Economics. This may have contributed to the public policy train wreck that was the high tax on income trusts (Stanbury, 2008). Of course, there is still the possibility that the “tax leakage” argument was merely a diversion to conceal the real motivation for the tax.




Tuesday, June 9, 2009
Review of Jack Mintz’ Estimates of the Tax Revenue Losses Attributed to Income Trusts
By W.T. Stanbury, Professor Emeritus, University of B.C.
June 9, 2009

1. INTRODUCTION

The purpose of this paper is to examine carefully the papers by Prof. Jack Mintz (formerly of the University of Toronto, now at the University of Calgary) in which he made estimates of the tax revenues lost due to the income trust form of business organization compared to the standard business corporation. I do this largely because Mintz’ estimates in 2004 and 2006 appear to have been influential in shaping the federal government’s policies toward income trusts. Certainly his 2006 estimate was much cited by the Minister of Finance as justification for the 31.5% tax on income trusts announced on October 31, 2006. As I will make clear, Mintz’ estimates are flawed and some of the flaws are serious indeed.

The paper is organized as follows. Section 2 briefly explains why the estimation of revenue losses due to income trusts (if any) is a difficult task. Section 3 provides a critique of Aggarwal and Mintz estimate of the revenue losses said to be attributable to income trusts in 2004. Section 4 examines Mintz’ revised estimates of revenue losses for 2006,including those claimed due to the proposed conversion of BCE Inc. and Telus Corp. to income trusts.. Section 5 presents my conclusions. The references follow.


2. COMPLEX PROBLEM

The calculation of the effect on tax revenues of two different forms of business organization is technically difficult. It requires deep knowledge of a complex (and dynamic) system.

First, one needs to assemble large amounts of data—see HLB Decision Economics (2004) which was able to do this without calling on the Department of of Finance. (see footnote 2)

Second, the results are sensitive to the assumptions (uncertainty). It is essential to examine the effects on the revenue loss of different assumptions. (HLB Decision Economics, 2004, was exemplary in this regard.)

Third, the estimated losses should be based on the effective (not nominal) rate for the corporate income tax. It varies considerably by sector. There was a big difference between the overall average rate used by Aggarwal and Mintz (2004) and HLB Decision Economics (2004), for example.

Fourth, the analysis needs to differentiate between at least three kinds of unitholders for tax purposes. For example, foreigners pay only 15% on the income from income trusts, while Canadians holding units outside an RRSP must pay the full marginal personal income tax rate—often over 40%. There are other problems which I omit for reasons of space.

In addition, there are conceptual roadblocks to understanding the problem of the different revenue stream for two different forms of business organization. Initially, one is inclined to accept the “tax leakage” argument because income trusts—which function essentially like a corporation-- pay no tax at source in contrast to business corporations. A careful policy analysis, however, indicates that with the inclusion of deferred taxes, the net difference in tax revenues at the federal level was far less than claimed by the Minister of Finance or by Prof. Mintz in his two studies. Indeed, as noted below, there may have been no leakage at all if it was properly measured.


3. Aggarwal and Mintz Study, 2004

In September 2004 , Lalit Aggarwal and Jack Mintz, published, “Income Trusts and Shareholder Taxation: Getting It Right,” in the Canadian Tax Journal, Vol. 52(3), May 2004, pp.792-818. I now describe the key points that need to appreciate about this paper.

First, the main focus of the paper was on “whether income trust arrangements that have exploited the non-neutral treatment of equity and other financial flows create specific economic distortions that undermine the efficiency of capital markets in Canada” (Aggarwal and Mintz, 2004, p.794). The much cited estimates of so-called “tax leakage” were only part of the paper, although they are the focus of my comments. Aggarwal and Mintz(2004,p.801) emphasized that “ numerous complexities are inherent in estimating the integrated tax impact of income trusts; the HLB [Decision Economics,2004]study emphasizes that estimates are highly uncertain and difficult to make.”

Second, the Aggarwal and Mintz (hereafter A&M) estimate of revenue losses is for both federal and provincial governments and for 2004. Neither of these facts are stated in any of the tables, nor in the conclusion. One gleans these crucial facts from the abstract at the start of the paper. The fact that the A&M estimate is for BOTH levels of government is never mentioned by any one who uses their estimate of tax revenue losses said to be attributable to income trusts. They attribute the losses solely to the federal government ---and that includes the Minister of Finance and his officials when they testified before the Commons Finance Committee on January 28, 2007. The significance of this point came two years later when Mintz (2006a, p. 690) stated: “Overall, the tax revenue loss to government is not large compared with current annual federal and provincial revenues of almost $500 billion.” Thus he is making it clear that his estimate is for both levels of government!

Third, A&M argue that deferred tax revenues related to income trusts ought to be included in the estimate of the tax consequences of income trusts. “An analysis of the tax revenue impact of income trusts must extend beyond the evident reduction of the corporate tax base. There is a commensurate increase in the personal income tax base because trusts distribute pre-tax cash flow as more highly taxed interest rather than as dividends or capital gains to unitholders. These distributions are taxable at personal marginal income tax rates that are substantially higher than the otherwise applicable corporate tax rates” (Aggarwal and Mintz, 2004, p. 802).
This point is ignored by the proponents of the A&M estimate of revenue losses. The inclusion of deferred taxes was NOT the position of the Department of Finance which Dennis Bruce points out is a based on a short- term, annual budget perspective, and not that of a broader and longer-term policy analysis---see HLB Decision Economics (2004).

Fourth, A&M make a serious error in the calculation of deferred taxes. They state: “As long as tax rates do not vary over time and the income trust’s risk-adjusted returns are no different from returns on alternative investments, the present value of taxes owing on registered savings plans is zero, implying that the income is equivalently exempt. We assume this to be the case when we empirically assess the tax implications of income trust arrangements” (Aggarwal and Mintz, 2004, p 799).
The effect of A&M’s assumptions is to assign a value of zero to the present value of deferred taxes. The authors cause confusion when they do not record this amount in their summary table and when they do not discuss the point when summing- up their results.

But a key assumption here is almost certainly wrong. The growth in the value of assets within RRSPs (and other tax deferral accounts) will almost certainly exceed the appropriate discount rate. That means that the present value of deferred taxes is positive. Dennis Bruce’s analysis shows that the inclusion of these deferred taxes make a huge differences in the estimate of the tax consequences of income trusts (HLB Decision Economics, 2004).

Fifth, A&M’s best guess estimate of “tax leakage” due to income trusts at $ 400 million to $600 million for 2004 for federal and provincial governments combined. The authors properly do a sensitivity analysis. They show that the estimate is very sensitive to the assumptions about the vale of certain data, notably the effective rate of the corporate income tax. A&M use a much higher effective rate than does HLB Decision Economics (2004). The effect of that choice is to increase A&M’s estimate of the revenue losses. The uncertainty is important as Aggarwal and Mintz (2004,p811) indicate in their conclusions: “Although we have arrived at an estimate of $400 million to $600 million in tax benefits associated with income trust structures, we believe that there is a wider range of possible numbers.”

Sixth, A&M mis-state a very important result of Bruce’s study. A&M (2004, p.801) state that Bruce estimates the revenue loss for 2003 at $213 million if deferred taxes are ignored, and $150 million if they are included. Table 8 in Bruce’s study (HLB Decision Economics, 2004), however, indicates that for 2003, the revenue loss for the federal and provincial governments is $154 million ignoring deferred taxes and plus $72 million if deferred taxes are included. That means income trusts did not create net revenue losses of the federal government in 2003 (or 2002 or 2004) - they had a net positive effect on revenues when referred taxes are taken into account, as they should be. Thus A&M made a serious error in describing contrary results by another researcher.

Seventh, A&M do not separate the tax consequences for federal as opposed to provincial governments. That is most unfortunate, because their estimate of the revenue loss is usually attributed solely to the federal government. Bruce failed to do this as well in HLB Decision Economics (2004). This was to result in much confusion in the subsequent debates because the Department of Finance much-cited estimates of revenue loss were only for the federal government.

4. MINTZ’ ESTIMATES IN 2006

Introduction: In October 2006, Prof. Mintz published a new estimate for tax revenues losses for federal and provincial governments for 2006 in the Canadian Tax Journal (Mintz 2006a). In that piece he also extended that estimate to assume that Telus and BCE converted to income trusts as they had announced they would in September and October 2006, respectively. The editor stated that, “The article was written on the eve of the government’s decision to discourage conversions of incorporated businesses to income trusts, announced on October 31, 2006.”

Mintz (2006b) published an op ed. in the Globe and Mail on October 18, 2006 summarizing Mintz (2006a). The day before, Mintz was interviewed by a reporter for the Globe and Mail in an article published on October 17, 2006. A few weeks later, Mintz (2006c) published another summary of Mintz (2006a).

Mintz (2006a): Here are my comments on this article. First, Mintz emphasizes the growth in the income trust market since 2004: “(EBITDA) of income trusts are estimated to be $18.7 billion by September 2006, based on growth in income trust issuances. Payments to third parties are estimated to be $3.1 billion, and to unitholders, $11.9 billion. With the Telus and BCE conversions, EBITDA are estimated to be $29.1 billion; third-party payments, $4.8 billion; and payments to unitholders, $18.5 billion.” Thus he estimated that the planned conversion of the two telephone companies would increase trust EBITDA by 55.6%.

Second, Mintz states that the estimate for federal plus provincial revenue losses in 2004 was $500 million. In Aggarwal and Mintz (2004) the “best guess estimate” was put at $400 million to $600 million.

Third, Mintz (2006a) estimated the federal plus provincial tax revenues losses for 2006 (but excluding the effects of announced plans of Telus Corp and BCE Inc. to convert to trusts made on September 11 and October 11, 2006, respectively) to be $700 million.

Fourth, when he discusses the differential tax treatment of three types of trust unit holders, he notes that 39% of the value of units are held by Canadians in RRSPs and other tax deferral accounts. He then indicates that the gross revenue losses in this category “could be offset by an annualized revenue gain arising from a higher yield on trust investments and larger pension and RRSP withdrawals.” Notice the tentative nature of this very important statement by use of the word “could”. In fact, Mintz did this in his calculations of the net revenue losses. Later, Mintz (2006a) states: “if it is assumed that a higher yield on units of income trusts provides greater retirement income in the future for investors, additional personal tax revenues, on an annualized basis, would be $200 million for current trust conversions, resulting in a net loss of $500 million annually” for this category of unitholders. However, he does not state what discount rate he used for this calculation. This suggests that Mintz took the present value of personal income taxes applied to withdrawals from tax deferred accounts into his calculation of net revenue losses. But the point is not clear.

In the view of a former Finance official, “Mintz failed miserably to address this crucial issue,” i.e. deferred taxes (Fortin, 2009). (For a more detailed discussion, see Fortin, 2006.) Yet Mintz was critical of the Department of Finance’s failure to include deferred income taxes in its estimate of “tax leakage.” In an e-mail to Brent Fullard, the president of CAITI, on November 28, 2006, Mintz said: “I do want to point out that there is a serious flaw in some analyses especially on the taxation of pension and RRSP accounts. Finance was not right to treat the impact as zero.” Most interesting—because I could not find anything in print by Mintz to this effect. Yet Mintz evidently made a considerable effort to get his negative views about income trusts into the public domain.

Fifth, it appears, however, that Mintz (2006a) had changed the way he deals with the deferred personal income taxes on units in RRSPs. Recall that in Aggarwal and Mintz (2004), the assumptions for these deferred taxes resulted in a present value of zero. Now, they amount is $200 million per year annualized. Quite a difference. Yet, there is no discussion of this important change in methodology and /or assumptions. Why? Surely, this point should be made clear to one’s academic and professional colleagues.

Sixth, Mintz (2006a) states that the combined federal and provincial tax revenue losses in 2006 – if both Telus and BCE become income trusts as planned —would be $1.1 billion. This estimate is hugely overstated as the superior work of Dennis Bruce (2007) makes clear. Both Telus and BCE stated that they expected to pay little or no corporate income taxes for the next several years. That means that if the two companies converted, the revenue loss would be much smaller than Mintz suggests. Apparently, he applied the average effective rate of corporate income tax for his previous set of companies to the two huge additions to his data base. Given their size, and the availability of company-specific data, these two corporations merited being handled by examining their specific situations. If he had done so, he would have reported a vastly lower estimate for revenue losses because the two corporations expected to pay little or nothing in corporate income taxes. The inclusion of BCE and Telus would have lowered the average a great deal. Professor Yves Fortin, on behalf of CAIF, estimated in December 2006 that “it might well be that no tax leakage would be found if such a study was done properly” (Globe and Mail, December 19, 2006). Dennis Bruce made essentially the same point based on extensive research—see below.

Seventh, Mintz said that in his estimates that “federal and provincial corporate taxes are estimated to be 9.7 percent of EBITDA, taking into account corporate tax changes and provincial capital taxes.” Note that this is lower than the figure of 14.7% used in Aggarwal and Mintz (2004, p. 801). Mintz (2006a) provided no explanation, but it may reflect the reductions made in the federal corporate income tax between 2004 and 2006.

Eighth, Mintz (2006a) does not provide a breakdown between federal and provincial tax revenue losses. This distinction was lost on the Minister of Finance who later repeatedly claimed that with the expected conversion of Telus and BCE, the federal government would have suffered “tax leakage” of $1.1 billion in 2006. Finance Minister Flaherty was careless with these numbers—and always on the side of exaggerating the revenue losses. I could find no published comments by Mintz correcting the Minister.

Ninth, Mintz (2006a, p.690), very usefully put the claimed tax revenue losses into perspective as follows: “Overall, the tax revenue loss to government is not large compared with current annual federal and provincial revenues of almost $500 billion. However, as the income trust sector grows, it will be important to evaluate whether this tax cut [the claimed $1.1 billion] is more efficient than other growth-oriented policies…” PricewaterhouseCoopers (2006, pp. 22-23) pointed out that Canada was running a budgetary surplus and – more important – it appeared to have a “structural surplus.”

Fortin (2009) noted that Mintz (2006a) failed to properly address the important difference between nominal tax rates and the actual or effective rates; that Mintz repeated the error in the Consultation Paper by ignoring the fact that income trust distributions are based on cash flow rather than profits and that the taxes later collected from unitholders is on a higher amount of income. Further, Fortin (2009) noted that Mintz (and Finance) ignored the fact that the Government of Canada had moved from cash to full accrual accounting in the Budget of February 2003. Thus deferred taxes do not adversely affect the budget position, but they may affect its cash position.

Mintz (2006b): The Globe and Mail op ed. by Mintz added a new piece of data not contained in Mintz (2006a), namely that about $726 million of the $1.1 billion in tax revenue losses in 2006 would be lost by Ottawa, the rest by the provinces. Note that this was less than two weeks before the new tax on income trust was announced.
To put the estimates of revenues losses into perspective, Mintz (2006b) noted that the market capitalization of Canadian income trusts was $210 billion or 11% of the total capitalization of the Toronto Stock Exchange at the time. Further, he noted that Ottawa and the provinces annually collect $50 billion in corporate income taxes.
Mintz(2006b) said the previous Liberal government’s reduction in the effective tax rates on dividends (which affected only taxable Canadian investors) with which the provinces followed suit – removed any tax advantages for Canadians holding trust units outside pension plans, RRSPs or RRIFs. Taxable Canadian investors hold 39% of income trust units. The income taxes they pay makes up for any losses in corporate income taxes. But still Mintz made no reference to deferred personal income tax revenues as an offset to corporate income tax losses in estimating federal revenue losses. Yet, as noted above, Mintz privately criticized Finance for failing to include deferred taxes in its estimate of tax leakage.

5. CONCLUSIONS

Mintz’ much-quoted estimate of tax revenue losses for 2006 assuming that both Telus and BCE converted to income trusts ($1.1 billion) was highly questionable for two reasons. First, that figure was for both federal and provincial governments. Mintz (2006b) stated that his estimate for the federal government was $726 million (compared to Finance’s estimate of $500 million). Second, even that figure was grossly over-estimated because—as noted above-- both BCE and Telus had said publicly that they expected to pay little or no cash taxes over the next few years. Given their size, and the availability of data, an individual calculation should have been used for each company.
Perhaps the best summary response to Mintz’ (2006a) is the testimony of Dennis Bruce before the House of Commons Finance Committee on February 1, 2007. Based on his much superior methodology, Bruce (2007a) told the Committee that the Department of Finance (whose estimate for 2006 was smaller than Mintz’) was “sharply overstating the tax leakage.” He said, “based on our overall analysis, we conclude the following: federal tax leakage for income trusts for 2006 was $164 million, not the almost $0.5 billion [$500 million] stated by the department; and ongoing tax leakage for income trusts post-2010, after taking into account the legislated tax changes, is approximately $32 million a year, about 5% of the department's estimate.”

Note that in a memo dated September 21,2006, Bruce concluded that when deferred taxes and the latest changes in corporate income taxes are taken into account, ”more taxes will be received (on a present value basis) from income trust conversions than would have been received under the corporate form” (HRD/HLB Decision Economics (2006b).
After the Minister of Finance announced further reductions in the corporate income tax in October 2007, Dennis Bruce (2007b) pointed out that had the reductions come a year earlier, they “would have all but eliminated the perceived tax leakage issue without the punitive distribution tax on income trusts.”

It appears that with respect to the estimation of the federal revenue losses claimed to be attributable to income trusts, a sort of Gresham’s Law prevailed. The notably flawed estimates of Jack Mintz were far more influential in the Department of Finance in 2006, and in the newspapers, compared to the professionally far better ones by Dennis Bruce of HDR/HLB Decision Economics. This may have contributed to the public policy train wreck that was the high tax on income trusts (Stanbury, 2008). Of course, there is still the possibility that the “tax leakage” argument was merely a diversion to conceal the real motivation for the tax.

FOOTNOTES:

1. HDR, a leading architectural-engineering-consulting firm, acquired HLB Decision Economics Inc. in March 2005. On published studies after that point relating to income trusts, HLB conducted business as HDR|HLB Decision Economics, Inc.

2. HLB Decision Economics collaborated with the Department of Finance in the summer of 2005 to come up with core set of assumptions and data that both could use in future studies.Finance used that data in coming up with the estimates reported in the Consultation Paper of September 2005. Bruce states that HRD/HLB used the data (with one adjustment) to publish its November 2005 report.The difference in the estimates of revenue losses was due to (i) deferred taxes and (ii) an update to the assumptions by HDR?HLB to fix a reporting error.He notes that it was a collaborative effort to come up with the assumptions for preparing estimates of revenue losses, but his firm’s work wasdone for industry as input to the public consultation process established by Finance Minister Goodale (e-mail to author,June 10,2009).

Note that the paper is labeled as being in the May 2004 issue of the Journal, but it was not available until September. It is common for academic journals to come out later than the date stated on the cover. An earlier version was Aggarwal and Mintz (2003).

3. See the Department of Finance’s “Consultation Paper” of September 8,2005 which describes its methodology and provides an estimate of $300 million for federal tax revenue losses for 2004.

4. More precisely, Bruce refers to “governments” throughout his study (HLB Decision Economics, 2004). Given the types of taxes under review, local governments would not be included.

5. The Department of Finance produced an estimate of $300 million for 2004 (released on September 8, 2005) and $500 million for 2006 (in the “Backgrounder” published on October 31, 2006). While the former study cited HLB Decision Economics (2004), the latter one did not, but cited Mintz’ work instead. Yet, Finance’s estimate for 2004 was based very largely on HLB’s methodology—except for the matter of deferred taxes which Finance refused to include. Further, Finance’s estimate for 2006 also relied on the basic methodology devised by HLB Decision Economics (2004).

6. I note that Mintz (2006a) did not provide the rich detail that was provided in the HLB Decision Economics (2004) or HDR/HLB Decision Economics (2005).

7. In addition, 39% are held by what he calls taxable Canadians, and 22% are held by foreigners. Each of the three categories is subject to different taxes and/or different tax rates. There is no question that there was true tax leakage in the case of foreigners’ holding trust units. They paid only 15% on the distributions they received—far less than Canadians. See Fortin (2006).

8. A close observer of the income trust tax, who insisted on anonymity, said: “Mintz came to change his views on such leakage---but he did so only at gatherings of tax specialists. He has never published anything revising what he said.”

9. The company sources on cash taxes that would have been available to Mintz in September 2006 when he was doing his paper were the following: Telus: the last update for “annual guidance” was August 4, 2006 BCE’s latest formal guidance for 2006 prior to October 2006 was dated August 1, 2006 in the “Management Discussion and Analyses” associated with the second quarter financial statements.


REFERENCES

Aggarwal, Lalit and Jack Mintz (2003) “Income Trusts and Shareholder Taxation: Getting It Right” (Working Paper presented at a Capital Markets Institute Conference, University of Toronto, September 2003).
Aggarwal, Lalit and Jack Mintz (2004) “Income Trusts and Shareholder Taxation: Getting It Right,” Canadian Tax Journal, Vol. 52(3), May, pp. 792-818.
Bruce, Dennis (2007a) Testimony Before the House of Commons Finance Committee, February 1,2007 (summarized in a news release the next day by HDR/HLB Decision Economics Inc.)
Bruce, Dennis (2007b) “Trusts Redux: Tax Policy for Halloween,” (unpublished op ed., October 31, 2007; available on the Canadian Association of Income Trust Investors website).
Fortin, Yves (2006) “TAXATION OF INCOME TRUSTS: IS IT WORTH THE COST AND THE TURMOIL?” (Unpublished paper, November 2006; this paper was posted on the websites of the Canadian Association of Income Funds (CAIF) in Toronto and the Coalition of Energy Trusts in Calgary. It was also distributed at the hearings of the House Committee on Finance on February 1, 2007).
Fortin, Yves (2009) E-mails to the author, June 1, 2009.
HLB Decision Economics (2004) “Risk Analysis of Tax Revenue Implications of Income Trusts,” (March 11, 2004) Appendix in HLB Decision Economics Inc., “Tax Revenue Impacts of Pension Fund Investments in Business Trusts,” (Study for the Pension Investment Association of Canada, April 14, 2004).
HDR/HLB Decision Economics Inc (2005) “Tax Revenue Implications of Income Trusts,” Report Commissioned by the Canadian Association of Income Funds, November 23, 2005.
HDR/HLB Decision Economics Inc (2006a) “Income Trusts and the National Economy,” Report commissioned by the Canadian Association of Income Trusts, April 2006.
HDR/HLB Decision Economics (2006b) “Chronology of Income Trust Tax Leakage Estimates, September 21, 2006 (Memo prepared for Canadian Association of Income Funds).
Mintz, Jack (2006a) “Policy Forum: Income Trust Conversions – Estimated Federal and Provincial Revenue Effects,” Canadian Tax Journal, Vol. 54(3), pp. 685-690.
Mintz, Jack (2006b) “Income Trust Conversions: Estimated Federal and Provincial Revenue Effects,” Globe and Mail, October 18, 2006.
PricewaterhouseCoopers (2006) “Income Trust Report” (Toronto, December 11, 2006). [www.pwc.com/ca/eng/ins_sol/publications/itr_1206.pdf], 46 pp.
Stanbury, W.T. (2008) “Leadership? Here’s Ten Reasons Why the Tax on Income Trusts Was a Public Policy ‘Train Wreck,’” The Hill Times, Sept.22, 2008, p12.

How can CBC represent Professor Booth as “neutral” when he gets funding from the federal government?

This arrival of Professor Booth, as the CBC’s latter day expert on “tax leakage” is more than little bit curious on many fronts. How can CBC hold out Professor Booth to CBC viewers as being “neutral” when he gets funding from the federal government, as evidenced by the funding he received from the Social Sciences and Humanities Research Council of Canada (SSHRC) in 2008 to write the paper entitled “Capital Market Developments in the Post‐October 1987 Period: A Canadian Perspective.”?

The SSHRC reports to Parliament through the Minister of Industry.

Even more curious is the fact that this paper discusses the Canadian capital markets success story known as income trusts, contained below. Correctly, Professor Booth states about income trusts that “Investors have been attracted to these high distributions, and income trusts outperformed equities and bonds by a wide margin over long period of time.”

This superior market performance of income trust is what made them the target for destruction by lobbying that was undertaken by Canada’s life insurers who wanted to kill their competition for Canadians’ retirement investment dollars and by CEOs who wanted to avoid the increased discipline required of income trust managers.

Even more curious is that in Professor Booth’s account of the income trust market and its arbitrary termination by Jim Flaherty in October 2006, there is no mention whatsoever about the reasons for Jim Flaherty’s destruction of this highly favoured and uniquely Canadian investment success story? So who prompted Professor Booth to make the completely erroneous claims on CBC of this patent nonsense, in which Professor Booth falsely claimed:

“the whole of the corporate income tax base was possibly at risk, or at least a significant part of it was at risk.” which seemed to indicate that the government took the proper action to tax income trusts.

Judge for yourself:


Capital Market Developments in the Post‐October 1987 Period: A Canadian Perspective
October 2008
Laurence Booth (University of Toronto)
Sean Cleary (Queen’s University)*

* The authors thank the Social Sciences and Humanities Research Council of Canada (SSHRC) for financial support provided for this project.


Finally, we discuss another alternative investment product, income trusts, which are unique to Canada. Income trusts can essentially be viewed as tax‐efficient equity securities that pay out most (all) of the operating income of an underlying operating company that is owned by the trust, which is structured so that it owns all of both the debt and equity securities of the underlying operating company. The capital structure of the operating company is set up so as to eliminate (or nearly eliminate) taxes at the corporate level, provided that the operating income is distributed to the trust unitholders.

Investors have been attracted to these high distributions, and income trusts outperformed equities and bonds by a wide margin over long period of time.

The growth of the income trust market in Canada during the early 2000s was dramatic. As of March 31, 2006, there were 238 income trusts listed on the Toronto Stock Exchange (TSX), up from 73 in 2001, and only a handful in the mid‐1990s. This growth
was reflected in the total market capitalization of these instruments, which grew from $1.4 billion in 1994 to $192 billion by March of 2006, accounting for approximately 10% of the quoted market value of the TSX. In fact, income trusts became the major source of equity initial public offerings (IPOs) in Canada during the 2000’s, often accounting for over half of all new equity IPOs. As a result of this growth and the importance of these instruments, the TSX fully incorporated income trusts into the S&P/TSX Composite Index as of March of 2006.

On October 31, 2006, Finance Minister, Jim Flaherty, announced unexpectedly that the distributions made by newly created trusts would be taxed at prevailing corporate tax rates, and that this new tax would apply to existing trusts beginning in 2011. This
announcement was made just as Canadian telecommunications giants Telus Corp. and BCE Inc. were in the midst of preparing to convert from the traditional corporate structure to the income trust structure, which would have added another $50 billion or
so in market cap to the income trust market. Not surprisingly, both BCE Inc. and Telus Corp. subsequently cancelled their plans to convert to the trust structure, and many other planned income trust IPOs were also cancelled. Indeed, the October 31st
announcement brought a dramatic end to the growth of income trusts, and put their long‐term future in jeopardy.

Dear Professor John Wilkes Booth, assassin of income trusts and professor at the Rotten School of Mismanagement

Prof. Laurence D. Booth (Booth@rotman.utoronto.ca)
J. L. Rotman School of Management
University of Toronto
105 St. George Street
Toronto, Ontario
Canada M5S 3E6

Dear Mr. Booth:
 
I am a senior citizen who has had the value of my retirement savings severely diminished by the unexpected and unwarranted tax being imposed on income trusts.
 
In addition, I have lost a portion of my retirement income stream because this proposed tax has caused some income trusts to either disappear or curtail their distributions. Also, when this tax comes into effect, and the income trust investment option disappears, I will the loose the majority of my current investment income stream.
 
I will then be forced to survive on a small pension income with few options to derive reasonable returns from my reduced retirement savings.
 
As the government has imposed this income trust tax fiasco on Canadian’s based on the false concept of tax leakage, I am extremely distressed by your misleading comments on CBC Question Period last night.
 
You stated “the whole of the corporate income tax base was possibly at risk, or at least a significant part of it was at risk.” which seemed to indicate that the government took the proper action to tax income trusts.
 
I believe that your statement was misleading at the least and possibly a complete fabrication at the most and requires public clarification.
 
Could you please explain with clarity, the exact risk related to the corporate income tax base?
 
I for one do not believe that you can as there was no risk to the tax base; in fact real damage to the corporate tax base has now occurred as a result of this fallacious income trust tax proposal.
 
I believe you have committed a great injustice to all Canadians for making this misleading statement on public television and I believe that you should either prove that there was a risk or apologize publically for making such a serious misleading statement.
 
I look forward to your response.
 
Sincerely;
 
Gerry XXXXX (a senior citizen)

Prof. Booth: Re: Your comments on CBC concerning tax leakage from income trusts

February 26, 2010

Prof. Laurence D. Booth (Booth@rotman.utoronto.ca)
J. L. Rotman School of Management
University of Toronto
105 St. George Street
Toronto, Ontario
Canada M5S 3E6

Mr. Booth:

You, Don Francis and myself had occasion to be interviewed by Havard Gould of the CBC for a segment on The National that aired this evening that dealt with the matter of the government’s taxation of income trusts. This policy was based on the government’s allegation that “income trusts cause tax leakage”.

On the CBC segment, you reaffirmed the government’s allegation by stating “the whole of the corporate income tax base was possibly at risk, or at least a significant part of it was at risk.”

Please clarify what you mean by “at risk”. At risk of what? The insinuation you are making on national television is that fewer taxes were going to be collected by Ottawa as a result of conversion of corporations to income trusts, such as BCE and Telus.

What is your proof for making such statements, as the only proof offered by the government to back it’s claims are 18 pages of blacked out documents? These documents have been blacked out for the sole purpose of hiding the fact that the government’s tax leakage analysis is grossly flawed, a fact that I was made aware of by Dennis Bruce of HLB Decision Economics on November 1, 2006 by way of his authoritative publication on this matter entitled “The tax revenue implication of income trusts”.

Dennis Bruce’s revelation about this gross error in the government’s analysis about tax leakage was reaffirmed to me in an email from your former colleague Jack Mintz, who wrote to me on November 26, 2006 stating:

“I do want to point out that there is a serious flaw in some analyses especially on the taxation of pension and RRSP accounts. Finance was not right to treat the impact as zero.”

Quite apart from Jack Mintz and Dennis Bruce, we have the authoritative findings of those like Professor Stanbury of UBC and groups like PricewaterhouseCoopers, RBC Capital Markets,. BMO Capital Markets, CIBC World Markets and others, who refute completely the government’s claims of tax leakage, however your comments indicate that you are supportive of the government’s claims of tax leakage. If so, please provide your proof of same and the academic justification for the claims you made on tonight’s CBC broadcast.

Thank you very much.

Yours truly,

Brent Fullard
(Volunteer) President and CEO
Canadian Association of Income Trust Investors/Taxpayers
www.caiti.info

647 505-2224 (cell)

Cc Havard Gould, CBC
Esther Enkin, CBC
Don Francis
William Stanbury
Dennis Bruce
Gordon Tait, BMO
Dirk Lever, RBC
Ross Sinclair, PwC

NDP feeling the heat of their fraudulent past

Elaine: Thank you for sharing this with me. I would simply respond to this letter, that is rife with nonsense, by asking Denise Savoie where is the NDP Party’s proof of tax leakage, and what is remotely fair about income trusts being double taxed in RRSPs when they aren’t double taxed when held in a pension plan? The issues, like “overvaluation” that Denise attempts to defend her party’s action with are complete revisionist history and to suggest that Diane Urquhart is widely respected is nonsensical in the extreme. Thanks again for sharing Brent


On 2/26/10 7:36 PM, xxxx wrote:

Mr. Fullard;

FYI

Elaine

----- Forwarded Message ----
From: "SavoiD@parl.gc.ca"
To: Elaine xxxxx
Sent: Fri, February 26, 2010 11:33:12 AM
Subject: RE: Income Trust Issue

February 26th, 2010

Thank you for writing to share your thoughts regarding income trusts. The issue of income trusts has been a difficult issue for many, as I know the Conservative government’s decision to tax trusts has had a serious impact on some of my constituents who were perhaps over-invested in trusts at the expense of a balanced portfolio. I’m deeply sorry if this has hurt you. In the months after the Finance Committee hearings into income trusts and before the recent Liberal motion, I spent time researching the issue and seeking out the wisest financial advice at my disposal to arrive at a decision.

Some of you have asked why I supported the Conservative plan to tax income trusts. I would like to take this opportunity to set the record straight and to share my thought process with you.

I must first clarify that I do not agree with the manner in which the Conservatives have proceeded, namely, misleading Canadians into thinking trusts would not be taxed due to a promise they made during the last federal election. This promise effectively served to reinforce the false impression that all was well with income trusts. However, before the election, in 2005, members of the Liberal party were openly speculating about whether to tax income trusts and, at the time, my NDP colleague, Finance and Financial Institutions Critic, Judy Wasylycia-Leis proposed a different way of proceeding to reduce the risk to seniors’ income. Unfortunately, her proposal did not get the support of either the Liberal or Conservative parties at the time.

The NDP has always favoured a full and comprehensive public discussion of income trusts and called for consultation on this issue long before the federal government broke its election promise not to tax trusts. In June of last year, well before the October 31st announcement of the Conservative’s so-called “Tax Fairness Plan”, the NDP asked the federal government to take action in order to protect small Canadian investors. Judy Wasylycia-Leis held a news conference in June 2006 and again in October to call for a closer look at the trust sector and to propose a moratorium on all new trust conversions in order to conduct an in-depth study into the reporting practices of income trusts as well as their impact on government revenue, pensions and industrial growth – a move that was supported by the National Pensioners and Senior Citizens’ Federation, the Small Investor Protection Association (SIPA) and the leading forensic accounting team of Rosen and Associates, among many.

The NDP’s call for a moratorium was made necessary by a series of well-documented and systemic problems with the income trust structure that had already been identified in reports by various renowned financial institutions, including Standard and Poors and the Canadian Securities Administrators, as well as in a seminal research report authored by well-known independent financial analyst Diane Urquhart, among others. These problems include inaccurate reporting of both the value and the returns of income trusts in addition to the conversion of many corporations to a trust structure in order to avoid paying corporate income taxes, causing so-called “tax leakage” and entailing future erosion of Canada’s corporate tax base.

One of the many individuals who questioned the reported value of income trusts was Paul Hayward, legal counsel for the Ontario Securities Commission. He warned that the use of the ill-defined term “yield” could potentially mislead investors into thinking they were receiving a higher return or gain on the capital they invested.

Similarly, research into income trusts conducted by Standard and Poors, the Accountability Research Corporation and the Canadian Securities Administrators (a consortium of 13 provincial and territorial securities regulators) concluded that trust payouts were largely overvalued and had significantly less cash available for distribution than reported by management.

In light of these facts and the testimony of experts in the trust sector during the House of Commons Finance Committee’s review of income trusts, the NDP agreed that the federal government had little choice but to tax trusts and we could not in good conscience reverse the position we took before and during the last federal election. The NDP has been clear and consistent in its position on income trusts and has always supported a full review of the investment opportunity that these trusts provide.

Contrary to the claims of lobbies representing certain groups of investors, the issue of foreign takeovers is not limited to the income trust sector. The flurry of Canadian corporate buyouts is being seen in other sectors as well. What's more, according to statistics provided by Standard and Poors, foreign ownership of Canadian trusts already made up 33% of trust units before the announcement of the Tax Fairness Plan. Correspondingly, the Department of Finance Canada estimated that foreign-owned trusts accounted for 50% of all energy trusts in early October 2006. Having said that, foreign takeovers are a matter of concern to me and my NDP colleagues and I have proposed measures to reduce the occurrence of this phenomenon.

As for the assertion that the changes to legislation regulating income trusts will result in greater tax leakage, the Canada Revenue Agency employs a number of tax avoidance tools, known as the General Anti-Avoidance Rule (GAAR) and “thin capitalization” rules, which deal with private equity groups that may seek to buy up trusts and load them with debt in order to keep from paying taxes. These rules apply to both trusts and corporations and are designed to prevent such tax leakage.

Furthermore, since the modifications to the income trust sector will only enter into effect in 2011, many analysts predict that income trusts will increase in value and recover most of the losses they suffered immediately following the unveiling of the Conservative Tax Fairness Plan. In fact, reports show that the average gain in the trust sector during the month of April 2007 alone, just six months after the announcement of the new trust tax, is 4.5%, a significant increase in value. The latest figures indicate that the value of trusts has rebounded and is now within 5% of its October 31st price.

The NDP’s overriding focus throughout the income trust debate has been to find a solution that best serves the interests of ordinary Canadians. We have been consistently fighting for fairer taxes and against corporate tax loopholes and in our opinion, the practices of many income trusts deserved a closer look. Our call for a moratorium on new income trusts was motivated by a desire to allow adequate time to resolve the many problems in a way that would cause the least damage to seniors’ income security. Once that option was no longer available, we followed the course of action that we thought was best with the most complete information as we could gather from experts.

I felt it was important for me to share my rationale in supporting the NDP’s position on income trusts. I hope you will understand that this was not a frivolous decision or one that was entered into lightly. Although I believe that the market will eventually rebound, I sincerely regret the financial hardship inflicted on Canada’s seniors, particularly those who were ill-advised to invest in already overvalued income trusts.

Once again, I thank you for your message.


Best regards,


Denise Savoie
MP Victoria




From: xxxx
Sent: February 18, 2010 10:34 PM
To: Savoie, Denise - M.P.
Cc: brent.fullard@rogers.com
Subject: Income Trust Issue


Ms. Savoie ;

This article by Mr. Fullard says it all! http://caiti-online.blogspot.com/2010/02/todays-hill-times-why-kill-golden-goose.html .

I would appreciate it if this government action, which has negatively impacted the financial situation of my family and the families of thousands of other Canadians, be given your immediate attention. I would also appreciate receiving you assurance that the 'Marshall Plan' will receive your support.

Sincerely,
Elaine xxxx

Please vote for my latest budget proposal

Vote HERE

Brent Fullard @ 2/25/2010 10:50:41 PM

Eliminate the tax treatment of executive stock options as capital gains (since no capital is at risk) and taxed at half the rate of income from employment (which is what these stock options gains really are), and commence taxing these stock option gains at full rates of taxation.

This will raise tax revenue, increase tax fairness, and end the subsidizing of compensation schemes that were at the root cause of the global financial meltdown.

The Global Financial Meltdown was caused by two things: (1) Lack of regulation that allowed CEOs to “go places” that they shouldn’t, and (2) compensation schemes that incentivized certain minded CEOs to “go there”

Although it IS the role of government to establish regulatory frameworks it IS NOT the role of government to determine compensation in the private sector, However there is one measure that is incumbent on both the US government and the Canadian governments to abolish as part of a thoughtful response to the Global Financial Meltdown and to ensure that it does not happen again, which is to abolish the capital gains treatment of Executive Stock Options.

These people have no money at risk and yet are being taxed (at half the rate of employment income) as if they did, via the capital gains treatment that they are arbitrarily accorded. It is Executive Stock Options and the lopsided risk/reward outcome that they provide that forms the large bulk of what these CEOs are paid. These CEOs behaviour should be expected to derive from how they are paid, and it often does as they take risks that shareholders left to their own devices would not (eg decision by CEO of Manulife not to hedge large book of market exposure caused by selling synthetic investment products), however tax policy should not be part of the system that rewards and induces this type of bad behaviour. Taxpayers should not, in effect, be ubnderwriting compensation schemes that are at the heart of inducing bad societal outcomes, like the Global Financial Meltdown.

All of Liberal’s budget demands are directly addressed by the Marshall Savings Plan.

Hey, four out of four ain’t bad?

At the invitation of local resident William Barrowclough, I attended a pre-budget meeting in Peterborough last night that was hosted by Liberal Candidate Betsy McGregor and featured Liberal Finance Critic John McCallum. It was probably a good thing that I did attend, on several fronts, given the comment I received from John McCallum who said words to the effect” “I hadn’t thought of it that way before”.

What John McCallum was referring to was the point I made to him at the meeting that the pending double taxation of retirement income from income trusts in RRSPs (but not pension plans!) is going to become the economic equivalent of Canada losing 2.5 million full and part time jobs in less than a year’s time.

This was relevant to last night’s discussion for the simple fact that John began the evening by describing what the Liberals to four priorities for the upcoming 2010 Budget will be and the basis on which the Liberal’s will evaluate the Budget namely:

(1) Jobs. Will jobs be protected/created
(2) Pensions. What will be done to address pension crisis
(3) Social Policy. Will any cuts to social programs be done “fairly”?
(4) Deficit. How successful are the measure in addressing the budget

The Marshall Savings Plan directly, and SIGNIFICANTLY addresses all four of these measures in ways that no other single policy measure could. I will address them in the reverse order of the Liberals priorities, and end with a description of how the Marshall Savings Plan addresses the Liberal’s number one priority, namely jobs

(4) Deficit: The MSP will generate $6 billion in annual tax revenue, 38% of which is presently going unrecognized by the Harper government, if you adopt the government’s flawed methodology behind their bogus “tax leakage” argument and 100% of which is at risk of being permanently lost ig the remaining 169 trusts suffer a similar fate to the 51 trusts that have been taken over to date through non-taxable means that has seen $1.5 billion a year lost by all taxpayers.

(3) Social Policy. Double taxing retirement income from income trusts held in RRSPs but not pension funds is the antithesis of fairness and is regressive to those people in society who can least afford it, namely the 75% of Canadians who are without an employer pension, who already have ebnough of a challenge facing them in their attempts to provide themselves with retirement income, without the government creating a grossly unlevel playing field, more than already exists by the diubke taxation of income trusts and the denial of pension income spltting. The MSP addresses this inequity head on, in a way that is tax revenue positive, Name one other policy that can do that?

(2) Pensions: The MSP is a major pension initiative that addresses the needs of all Canadians and especially the 75% of Canadians without pensions and is revenue positive to boot. This is why the MSP was able to achieve the phenomenal level pf publci support of 79.6% acceptance in a recent Envioonic Research Poll. Name one other serious measure that could be implemented by the Liberals or any other party that is able to achieve that kind of public support.

(1) Jobs: Evidently John McCallum did not read my email of February 2, 2010 or my blog of the same day that reads:

Flaherty’s INCOME trust tax is like 2.5 million looming job losses
Tuesday, February 2, 2010
http://caiti-online.blogspot.com/2010/02/flahertys-income-trust-tax-is-like-25_02.html

What is a job, if not a stream of INCOME, in return for work invested by Canadians in the Canadian economy?

What is an income trust, if not a stream of INCOME in return for money invested by Canadians in the Canadian economy?

For the 2.5 million Canadians who wisely invested in profit sharing income trusts ( rather than some synthetic derivative investment like Manulife’s (unhedged) Income Plus or some ABCP house of cards), owning a diversified portfolio of INCOME trusts was like having one of the most secure jobs in Canada. Almost like being an MP or an unelected Senator, but on a much smaller scale.

For some, this income stream represented a part time job, that gave them discretionary income to improve their standard of living, send their kids to college, help pay for their parents retirement home costs, etc. In less than year’s time, these people have received there MASS LAYOFF NOTICES from Stephen Harper and Jack Layton and will lose this stream of income as these trusts get taken over by pension funds who are exempt from the tax, or foreigners like state owned Korean National Oil Company whose desire to make Korea more energy self sufficient appears to be more important to Ottawa than Canadians having the stream of income they need to live on? Hello NDP?

For others, and probably the vast majority of INCOME trust investors, INCOME trusts represent a full time job, as the INCOME from their profit sharing income trusts are the sole means of their daily survival and standard of living.

Don’t take my word for it, Read the comments from Canadians across the country who are deeply afraid and frightened by the “job losses” that are before them caused by Jim Flaherty’s callous recklessness, not to mention incompetence and deceit, by going to : http://marshallplan.ca/index.html


There you will see comments like this:

“When the income trust tax proposal becomes effective in 2011, I believe the cash flows from these investments will dissipate and I will be left with no viable investment alternatives. This will result in insufficient funds for my wife and me in our retirement years. There are many hundreds of thousands retirees in the same position as I, who would like to see this unjustifiable income trust tax proposal revoked.’

And this:

“Income trusts are the only way we can support ourselves in retirement. If the government approves The Marshall Savings Plan it will at least give many of us a chance of financial freedom instead of personal bankruptcy.”

And this:

“Canadians need Income Trusts as an investment choice. There is no honest or reliable return on capital by any other investment. Most retirees do not have pensions and when one considers the "Baby Boom" generation, there's going to be a disastrous decline in the standard of living as they retire. This will negatively affect the economy beyond all belief. As GDP falls, so will government tax revenue. The Marshall Plan is all the "stimulus" that is required and it costs nothing. Wow! Who can't get their head around that?”

All of these people’s income is going to fall off the cliff in LESS than a YEAR”S time! Do people not know how devastating that will be for these people as well as the ENTIRE Canadian economy? In today’s Globe, Flaherty is getting advice in the headline article of the Report on Business that:


Flaherty urged to keep spending taps open

Jeremy Torobin and Tavia Grant
Globe and Mail
February 2, 2010
Ottawa, Toronto —

Canada's leading private economists are urging Finance Minister Jim Flaherty to tread a cautious path in his March budget and keep spending flowing in a fragile recovery.

At a meeting in Ottawa on Tuesday, the economists will suggest Mr. Flaherty look past some of the better-than-expected data in Canada and the United States and resist moving too quickly to rein in the deficit.

The economists have boosted their projections for the economy, which Mr. Flaherty uses to shape his own assessments. They now see average economic growth of 2.7 per cent this year, according to a Bloomberg survey. That's higher than the 2.3 per cent Mr. Flaherty projected in his September fiscal update, but still well below the 5 per cent to 6 per cent that typically follows a deep slump.

“The dominant theme here is that unlike recoveries from previous recessions this one's going to be fairly slow and drawn out,” said Craig Alexander, deputy chief economist at Toronto-Dominion Bank. “I don't think the government should be tightening fiscal policy before the recovery has gained greater traction.”

In the U.S., President Barack Obama is facing intense political pressure to start taming a deficit on track to reach a record $1.6-trillion (U.S.), even as a stubbornly high unemployment rate forced him to ask Congress on Monday for another $100-billion to create jobs.

Canada, by comparison, is in a better position to carefully talk about a plan for tackling the budget shortfall that the global downturn spawned. Mr. Flaherty and newly minted Treasury Board President Stockwell Day have said the budget will include a road map to bring the budget back into balance within five years.

Most Canadian economists say outlining such a strategy is a good idea, but caution against being too aggressive.

“Unless economic growth turns out to be significantly stronger than economists like myself are projecting, the recovery won't do enough to get back into a balanced budget,” TD's Mr. Alexander said. “The budget is an opportunity to lay out a framework for what you try to do over a five-year horizon, and in that context there's a perfectly good opportunity to outline how you intend to, after the economy's gained significant momentum, get back into a balanced budget.”

At the same time, some economists are so cautious in their outlook that they say it's premature to even talk about spending restraint. Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said that even if the Parliamentary Budget Officer's recent warnings come true and Canada faces a so-called structural deficit of up to $19-billion (Canadian) five years from now, the country's debt load wouldn't be rising at a pace that increases the ratio of debt to gross domestic product.

“We're not Greece, so we don't have to impose an austerity program while the economy's still weak, or even talk about it,” Mr. Shenfeld said. “There's lots of time to adjust fiscal policy if it turns out three or four years from now we're still running a modest deficit.”

The deficit spending, and when and how to refill the hole, will be the front-and-centre topic at today's meeting, said Michael Gregory, senior economist at BMO Nesbitt Burns, not least because of nagging concerns about the effect that an aging population and health-care costs will have on long-term growth, regardless of the economic slump.

Reports late last week on both sides of the border showed Canada's economy grew at a faster-than-anticipated 0.4-per-cent pace in November and that the U.S. economy expanded at an impressive 5.7-per-cent annual pace in the final three months of 2009. Still, although both numbers caused some forecasters to increase their estimates of Canada's growth in the fourth quarter, many economists are skeptical the U.S. can keep growing at anywhere near its October-through-December pace, most of which was attributed to companies replenishing depleted inventories.

In any case, growth in both Canada and the U.S. this year will be on the strength of billions in government stimulus measures, not to mention rock-bottom interest rates, so fiscal policy makers face the crucial task of timing their belt-tightening just right because it remains unclear when the private sector will see self-sustaining demand.

Deficit reduction is important, but governments will have to walk a tightrope in the next year, said Jay Myers president and chief executive officer of Canadian Manufacturers & Exporters, which is hosting Mr. Flaherty at a conference later Tuesday in Ottawa.

“The year of recovery is going to be much more challenging for federal and provincial governments than the year of recession,” Mr. Myers said. “They basically knew what they had to do in recession. It's much more challenging now, to make the right choices.”

The balance hinges on beginning to unwind the extraordinary spending while also encouraging investments in new technology, innovation, skills development and market diversification that help growth over the long haul, he said.

Other topics that might be raised Tuesday range from new housing regulations to learning to live with the strong dollar, said Sheryl King, head of economics at Merrill Lynch (Canada).

The Finance Minister warned last month he will step in if the white-hot home resale market continues to push prices higher by tightening the rules for borrowers, such as increasing minimum down payments and shortening the maximum length of mortgages.

McGuinty wants to make Toronto an elite financial center, or did he say a center for the financial elite?

CBC reports: “At a $950-a-plate dinner this evening that pulled in about $2.16 million for his governing party” Dalton McGuinty said “Why couldn't we come together, industry and government, and commit ourselves to a strategy to make Toronto one of the world's elite financial centres?"

If that’s Dalton’s mission, then he better realize that making Toronto into one of the worlds “elite” financial centers is not aided by practices like taxing income trusts on fallacious arguments of tax leakage, or using blacked out documents as “proof”, that are more in keeping with third world countries than “elite” financial centers, unless he wants to emulate the secrecy of Swiss Banking via the use of blacked out documents? Furthermore, how does Dalton McGuinty expect to reach this lofty goal of making Toronto into an elite financial center if the products that are now being offered to investors fail to meet investors’ needs? The income trust tax was a case of turning Toronto into the financial sector equivalent of Detroit and making products that no-one wants to own. But then Dalton did bail out GM didn’t he, along with GM’s unfunded pension liability, while at the same time playing a role in nuking $14 billion of Ontarians retirement savings, since 40% of trust investors reside in Ontario and without the letter of support from Greg Sorbara, Jim Flaherty would have a harder time getting away with his tax leakage lie.

Does Dalton expect to build Toronto into an elite financial center by selling refrigerators to Eskimos, as the saying used to go? Or maybe Dalton is a big fan of Manulife selling more of its unhedged synthetic products and making Toronto into the world headquarters of the next AIG? Is that the kind of “elite” that Dalton has in mind, by supporting companies that engage in practices that Warren Buffetr considers “crazy”?

Dalton along with former Finance Minister Greg Sorbara played a sordid role in killing income trusts, which was one of Canada’s greatest, if not the greatest financial success stories. Faced with this success, Dalton along with Sorbara and Jim Flaherty along with Stephen Harper decided to quash the success known as income trusts in just the same way that Diefenbaker killed the Avro Arrrow. For Dalton McGuinty to give a speech about making Toronto into an elite financial center after playing a role in killing one of Canada’s greatest financial innovations, is as ludicrous as had Diefenbaker made a speech about making Malton into an elite areospace center after killing the Avro Arrow.

Making Toronto into an elite financial centers is exactly the point I made to the McGuinty government in an email dated March 15, 2007 to Arthur Lofsky who was a senior person in Sorbara’s office at the time. On the impact of the trust tax on Toronto’s status as a financial center, I refer you to items (2), (3), (4), (5), (6) and (7) of my email.

I get the impression from Dalton McGuinty’s speech tonight, that he just awakened to the reality that Toronto is heavily dependent on its economic well being on the financial sector. Where was he in March of 2007, when I was making this very point, and wonder who he is turning to for inspiration for tonight’s speech if not the very people like Ed Clark of TD Bank who had a commercial vested interest in killing income trusts? That move turned Toronto and Canada into the financial laughing stock of the world as captured by these words of internationally respected Denis Gartman of the Gartman letter who had these words of praise for Jim Flaherty, and by extension Greg Sorbara and by extension Dalton McGuinty:

“Canadian Finance Minister, Jim Flaherty, he of the idiotic “trust” taxation decision rendered last October 31st, which we still believe ranks as one of the worst decisions ever rendered by a person in a position of monetary authority”

Date: Thu, 15 Mar 2007 13:25:47 -0400
To:

Arthur:

Thank you for taking the time to speak with me. Our association, CAITI directly represents over 1 million Canadian income trust investors. Our website is www.caiti.info. Our request of Minister Sorbara is that he call upon Federal Finance Minister Jim Flaherty to make the proposed federal income trust taxation a separate stand alone bill and not a part of the Federal Budget to be tabled on Monday March 19th. My understanding is that federal Liberal MP David McGuinty may be raising this same matter with Premier Dalton McGuinty, sometime today or tomorrow. I am told that Alberta will be making a similar request on the part pf the 70 income trusts that reside in Alberta. Over 150 income trusts reside in Ontario.

Making the income trust tax legislation a stand alone piece of legislation was one of the three recommendations of the Finance Committee report. The first was that the government release its data and methodology that supports the assertion of tax leakage. No reports or analyses has been provided. Requests under the Access to Information Act resulted in 18 pages of blacked out documents.


Here’s the argument that has been presented to Alberta by the Canadian Association of Income Funds (CAIF) who are an issuer association:

Brent, my apologies for the slow response to your Ontario question. The message to the provinces is that under Flaherty's plan (see table attached) they will receive no incremental tax revenue until at least 2011, and even that is uncertain. (because of accumulated tax pools it is highly unlikely that many of the energy trusts will be cash taxable for many years even after 2010, assuming they are around to convert to corporate structures and this message has also been passed to Alberta Finance ) The cost-benefit argument then is quite simple - no benefit in the short-term (and perhaps even in the long-term) and a whole raft of negative consequences in the short-term. The other point that can be made is that Ontario is the home of roughly half the trust unitholders in Canada - we know that the Province of Ontario has seen a significant rise in personal tax revenues in recent years, much of it we believe coming from the hands of these same unitholders and thus if the distributions disappear where does the Province plan to generate these lost tax revenues from? (Even if investors revert to liquidation to generate revenues as an alternative, capital gain are only 50% taxable) Finally, the Liberal plan is intended to share the 10% incremental tax revenue with the provinces immediately and should be viewed as a better deal for the provinces than what Flaherty has proposed. Call me if any of this requires further clarification. Best regards. George (403-699-7367)

(1) It is the recommendation of the Finance Committee to do so.(see text in (9) below)

(2) The committee is also calling for the release of data and methodology, without which there is no government accountability.

(3) Ontario investors represent the largest block of investors in income trusts about 40% of all investors.

(4) Toronto is the investment capital of Canada. During the last ten years Toronto based investment dealers raised over $82 billion in new capital, earning underwriting fees of 5% distributed as follows (this excludes secondary trading fees)

CIBC $1,332,250,000
RBC $948,200,000
Scotia $749,900,000
BMO $526,900,000
TD $349,500,000
National $200,600,000

Total $4,107,350,000

(5) Income trusts represented over 50% of capital raised in Canada over this period. Capital raising for the income trusts market is a market dominated by domestic dealers. No foreign dealers were involved in this activity. This is in stark contrast to other capital raising where US and foreign dealers have been steadily encroaching on Canada dealers’ turf and therefore profitability.

(6) The investment management industry is also centered in Toronto. Toronto based investment managers manage dedicated income trust portfolios for over 1.3 Million Canadian. This is an important knowledge based industry. The demise of the income trust market will mean these investors will gravitate to other markets in pursuit of high yielding income returns. Most likely the bulk of this money will gravitate to the US High Yield market, and therefore US investment managers. This will seriously undermine the captive nature of this important market for Ontario based businesses, Ontario investors, Ontario investment dealers and Ontario investment managers.

(6) Approximately 150 of the 270 income trusts are headquartered in Ontario,. These trusts represent approximately 40% of the overall $210 billion market capitalization of income trusts.

(7) The reduced market price of these companies, combined with the steady cash flow nature of these businesses make them ideal targets for private equity buyers who are ready to capture the “event driven: value disparity at which they presently trade. The $35 billion loss in value creates a value opportunity, or “value arbitrage’ of about $140 million per income trust on average. This takeover wave has begun, see attached file. These buyers will debt-leverage these companies and through extensive use of the corporate deducibility of interest will divert the pretax cashflows to foreign tax jurisdictions and avoid paying taxes in Ontario and Canada.

(8) Furthermore an important and vibrant sector of Ontario’s business base will now have their head office “command and control” shifted outside of the country and their businesses highly levered with debt financing.

(9) There are considerable socio-economic costs particularly borne by seniors as a result of losing this important investment choice and source of income in a protracted low interest rate environment. See strong comments by CARP and CRIIA and others.

"CARP notes that the severe impact of the tremendous losses of retirement income due to the Conservatives’ Income Trust policy can be eased with the Liberal proposal. Losses ranging from $10,000 to $100,000 have been reported to CARP.

Regardless of the amount, such losses can create social and health crises, especially with the reduced market value of income trusts, and in some cases, lower monthly distributions - a problem which is expected to increase as the four-year tax holiday comes to an end.

This translates into lower spending power, which, in turn, affects the economy and the country's productivity. Grandfathering current Income Trusts would, at least, ensure that investors get a better monthly distribution and the opportunity to significantly reverse their losses."

(10) Text from Committee’s report:

“The proposal to tax income trusts is of such significance and has had such a devastating effect on Canadian investors that Members of parliament deserve a clear vote to best represent the interests of their constituents. The federal government should, therefore, separate it from the other sections of the Ways and Means Motion and table it in a stand-alone piece of legislation. The pension income splitting, the 0.5% reduction in the corporate tax rate in 2011 and the increase in the age credit should proceed as quickly as possible in their own separate piece of legislation”

Thank you very much,


Brent Fullard
President and CEO
Canadian Association of Income Trust Investors
www.caiti.info

647 505-2224 (cell)

John McCallum presented with petition in support of Marshall Savings Plan

This evening, William Barrowclough of Peterborough presented to Liberal Finance Critic John McCallum a petition on behalf of 3,446 supporters of the Marshall Savings Plan from across the country calling upon the government to include the Marshall Plan in Budget 2010. The occasion of John McCallum's visit, was a pre-budget consultation meeting held in Peterborough and hosted by Liberal Candidate for Peterborough, Betsy McGregor.

The bound petition package consisted of the following:


1) Signatures and Names of 3,446 Canadians calling upon the Government of Canada to adopt the Marshall Savings Plan in Budget 2010.

2) Environics Research poll of February 10, 2010 (conducted February 4 – 9th) that reveals that 79.6% of Canadians support the Marshall Savings Plan for inclusion in Budget 2010.

3) Summary description of Marshall Savings Plan as downloaded from MarshallPlan.ca, where you can also read the comments from over 700 Canadians who support the Marshall Savings Plan.

4) Full page advertisement that appears in today’s edition of Whitby This Week, the local publication of Finance Minister Jim Flaherty’s riding of Whitby-Oshawa.

5) Selected newspaper articles that are supportive of the Marshall Savings Plan (there are no news accounts that are not supportive of the Marshall Savings Plan), including the following:

Hill Times article: “ Income trusts: why kill the golden goose of tax revenue? Some 80 per cent of Canadians support the Marshall Savings Plan for inclusion in Budget 2010. Now it's the politicians turn. By Brent Fullard

Hill Times article: “ Stop the income trust bleeding: adopt the Marshall savings plan ” by Professor William Stanbury

Financial Post article: “ ’Marshall Plan' for trusts: Tories must correct income trust blunder” by Diane Francis

John McCallum was asked by William Barrowclough to present this petition to the government during that part of the daily affairs of Parliament that specifically provides for such petitions to be presented to government on behalf of Canadians, that occurs just prior to Question Period each day. Parliament will resume sitting on Monday March 1st with the budget expected to be tabled March 4th, giving ample time for Canadians from across the country to be heard on this simplest of requests. The Marshall Savings Plan will generate $6 billion in annual tax revenue for the government and will help address Canada’s pension crisis as well. Never before has a simpler decision been asked to be made, as it is a decision with no trade-offs. Only upside.

Canadians will be watching very closely.