Monday, March 1, 2010

Professor Booth's attempt at Rebuttal

Professor Booth was the person acting as Flaherty’s shill on tax leakage on the lame CBC piece this past Friday on income trusts that was more cover-up than it was expose, which is what it was supposed to be.

Bruce: thanks for sending this and I guess thanks to Professor Booth for providing some attempt to justify what he said on CBC.

Where do I start?

What makes this reply specifically nonsensical is Professor Booth's comment about pension funds and limiting their role in owning income trust for some arbitrary reason predicated on the false assumption about tax leakage, since the pension funds are the only tax deferred group that can now own income trusts and not pay the 31.5% tax, or are we supposed to pretend that piece of political horse-trading with the pension funds to buy their compliance never took place, or pretend that OMERs only paid $2 billion to buy Teranet for the privilege of paying the 31.5% tax, which it will not? Ditto all the other takeouts of trusts by pension funds.

Next. As a Professor of Structured Finance surely the Professor is aware of the concept of "tax arb", which is exactly what the government created when it taxed RRSPs at 31.5% and pension funds at zero under the Orwellian Tax Fairness Plan and which allows these pension funds to act in a predatory fashion and exploit average investors misfortune to garner a risk free windfall profit by taking these trusts private and evading the 31.5% tax and thereby capturing the value lift between intrinsic value (in the hands of the untaxed pension fund) and artificially depressed public trading value ( in the hands of the taxed public investor)

Next. The comment about BCE and Telus being the government's motive is true, however the Professsor's acceptance of the government's argument that it would have lost tax revenue as a result of these conversions is not correct, as a simple math exercise proves that billions more in tax revenue would have been collected had these companies converted to trusts. See:

Next. The part about escaping corporate taxes is the old false canard about tax leakage which is a complete hoax argument that is concocted by the government by leaving out all the taxes collected in RRSPs, and given that 38& of trusts are in RRSPs, this is like leaving out Western Canada when doing a survey of Canada and is the difference between tax leakage and tax neutrality, or the difference between knowing what you are talking about and repeating somebody else's lies and faulty analysis (Jack Mintz) versus those whose work on this matters is credible and complete, namely HLB Decision Economics, Professor William Stanbury of UBC, BMO Capital Markets, CIBC World Markets. RBC Capital Markets, Deloittes, PricewaterhouseCoopers all of whom have concluded there is no tax leakage and have published reports that have said so, as early as late 2006.

Next. His comment about "tax losses" in pension funds is completely refuted by Finance Minister Jim Flaherty himself, who when confronted by one of the few intelligent business reporters in Canada pointed out to Jim Flaherty that the LBO of BCE was no different than an income trust of BCE and especially since it was now going to be owned by a pension fund and a couple or three US Private equity firms, Jim Flaherty said words to the effect of "yes but we all know that the pension funds ultimately pay out these monies to the pension beneficiaries who pay taxes". Evidently "everybody" excludes Professor Booth?

Or perhaps I have taken the wrong interpretation of what Professor Booth is saying when he states that " Of course this lost tax would have to be made up by tax increases elsewhere." and he isn't fear mongering about raising the GST or some such thing to compensate for the alleged tax leakage from income trusts, but is actually acknowledging that a business as an income trust raises just as much tax for government (but at the investor level) as does that same business as a corporation (except some at the investor level and some at the business level)?

Next and most galling is the comment at the end about what he claims investors thought they were buying and the returns that they experienced. This is patent nonsense of the worst kind and I am less inclined to feel sorry for Professor Booth for the simple fact that this is so wrong as to be misrepresentation, and I could cite any number of studies to refute thus point but will only cite one report to refute this false claim, namely Professor Booth's own published work of 2008 which had this to say about income trusts:

"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."

As for his comments about the "sad" performance of the last 18 months, what is he talking about, as he is completely contradicting the findings of his 2008 report which stated " income trusts outperformed equities and bonds by a wide margin over long period of time.", which is the actual truth and not the line he is now attempting to spin, as if that point would have been any form of justification for the government lying about tax leakage and/or killing income trusts which has been extensively lobbied for by the insurance industry to make people be more captive to investment garbage like ABCP and more specifically Manulife's Income Plus that wasn't even hedged and almost brought Manulife crashing to the ground.

I will end with a skill testing question for Professor Booth, the Rotman School's CIT Chair in Structured Finance. What percent of Manulife's book of variable rate annuity products like Income Plus is presently unhedged and thereby represents systemic too big to fail risk for Canada's largest life insurer?


On 2/28/10 11:39 PM, "Bruce Benson" wrote:

> Brent, you will find this interesting.
> -----Original Message-----
> From: Laurence Booth [mailto:Booth@Rotman.Utoronto.Ca]
> Sent: Sun Feb 28 2010 7:01 PM
> To: Bruce Benson
> Subject: RE: CBC interview regarding questions for the politicians
> I was out of the country so am unaware of what part of my interview was
> reported on CBC.
> However the government acted for two reasons 1) pension funds were
> increasingly buying income trusts since provincial laws were changed to
> effectively give them protection from unlimited liability plus they were
> included in the TSX 2) Telus, BCE and parts of Encana were on the verge of
> converting to an income trust structure.
> The result is that large parts of corporate Canada would escape corporate
> income tax and the income would flow increasingly to tax preferred pension
> funds (or RRSPs) and foreign investors where there would be no offsetting
> personal income tax capture. The point is not the tax that was lost but the
> tax that would be lost as a result of future conversions. Of course this
> lost tax would have to be made up by tax increases elsewhere.
> I don't know whetther all my interview was broadcast but I stated explictly
> that there would be no significant tax implications for ordinary tax paying
> Canadians, since the dividend tax credit would largely offset the imposition
> of the distribution tax. Of course since big institutions sold off income
> trusts after the tax was imposed those ordinary investors suffered a capital
> loss of about 15%.
> Income trusts are equities not fixed income securities and the sad fact is
> that investors were sold these as a bond equivalent not realising that they
> were equities and gains and losses of this order of magnitude are normal in
> the equity market. Sadly the experience of the last 18 months has reaffirmed
> this.
> Best wishes
> Laurence Booth
> ________________________________
> From: Bruce Benson []
> Sent: February 27, 2010 5:01 PM
> To: Laurence Booth
> Subject: CBC interview regarding questions for the politicians
> Prof. Laurence D. Booth
> (
> J. L. Rotman School of Management
> University of Toronto
> 105 St. George Street
> Toronto, Ontario
> Canada M5S 3E6
> Dear Mr. Booth;
> I had the opportunity of watching and listening to your comments regarding
> the CBC broadcast last night regarding Questions to the Politicians. These
> questions came from many Income Trust investors who want justice and who
> were given the opportunity to voice their concerns during this period of a
> prorogued parliament. Unfortunately no justice was served due to this
> broadcast. It was filled with misleading comments some of which I believe
> came from you. You stated that the whole tax base would be at risk or part
> of it was at risk. Can you please justify why and how you came to this
> conclusion? Where is your proof? Perhaps you subscribed to this way of
> thinking because you believed what Flaherty and Harper were saying. Did you
> do any kind of analysis to support your position and/or the government's
> position? If not, you should publically be brought to task for your
> downright misleading comments. Reports by HLB Decision Economics, BMO, RBC
> and PwC seem to contravene your statements. Therefore your comments that
> there was a "possible risk to the tax base (or significant part of it) due
> to income trusts" is a fallacy. Since the implementation of the so called
> Tax Fairness Plan there has been real tax leakage where there previously was
> none. Seems you and many others are stuck in a time warp created by
> Flaherty/Harper. You are doing nothing to support your position except by
> resorting to the same old government hype and lies. I do believe that Mr.
> Brent Fullard is one of the few pillars standing up against government
> rhetoric and lies. You sir, are doing nothing to dispel the lies and lift
> the burden of ignorance in Canadian society. As a professor I would have
> expected more.
> Yours truly
> Bruce Benson
> Calgary AB


Dr Mike said...

F--k me---I am so pissed-off , I have almost nothing to say.

If these are the kind of idiots we are dealing with , then no wonder this thing was & is so screwed-up.

I thought this guy , because of his academic standing , would have a better understanding of the situation.

I was wrong.

Dr Mike Popovich

Dr Mike said...

Now that I have calmed down , 2 last points.

First : Within our retirement accounts we now have trusts that have or will convert to corporate structure--as such we will now have dividend payers within accounts designed only for interest bearing issues (which trusts were) -- this leads to a further loss on our part as there is no dividend tax credit within these accounts & double taxation will ensue (another inequity which gov`ts refuse to correct) --there must be a correction of this situation as this has happened thru no fault of our own---the Marshall Plan comes to mind.

Second : Professor Booth refers to the fact that investors did not realize trusts were not equities--this point is completely invalid as it was gov`t interference within the financial markets that caused the loss & not investor stupidity---it is one thing to be so bone-headed that you lose your investment cash & it is completely another if the gov`t stepped-in to force the issue.

Dr Mike Popovich

Anonymous said...

Dr Mike : " F--k me---I am so pissed-off , I have almost nothing to say.

If these are the kind of idiots we are dealing with , then no wonder this thing was & is so screwed-up."

We are dealing with some idiots, some dishonest politicians and university professors and a bunch of ignorant MPs.
Big business did not like " Income Trusts " and they said it loud and clear to Harper and Flaherty. In come Trusts competition for them was too much to bear. They were not ready to hike dividends, share the profits with the owners and keeping control of the cash-flow allows them to finance their power trips.

Yes Dr Mike, we deal with idiots, dishonest people, liars and a great number of ignorants.
That's the way it is and we have to accept the fact that big business has power and access to our elected members while we ordinary citizens all we have to do is pay our taxes and be considered as small change.

I do hate the way things are unfolding in Canada today.
I have no respect for politiancs betraying their word and serving big business and lying to the vast majority to acheive their goal.

You are pissed-off ? You are not alone and my furor is growing....

Anonymous said...

Bruce thank you for his work on this one. And of course to Brent for doing such a great job on "de-coding" Professor Booth's response. Love the skill testing question.

I think all of us would be interested in his answer to the skill testing questions. Maybe his answer will come in the form of 18 blacked out pages? ... LOL.

I think we also know Professor Booth's inherent bias ... it looks like he is a full time U of T staff, so he would be entitled to a company pension plan.

Hmm pension plans at University institutions? Who manages them? How easy is it to get full time teaching status these days? Perhaps Dr. Booth would have changed his stance if he were a part timer with no pension.

Best wishes back to him - for where he is going he is going to need those best wishes more than trust investors.