Monday, November 29, 2010

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

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

Eagle Energy Trust flies using new structure

CTV News
November 24, 2010

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

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


OPTrust, partners create landmark REIT

Boyd Erman
Globe and Mail
Nov. 29, 2010 1

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


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

November 29, 2010

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

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

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

1. Introduction:

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

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

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

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

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

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

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

2. Flaherty’s public policy train wreck:

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

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

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

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

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

4. The sobering effects of the global financial meltdown:

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

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

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

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

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

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

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

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

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

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

6. The two greatest impediments to securing adequate retirement income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Inconvenient truth about trusts by BMO Capital Markets See:

Income trusts are efficient at investing, growing by PricewaterhouseCoopers

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

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

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

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

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

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

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

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

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

10. Conclusion and Policy Recommendation

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

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

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

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

Yours truly,

Brent Fullard
Canadian Association of Income Trust Investors/Taxpayers


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

Wednesday, November 24, 2010

Gordon Pape in today's Star

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

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

Brent Fullard
Canadians Association of Income Trust investors/Taxpayers

Wednesday, November 17, 2010

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

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

Wednesday, Nov. 17, 2010

My comment:

This is great news!

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

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

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

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

Tuesday, November 16, 2010

Hill Times - Letter to the Editor

November 15, 2010

Prime Minister should look at facts on income trusts: reader

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

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

Robert Bertuzzi
Castlegar, B.C.

Saturday, November 13, 2010

This would be perfect for the remake of Dr. Strangelove

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

Thursday, November 11, 2010

Remember. Imagine. Act?

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

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

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

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

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

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

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

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

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

Wednesday, November 10, 2010

Monday, November 8, 2010

A prime example of how "democracy" really works in Canada

The false arguments that led to the tax on income trusts
The PM, some corporate CEOs, and government advisers argued that the reason for killing income trusts was 'tax leakage.' The evidence suggests far different motives.

Published November 8, 2010
The Hill Times

The huge tax on publicly-traded income trusts announced by the Harper government on Oct. 31, 2006, involved three remarkable actions: deception, false arguments, and breach of fiduciary duty.

The deception was framed by Prime Minister Harper himself.
The main stated reason for the new tax (alleged "tax leakage") was not the real reason. It was the reinvestment, growth and competitiveness (RGC) argument put forward by CEOs lobbying efforts. This has now been revealed by Lawrence Martin in his new book Harperland. The problem became, for the PM, one of corporate governance not taxes, reports Martin.

False argument #1 was the “tax leakage” justification for the new tax. It was demonstrated to be false by Dennis Bruce of HLB/HDR Decision Economics in his testimony before the Commons Finance Committee on Feb. 1, 2007.

False argument # 2 was made by the CEOs and directors who lobbied Harper and his senior advisers in 2006. Their RGC argument was a cover story for strongly self-interested objectives. The CEOs wanted to kill the income trusts because they threatened to reduce their discretion over net income after taxes, and because some CEOs faced direct competition from trusts which had a lower cost of capital. The CEOs’ lobbying was greatly assisted by very senior officials in the federal government who were predisposed to believe their arguments.

The CEOs who lobbied the government were breaching their fiduciary duty to their shareholders. The shareholders of many corporations wanted their corporation to convert to the legal form of an income trust in order to maximize shareholder value and produce higher payouts at a time of declining interest rates. Yet the CEOs lobbied to eliminate this option—and did so in violation of their primary fiduciary duty.

Note that three types of trusts were not made subject to the new tax: Real Estate Income Trusts (REITs); Licensed Limited Partnerships (LLPs); and non-publicly traded trusts.

Lawrence Martin’s Revelation

The key passage from Martin’s new book Harperland: The Politics of Control (Viking, 2010) on the income trust tax reads: “In fact, the government’s rationale for the flip-flop—the lost tax revenues—was not the real reason for it. When the announcement came, Tom Flanagan, still in Harper’s good graces at the time, asked him the reason for the reversal. ‘Well, when I was in opposition,’ Harper replied, ‘no one told me that all the big corporations were about to convert to the income trust form of organization.’ He wasn’t as worried about tax leakage, he explained to Flanagan, as he was about corporate governance. The income trust concept was fine, he believed when used in a limited sphere. But when it was beginning to be adopted by big manufacturers and service corporations, he was persuaded that it was the wrong way to go. James Rajotte, who served as chair of the [Commons] industry committee, was of the same impression. But it was not the case Harper and Flaherty put to the public because corporate governance was too complex an issue.”

False Argument #1: So-Called “Tax Leakage”

The “tax leakage” argument, while emotive and apparently understandable by the public, was based on the Department of Finance’s seriously flawed methodology of omitting deferred taxes. Further, Finance excluded the future effects of legislated cuts to the corporate income tax, and made other errors, all of which biased its estimate upwards. When Dennis Bruce corrected all the errors and included deferred taxes, there was no tax leakage in 2006, not $500-million as Finance had said. See his testimony before the Commons Finance Committee, and the news release of HDR/HLB Decision Economics on Feb. 1, 2007. However, the Harper government apparently believed that the “tax leakage” argument met the test of Prof. Tom Flanagan’s proposition that an argument “doesn’t have to be true. It just has to be plausible.”

Decoding “Corporate Governance”

The phrase “corporate governance” quoted above is a misappropriation of a term which usually refers to “the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled,” (Wikipedia).

In the taxation of income trusts issue, “corporate governance” subsumed two quite different things. The first was the real intent of the CEOs and corporate directors who lobbied secretly in 2006. They wanted to destroy an alternative form of business organization—income trusts—that was making their life uncomfortable. The second consisted of the set of arguments—relating to reinvestment, growth and competitiveness (RGC)—used by the CEOs and directors to justify government action, not just to stop the creation of new trusts, but to eliminate this form of business organization.

The CEO’s Agenda

The hidden agenda of the CEOs who sought to eliminate income trusts—as is often the case with lobbying—was entirely self-serving. In summary terms, the CEOs wanted to preserve their enormous discretion over the actions of the corporation, particularly how excess earnings are deployed. They opposed conversion to the trust form despite the fact that such businesses attained a higher market valuation and therefore a lower cost of capital—a crucial factor in head-to-head competition.

Many CEOs were under pressure to convert to income trusts. Gwyn Morgan, recently retired as president and CEO of EnCana Corporation, a leading energy firm, said that “it is fair to say that Canadian directors and management teams have increasingly been faced with shareholders who are demanding to know why their corporations were not converting to a trust,”(The Globe and Mail, Nov. 2, 2006). Investors (particularly seniors) very much liked the idea of larger and steadier payouts of earnings , particularly when faced with a period of declining interest rates.

Why was the trust form an anathema to some CEOs? Business columnist Diane Francis (Financial Post, Dec. 2, 2006) emphasized that in the “real world…corporate managements usually deploy their cash surpluses to overpay themselves. Then they often get involved in unproductive, but tax-efficient, endeavours such as buying back stock, which, not coincidentally, also enhances the value of their own wallets. In addition, corporations use surplus cash to make sometimes foolish diversifications, acquisitions or sub-optimal investments in their own businesses.”

The key change in converting a business to the trust form was that the business is legally required to distribute annually all of its income after deducting capital cost allowance (a non-cash expense) and certain other items. Thus net new investment requires the CEO of a trust to raise money in the capital market. CEOs of regular corporations can use retained earnings (i.e., net income after taxes minus dividends).

I now discuss the lobbying by some CEOs in 2006, and after that I examine the arguments they made to kill the trusts.

Lobbying by CEOs in 2006

From the public’s perspective the trust issue “went dark” once the Harper government assumed office on Feb. 6, 2006, following the Conservatives’ repeated election promise to “never tax income trusts.” The new government made no effort to conduct a public consultation process (as had the previous Liberal government in 2005) when the trusts issue heated up again in mid-2006.

In retrospect, we learned that during 2006 certain CEOs and directors were able to lobby the minister of finance, senior officials, and even the PM. On Nov. 2, 2006, The Globe and Mail reported that “High-profile directors and CEOs, meanwhile, had approached Mr. Flaherty personally to express their concerns: Many felt they were being pressed into trusts because of their duty to maximize shareholder value, despite their misgivings about the structure,” (by Sinclair Stewart and Andrew Willis, “Income-trust crackdown: The inside story”).

The minister of finance himself revealed the lobbying by business leaders when responding to questions before the Commons Finance Committee on Jan. 28, 2007: “I had communications with these companies[not identified]… . I had directors of other companies[not identified ] talking to me and saying to me, “Jim, you know what’s happening out there. We’re being pressured to convert to income trusts by our shareholders because of a tax loophole. And is that the right way to run our businesses?” I had directors saying to me, “I don’t want to vote in favour of this corporation that I’m a publicly traded corporation that I’m a member of the board on. I’m an experienced business person. I don’t think the income trust is the right thing for this ongoing operation. But the shareholders do because they can get greater returns in that structure.”

There was no counter-lobbying in 2006. That would have allowed other views and actual facts (as opposed to mere opinion) to be heard by the government, as there had been when the Liberals reviewed the regime for income trusts in 2005 (see De Cloet, Chase, and Stewart, The Globe and Mail, Oct.11, 2005.)

The CEOs strongly preferred to exercise influence in private. Finance Minister Jim Flaherty noted that “What I find troublesome, quite frankly, is that I have CEOs of banks, and leaders on Bay Street who have said to me, privately, absolutely it was the right thing to do. But they don't go out publicly and say the same thing. And that is one of the burdens that one bears in public life,”(National Post, June 9, 2007).

The lobbying effort probably went into high gear on Sept. 11, 2006 when Telus Corporation announced its intention to convert to a trust. The intensity likely increased when BCE Inc., one of the largest businesses in Canada, announced on Oct. 11 that it was converting to a trust.

Which CEOs Lobbied?

We know the names of only a few of the CEOs who lobbied on the income trust issue in 2006.

Paul Desmarais Jr., “the well-connected chairman of Power Corp. of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico [in late March 2006 ], and told him he should act quickly to stop the raft of conversions, according to sources,”(Stewart and Willis, The Globe and Mail, Nov. 2, 2006). One of Power Corp’s largest subsidiaries, Power Financial, was facing very tough competition in the retirement products market from CI Financial which had converted to trust status in June 2005. As a trust, CI was able to raise capital at a lower cost than Power Financial which chose to remain a corporation.

Dominic D’Alessandro, CEO of Manulife Financial, was said to have met with the finance minister and argued for taxing income trusts. (He later testified before the Commons Finance Committee on Feb.1,2007.) Just like Power Corporation, Manulife was also facing intense competition from CI Financial. He was an up-from-the- street man who rose quickly within Manufacturers’ Life and made it grow rapidly. In general, he was among the most aggressive and outspoken of financial industry CEOs. D’Alessandro was then registered under the Lobbyists Registration Act, but Paul Demarais Jr. was not. (Note, however, if an executive spends less than 20 per cent of his time on lobbying activities, he need not register under the Lobbyists Registration Act.). D’Alessandro would likely have had a high level of face validity because he was the close runner-up for most respected CEO of the year in 2005 as voted by 250 of his peers.

EnCana Corporation had consulted officials in Finance as early as 2004 about putting some of its mature assets into an income trust. By the fall of 2006, EnCana on the verge of a decision to create an income trust. It would have been a huge deal (see The Globe and Mail,Nov.4,2006;and CTV News,Nov.6,2006). Gwyn Morgan, the former CEO of EnCana, but still a director, loathed the idea—despite the fact that it meant great things for EnCana’s public shareholders. Creating a trust would generate a large amount of cash for EnCana to put into exploration and development, and possibly acquisitions.

Just before the EnCana board meeting in the fall of 2006, at which the decision to create an income trust was to be made, industry insiders indicate that Morgan alerted the Finance Minister (and possibly the PM) of EnCana’s plans, and requested that the deal be blocked.

When Gwyn Morgan lobbied to eliminate income trusts, he had enormous face validity for several reasons: (i) He was one of Harper’s few close friends from the days they both lived in Calgary; (ii) As its CEO until the end of 2005, Morgan had been the driving force in the growth of EnCana Corporation and built it into the biggest independent oil and gas producer in North America. In October 2005, EnCana had a market value of $50-billion. (iii) A poll of 250 CEOs had named Morgan the Most Respected CEO among his peers in 2005, according to the 11th Annual Canada’s Most Respected Corporations Survey. (iv) On April 26, 2006, Harper had nominated Morgan to be the chair of newly-created Public Appointments Commission (PAC). However, less than three weeks later, Morgan had been rejected by the Commons Public Accounts Committee reviewing his nomination , deeming him “unsuitable” for the post. Morgan made no public complaint (although the PM decided not to set up the PAC).

The prospect of another huge income trust conversion was exploited by those intent on killing income trusts to foment a sense of alarm at the highest levels of the Harper government. The announcement of EnCana conversion would have closely followed the Telus (Sept. 11, 2006) and BCE (Oct. 11, 2006) announcements (see Stewart, Willis, and Ebner, The Globe and Mail, Nov. 4, 2006).

CCCE’s Notable Silence

At the time of the lobbying, Desmarais, and D’Alessandro were the two vice-chairs of the Canadian Council of Chief Executives (CCCE), arguably the most influential lobbying organization in the capital. However, CCCE was conspicuously quiet on a new tax that wiped out $35-billion of stock market value within three weeks. CCCE’s decision to stay silent on the tax caused considerable friction and one of its members quit—an unprecedented action.

The Reinvestment, Growth and Competitiveness (RGC) Argument

Smart lobbyists understand that they must offer arguments to persuade senior officials and their political masters to have government deliver what they want. Lobbyists also understand the importance of supplying the deciders in government with a rationale for government action that will be at least plausible to the public. The two sets of arguments may be different. In either case, the argument may be false (but appealing).

Information provided in confidence by a source close to the scene at the time indicates that the most important reason why the minister of finance, and the Prime Minister, decided to reverse the Conservatives’ promise not to tax income trusts was the belief that trusts had a lower rate of reinvestment of their earnings (because they are obligated to distribute all of their earnings to unit-holders, albeit after capital cost allowance). Capital investment is an important determinant of productivity growth which is the main basis of increases in the real standard of living. Thus—it was argued—the conversion of major corporations to income trusts would slow the rate of economic growth.

This was the argument pressed on the minister and the PM by the CEOs and directors—and it was echoed by the most senior advisors (see below). It was based on a few emotive phrases: investment, growth and competitiveness. Gwyn Morgan put it more tentatively than most when he said: “the most important concern” about the growth in the number of income trusts lay in possible decline in “national competitiveness.” He said, “research, reinvestment and growth are crucial to the future living standards of all Canadians. To the extent that trusts may have limited these things, the government had reason to be concerned,”(op ed., The Globe and Mail, Nov. 2, 2006).

He, like every CEO who made essentially the same argument, offered no hard evidence, nor any independent analysis. It was simply the conventional wisdom—but it was intuitively appealing. In my view, it was a false argument.

Contrary Evidence and Analyses

I now review the contrary analyses beginning with the formal examination into this matter by two groups. The first was global accounting firm PricewaterhouseCoopers (Income Trust Study, December, 2006). It concluded that “A review of Canada’s more than 250 income trusts indicates that trusts have been making an important contribution to the economy, investing their capital and growing their businesses at impressive rates. In 2005, trusts enjoyed (year over year) sales growth of 54 per cent to $74.3-billion, while net income improved 62 per cent to $10.6-billion, capital investment totaled $26.5-billion in 2005, or 230 per cent of net income. These findings are counter to the contention of the federal government that income trusts do not reinvest in their business and amount to a long-term-dead end for Canadian businesses.”

The second study was by the major consulting firm HDR/HLB Decision Economics (Income Trusts and the National Economy, April 6, 2006). It concluded that “The evidence amassed in this study demonstrates that the public policy concern over trusts negatively effecting productivity is not only unwarranted, but that suppressing growth in the trust sector—by means of law, regulation or taxation policies—could be tantamount to suppressing growth in the Canadian economy.”

Further, Andrew Sharpe, described as “one of Canada’s foremost productivity experts and the head of the Centre for the Study of Living Standards based in Ottawa.”… said, “I don’t really think there’s any strong evidence that income trusts are hurting Canada’s productivity.” Further, “the evidence on productivity points elsewhere: to traditional companies in Corporate Canada, whose records on investing profits in innovation and competitiveness are on shaky ground,”(Heather Scoffield, The Globe and Mail, Nov. 2, 2006).

Professors Sean Cleary and Greg MacKinnon of the Sobey School of Business at Dalhousie took exception to the CEO’s argument against trusts to the effect that “by paying out earnings and not reinvesting in their businesses they will hamper growth in the economy. It is impossible to know if this is true. While trusts generally do not reinvest their profits to finance growth, trusts can (and many do) raise external funds to finance growth by simply selling new units to investors. Most experts will agree that having to go back to the markets to raise new funds is generally beneficial since it provides discipline for managers and it prevents them from wasting resources on inefficient businesses,” (The Halifax Chronicle-Herald, Nov. 9, 2006).

Help From Senior Officials

The CEOs were aided in their efforts to kill income trusts in that their argument resonated strongly with the most senior officials advising the PM, namely Kevin Lynch, then clerk of the Privy Council, and Mark Carney who had responsibility for the income trust file within Finance.

I have been told that Mark Carney put forward the reinvestment, growth, competitiveness argument to Flaherty. Almost simultaneously Lynch made the same argument to Prime Minister Harper.

Lynch was clerk of the Privy Council from March 2006 to June 30, 2009, and formerly DM of Industry (1995-2000) and later of Finance (2000-September 2004), and believed he was a guru on RGC matters. While serving as deputy minister of Industry from 1995 to 2000, Lynch became greatly concerned about the “productivity gap” between Canada and the U.S. Lynch pushed the PMO for action. The issue morphed into the “innovation agenda,” and Lynch championed increased research spending, Internet access for schools, and the Canadian Research Chairs program, aimed at stemming the “brain drain.” ( , March 13, 2006). Thus Lynch would have been predisposed to the argument that CEOs were making against trusts.

Carney was appointed senior associate DM of Finance in November 2004. As head of the tax policy branch, he was responsible for the income trusts file. On Oct. 11, 2005, The Globe and Mail reported that Carney “did not buy the line that income trusts are good for productivity because they encourage corporate managers to be more disciplined when making investments.” Further, he “doesn’t believe that income trusts help the Canadian economy because they don’t encourage reinvestment,” (De Cloet, Chase, and Stewart). In October 2007, Carney became governor of the Bank of Canada with the strong support of Flaherty ( News Staff, Oct. 4, 2007).

Brent Fullard, founder and president of the Canadian Association of Income Trust Investors, argues that Carney came into Finance strongly biased against income trusts. That bias was developed because Carney’s entire background in finance consisted of working for Goldman Sachs, an institutional dealer with no retail clients. Many of Goldman’s important clients wanted to eliminate the trust model and continue with business as usual under the corporate model. To protect its own interests, Goldman took up their cause with enthusiasm.

In summary terms, the RGC rationale put forward by the CEOs lobbying the Harper government in 2006 to get rid of income trusts was both self-serving and unsupported. The best analyses and research available did not support the CEO’s claims. However, their arguments were simplistic and intuitively appealing, and they were reinforced by the most senior officials. Most importantly, the RGC arguments were sufficient to convince the inexperienced PM.

New, Young PM Faces His First Big Challenge

When he started dealing with the trust issue in mid-2006, Stephen Harper had been PM for only about five months, and he was 47 years old with no background or experience in the capital markets into which he was about to meddle on a large scale. The transition from opposition leader (which he became in May 2002) to PM is a huge one.
Harper quickly adopted a highly-centralized system of decision-making in which he was (and still is) “the decider.” Above all, the new PM sought complete control over his government’s communications.

As PM, Harper became the “centre of the Ottawa universe.” The business executives who had refused to help finance the Reform Party (of which Harper had been a founder in 1987) and its successor the Canadian Alliance, were now paying court. No doubt the CEOs laid on the flattery with a trowel. Aided by senior officials, their lobbying efforts were successful.

Breach of Fiduciary Duty

I believe that the CEOs and directors were violating their primary fiduciary duty to shareholders to maximize shareholder value by lobbying to eliminate the income trust option. They ignored the demand by their shareholders to at least carefully study the option of conversion, or putting some of the corporation’s assets into a trust as EnCana was planning to do in the fall of 2006. The success of the CEOs' lobbying efforts denied their shareholders a legitimate opportunity to achieve higher returns on their investment.


The announcement of the new tax on certain income trusts announced on Oct. 31, 2006, was a brutal “remedy” to a non-problem when we strip away the flawed methodology and errors in Department of Finance’s estimates of “tax leakage” for 2006. By announcing a moratorium, the minister of finance could have stopped the creation of new trusts, and grandfathered the existing ones. However, that would not have met the objectives of the CEOs who lobbied the Government in 2006.

We now know that “tax leakage” was not the real reason for the tax. It was based on arguments relating to reinvestment, growth and competitiveness. Those arguments—pushed by CEOs —were not supported by the best available studies or analytical reasoning.

The tax has rightly been called a public policy “train wreck” for three main reasons: (i) the predictable adverse policy outcomes, notably the $35-billion loss it created for some two million Canadians along with the loss of a very popular retirement income investment vehicle; (ii) the deplorable process by which this policy came into existence; and (iii) the subsequent huge reductions in tax revenues when the crippled income trusts were acquired by sovereign entities, and by foreign private equity firms. It was not the wealthy, but ordinary Canadians—patrons of Tim Hortons—who have paid the huge bill.

W.T. Stanbury is professor emeritus, University of British Columbia.
The Hill Times