Monday, November 29, 2010

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:


Dr Mike said...

Ok Mr Duncan , the next move is yours.

You are a sharp guy & this is a way to enhance the incomes of retirees & boost the gov`t tax coffers.

Nothing fancy here just the facts.

Dr Mike Popovich

Anonymous said...

Mr Duncan

The Guiding Light !

You now have a document which is not blacked out a guiding light
which will provide you the framework to help the pension issues in this province currently and only to worsen in the future.
It explains how income trusts can be an efficient corporate capital structure especially our small to midcap business corporations.
An income solution for the 75% of Canadians with no corporate or government pensions and seniors who seek income.

The excuses are over the truth is in front of you and most of all they are not blacked out !!


Bruce Benson said...

To be honest, the only pension the politicians cares about is their own feather nested, gold lined, taxpayer funded pension plan. Those 75% of people without a government or privately funded pension plan be damned. Let them eat dirt. Mr. Duncan will not be the guiding light here. Untill the75% of those without pension plans get off their asses and see the light, nothing will change.

Anonymous said...

Hi Brent, great piece, although I have limited confidence in the capacity for Dwight to do much more than mutter platitudes, and even those have to be scripted.


Anonymous said...

The amazing thing with Ontario is that ITs were giving the Ontario government access to Oil and Gas earning through the taxation of ITs held by Ontarians. While manufacturing was being decimated Ontario was leeching off of Alberta and Saskatchewan and they chose to throw that away as well in the name of their masters.

I think the investigation should be of the intellectual capacity of all provincial and federal finance ministers, they should be forced to write Univ. exams with no study since they now make decisions.


Anonymous said...

If we left the security of our retirement futures up to these clowns we would ALL be eligible for the GIS