Thursday, May 10, 2007


Petition to the Government of Canada - Income Trust Broken Promise



WHEREAS: The Prime Minister said that there is no greater fraud than a promise not kept; and

WHEREAS: He emphatically promised during the last election never to tax Income Trusts; and

WHEREAS: The Conservative Government recklessly broke their promise by imposing a 31.5% draconian tax on Income Trusts; and

WHEREAS: The broken promise wiped out over $25 billion of the hard-earned retirement savings of over 2 million Canadians; and

WHEREAS: Independent experts subsequently provided Parliament with clear evidence that the Finance Minister’s decision to tax Income Trusts was based on flawed methodology and incorrect assumptions.

We, the undersigned residents of Canada, call upon the Government of Canada:

to acknowledge that their financial justification for imposing the tax was flawed; to apologize to Canadians who were unfairly harmed by their reckless broken promise; and to repeal their draconian 31.5% tax on Income Trusts.

Please affix Signatures (Sign own name. Don't print.) and Addresses (Provide full addresses & postal codes) below:







Please return this petition (signed) to:

The Honourable John McCallum, MP; 110 Justice Building; House of Commons; Ottawa, Ontario K1A 0A6

(No postage is necessary to send mail to Members of Parliament)

Tuesday, May 8, 2007

Vulture Capitalists Circle Flaherty's Energy Prey!


-- U.S. Players Expected To Capitalize On Flaherty Blunder!

by Shaun Polczer
Calgary Herald
Tuesday, May 08, 2007

A loophole in federal trust taxation policies will make Canadian energy trusts plump takeover targets for U.S. hedge funds and private pension plans, industry observers warned Monday.

That's because private trusts and large pensions like the Ontario Teachers won't be subject to a 31.5 per cent tax on distributions when the changes come into effect in 2011.

John Brussa, a partner with Calgary oilpatch lawyers Burnet, Duckworth and Palmer, said he expects to see the emergence of new corporate structures designed specifically to exploit that advantage -- including acquisitions of existing trusts by Canadian pensions and speculative American hedge funds.

"That tax represents a big inviting target for people that can eliminate it," he said on the sidelines of a Conference Board of Canada meeting at the Telus Convention Centre.

"If you see a $20 bill on the ground you tend to want to bend down and pick it up. And those people will be pension funds, they'll be U.S. private equity guys . . . those are the folks who see that as a tempting target."

Although he doesn't expect to see a wholesale takeover of the Canadian energy trust sector before 2011, Brussa -- who previously prepared tax opinions for companies considering trust conversions -- said the mould has been set with Thunder Energy Trust.

In April, Thunder was taken over by a consortium that included Overlord Financial Inc., the Public Sector Pension Investment Board (PSPIB) and a numbered Alberta company for $200 million.

The Ottawa-based PSPIB is a Crown corporation charged with overseeing the pension assets of the federal public service, the Canadian Forces and the Royal Canadian Mounted Police.

John Dielwart, president of ARC Resources Trust, described the exemption of private trusts as an "egregious omission" to the new rules that were announced Oct. 31.

"By excluding private trusts, big private equity funds, big pension funds can still play this game the way they always have. Individual Canadians, either retired or saving for retirement, are basically being thrown under the bus. It's intolerable, in my view."

Bill Andrew, president and CEO of Penn West Energy Trust, said all the big trusts --including Penn West -- will be looking at alternative corporate structures as the tax deadline draws near.

Andrew said "vulture funds" in the form of ultra-speculative hedge investors are already looking to Canada as fertile ground for speculative assets ahead of what they see as looming consolidation in the sector.

"(Hedge funds) are in it for the short haul; they're in it for the flip."

Finance minister Jim Flaherty was scheduled to address the gathering, but was a no-show.

Gordon Tait, managing director of income and royalty trust research with BMO Capital Markets, said one impact of the federal government's decision has been to reduce the number of initial public offerings of energy companies and increase foreign ownership of the trust sector.

Before he became a research analyst, Tait was Enerplus Resources Fund's chief financial officer.

He said the government's "tax fairness plan" creates a two-tiered investment landscape that favours large institutional investors over ordinary Canadians.

"If it's good enough for the Ontario Teachers' fund, why not my RSPs?" he asked.

Although he doesn't expect the trust sector to disappear, he predicted a greater number of trust buyouts as 2011 draws closer.

"As we get closer to that 2011 deadline you'll start to hear the knock on the door," he said.

ARC's Dielwart, who is also co-chair of the Canadian Coalition of Energy Trusts, agreed that the present government is unlikely to reconsider its stance.

But he also vowed to carry on the fight in the absence of an election to topple the ruling Conservatives.

"We will not quit, we will not stop fighting this ill-advised policy," he said. "Until such a time as there is no life left in our bodies, we will not give up."

Wednesday, May 2, 2007

Governor Bank of Canada Frets Over (Flaherty) Sell-Out Of Canada!


-- How About Zeroing In On Real Problem: Jim Flaherty!

Guest Editorial by Brent Fullard, CAITI

David Dodge needs to get his supply/demand terminology straight. Rather than fretting over the “inexhaustible supply of debt” to finance the takeout of public Canadian companies, perhaps he should take the time to realize that this is actually the demand side of the equation, not the supply side.

Private equity has demand for investments. Canadians have demand for investments. The demand for investments on the part of Canadians is most acute for those 70% of Canadians who are not members of pension plans. This distinguishes them from virtually every occupant of Ottawa, David Dodge included.

Finance Minister Jim Flaherty’s policies grossly favour foreign investment demand at the expense of domestic investment demand. Fret that outcome for a moment if you will.

Rather than fretting over the wrong side of the supply/demand equation, over which he and all of Ottawa have zero control (i.e. pools of private equity), perhaps Mr. Dodge and his office would be better served by acknowledging the true “supply side” of this equation, namely the income trust market and near income trust companies like BCE and Telus that Canada’s “Its not my fault!” Minister of Finance, The Honourable Jim Flaherty, has fattened up for slaughter. By this, I am referring to Flaherty’s foreign private equity friendly measures, whereby Mr. Flaherty:

(1) cratered the value of the $200 billion income trust market, by imposing a tax of 31.5% on every public income trust; yet there is no such tax on the myriad number of other 'tax flow-through' entities in Canada, including private income trusts owned by pension plans.

(2) imposed central planning style growth restrictions on income trusts if in the hands of average Canadians; but no such growth restrictions are imposed when trusts are transferred to the hands of foreign private equity or any other ownership arrangement.

(3) eliminated the 15% withholding tax that would otherwise be paid by the largest pools of leveraged buyout loans, namely foreign lenders and foreign capital providers.

Despite Flaherty's intellectually vacuous argument -- “it’s not my fault” -- these three measures of Flaherty’s are certain to triangulate a most undesirable result: a vastly increased supply of now highly-vulnerable Canadian companies ripe for the pickings by predatory foreign and domestic private-equity interests.

Yes, that’s the supply side of the equation, whereas foreign private equity is the demand side of the equation.

Fretting is one stop shy of “it’s not my fault”. Time for the supposed straight-talking David Dodge to get his facts straight and speak the truth. Jim Flaherty is grossly incompetent, and his actions on all fronts are undermining the economic sovereignty of our country.

Does that fall within the Bank of Canada’s mandate?

One last question. How many Canadians does an association like CAIT have to represent before they get an audience with the Governor of the Bank of Canada?

Is one million plus sufficient?

Saturday, April 28, 2007

Flaherty's War On The Less Privileged!


“Income trusts are popular with seniors because they provide regular payments that are used by many to cover the costs of groceries, heating bills and medicine. They also provide tax relief from a government that is addicted to taking too much money from their pockets and spending it without care, and very often without meaningful results.

"So one must ask, why is the [Liberal] government clamping down on the retirement savings of seniors and investors?”
-- Stephen Harper, Autumn 2005

My husband is now packing to go to a contract job in Calgary. He retired in June but his retirement ended when Harper said that he would tax income trusts. John is lucky because he was able to find work. Hopefully he can make another try at retirement in a few more years. I will stay in Ont. to look after the home etc. We will get together as often as we can. I wish Harper would think of us while he enjoys his family life. Maybe he would like to come and cut our lawn with all those tax $$'s that he is stealing from us.

“Mr. Harper don't come knocking at my door for my vote. I have a finger that I am itching to show you.”
-- Elaine, December 30, 2006

Yes, so many political and social paradoxes seemed to emerge when, on Halloween Eve 2006, Canada’s free-market Conservative government brazenly broke a much-publicized election promise, and introduced a calculated plan to destroy Canada’s booming income-trust investment industry -- along with the savings of millions of struggling retirees and self-employed entrepreneurs.

However, aside from obvious political contingencies, deeper sociological divisions in Canada culminated in this surprisingly unprincipled political decision.

What were the socio-cultural undercurrents that ultimately impelled Canada’s new Prime Minister (guided by his badly-briefed Finance Minister) to transform the ruling Conservative Party from the would-be “protectors” of retired and self-employed Canadians into the iron-willed tormentors of this beleaguered demographic class?

Well, here’s the socio-economic “story behind the story.” And it ain’t pretty.

Maintaining Social & Economic Hegemony

To start with, by 1999 many Canadian retirees and self-employed savers found that despite the official declining inflation rate, many “below-the-surface” costs of living were actually soaring. For example, Canadians were encountering ever-escalating heating and electrical bills, automobile expenses, property taxes, insurance rates, and home-repair costs. And the cost of medical drugs (prescriptions) for seniors were rising too.

Yet, at the very time when these “hidden” costs of living were rising, traditional investment income instruments such as GICs, bonds, and mutual funds were generating less and less income. Non-wealthy Canadians were slamming into a low-interest-rate financial wall that was jeopardizing their ability to “keep up.”

Be advised that what we are talking about here is a socio-economic stratum of Canadians ignored by official Ottawa, a demographic group falling under the radar of most “experts.”

These “Left On Their Own” (LOTOs), as we shall call them, comprise a socio-economic demographic that falls right in the middle of the two groups that official Ottawa obsessively focuses on: (1) the “designated” poor for whom progressive social programs are constantly created, in order to make Canada’s elites feel good about themselves (and assure themselves that they’re not like those “selfish”Americans); and (2) Canada’s wealthy movers and shakers -- the privileged aristocracy who populate such gilded urban enclaves as Rosedale and Rockcliffe Park -- whose money and influence makes things happen politically and culturally.

Desperate LOTOs: Sink Or Swim Time

Demographically, the “left-out” social stratum we are talking about here is the entrepreneurial middle class and lower middle class of Canada -- self-employed individuals used to fending for themselves without the help of government, or without the perks of social privilege exercised by Canada’s uber wealthy and influential.

Exactly whom are we talking about when refer to LOTOs? Self-employed small businessmen (and business women), for one thing. Farmers. Shop owners. And self-employed contractors, truck drivers and tradespersons.

This marginalized demographic is typified by the stereotypical “cultural philistines” who inhabit the much-maligned suburban “905” calling area of Greater Toronto, for example -- and are despised by Canada’s elites. Wrong schools, wrong politics, wrong religious beliefs and wrong tastes in books, music and TV (and perhaps wrong colour of skin).

As retirees, LOTOs don’t usually benefit from the kind of gold-plated, indexed pension plans doled out to Canada’s government and bureaucratic elite. Nor can they turn to the generous inheritances, pensions and trust funds that contribute to the ample retirement income of Canada’s wealthy classes.

Instead, self-empoyed LOTOs are often pensionless, and must depend on the savings they can accumulate within their RSPs.

Climbing Back From The Abyss

The bottom line is that by the late 1990’s, many LOTOs found that their savings had been eroded by the implosion in interest rates, and from bad advice received from establishment banks, stock brokers and financial advisors. First, it was the declining income from GIC’s, bonds, and recommended income funds. Then it was the resounding crash in hi-tech stocks and highly-touted mutual funds.

For retirees, in particular, just scraping by was becoming problematical, especially since many of these individuals were being forced to dip into their remaining savings to compensate for lost income of all kinds.

That is, until they discovered…you guessed it…income trusts! (Sound the trumpets!)

In return for the enhanced income generated by these investment vehicles, LOTOs had to take on more risk -- especially when it came to higher-yielding but more volatile energy trusts. However, many LOTOs were willing to give it a try.

Of course, most financial advisors still counseled against investing in such esoteric investment vehicles, because those advisors viewed the sale of traditional stocks and bonds as their real “bread and butter.” And besides, it was too much trouble to learn what income trusts were about, especially since it was only a matter of time till Nortel would hit $120 again and the good times would return.

The Seeds of Discontent: The Underclasses’ Gain Is The Establishment’s Loss

Yes, finally, some of the pieces of our intriguing social-fiscal puzzle are starting to come together. You see, there was a great difference in the way many LOTOs -- used to taking responsibility for themselves, taking risks, and forging success through self will -- responded to this consensus financial opinion -- in contrast to the response of Canada’s self-satisfied elites.

For example, well-connected brokers and advisors “babysat” all things financial for the wealthy. So why should privileged Rosedale clients, for example, take the time and initiative to research a new investment class, even if it promised to generate more income? After all, it was only a matter of time until their brokers again reserved shares for them, in the next hot stock IPO, and then flipped those shares for them, for quick and easy profits.

As far as privileged government bureaucrats were concerned, considering their six-figure salaries and indexed pensions, why should they personally worry about the present or future economically? And why take any risk at all with personal savings? After all, during any economic downturn, it would still always be possible to siphon off more tax money from Canada’s obliging taxpayers, to finance higher public-service salaries and pensions.

As for Canada’s business journalists, the business consensus of the day paid their salaries and put money into their corporate pensions. And of course, to choose to write about business -- rather than to take the risks involved in actually being a business person -- signifies all one needs to know about the risk-taking inclinations of such individuals.

So in the end, guess which major demographic stratum initially broke with the prevailing financial consensus and forged a new investment path with income trusts? Yes, a significant segment of independent-minded LOTOs -- some retired, some still working -- began investing in income trusts. And via the Internet, these same enterprising investors initiated a comprehensive exchange of information on income trusts.

And not only did these pioneering investors place their financial “bet” on one of the most lucrative Canadian investment vehicles of this century’s early years, but also on the investing success story of the decade -- investment in energy (via energy trusts).

Wrong People In The Right Investing Sector: This Must NOT Continue

In other words, from the point of view of Canada’s social and financial establishment, the wrong people (in terms of privilege, influence, education, family background and perhaps skin colour) found themselves in the right investing space at the right time, and prospered. And their growing prosperity became an increasingly sore point for many of those who considered themselves educationally and culturally superior to members of the LOTO demographic.

Not only that, but as income trusts created more wealth for their investors over the years, increasing numbers of previously-disinterested investors wanted in on the trust “party.” This, in turn, drew away business from the customary banking, brokerage and mutual-fund "boondoggles" designed to separate clients from their money and generate high-margin profits for Canada’s financial establishment.

Surely, the financial establishment opined among themselves, these income-trust arrivistes (translate as underclass) should not be allowed to prosper any more. It was setting a bad example for all the other fools, um, clients who otherwise would be happy with the investment advice they were receiving from Canada’s investment establishment -- even if much of that advice had been flawed (could anyone use some discarded shares of Bre-X, Nortel or Bombardier?).

But that was just the beginning of the “establishment” animus against income trusts. As the income-trust “boom” became harder to ignore, Canada’s business journalists also began jumping on the ‘damn income trusts and their foolish investors’ bandwagon. “Pure luck,” members of the chattering class first opined on ROB TV (now relabeled BNN TV).

Then as they were proven wrong over and over again, the financial and media cognoscenti upped the ante. “It’s a dangerous bubble,” they insisted. “These foolish trust investors must be protected from themselves” (or they will catch up to us in terms of prosperity and influence and upset the existing status quo).

However, despite all the doomsday trepidations and warnings of the financial establishment, the trust bubble never seemed to burst. In the opinion of these critics, financial Armageddon was only a few imagined transgressions away for those “damned lucky” income-trust investors -- if only something terrible would happen. But that terrible "something" never seemed to occur.

And then it dawned on all those bitter naysayers, who had missed the boat on the energy and trusts boom, that if pure economic factors couldn’t do the job of pricking the income-trust “bubble,” then the clumsy hand of government could.

After all, there had to be something wrong with these esoteric investment vehicles if so many knowledgeable observers disliked them (even if they didn’t know anything about them) and missed the boat on them. And if so, only government could turn back such a dangerous investment tide, all the while putting Canada’s privileged establishment back in control.

Enter a new era of lame innuendo and scandalmongering regarding income trusts, fueled by the business scribes of Canada’s establishment house organ, the Gobe & Mail. [In past blogs, we’ve already deconstructed the media mythmaking that transformed income trusts into Public Enemy Number One.]

Tax Leakage: The Mythical National Crisis That Never Existed

Yes indeed, we’re referring to the popular “tax leakage” myth. And previously, we’ve shown the distortions and machinations behind this nasty libel against income trusts. So let’s get right to the point of today’s “storyline” regarding Canada’s privileged vs the LOTOs. And that is, by destroying the income trust industry, and its perceived “low-rent” investors, the Conservative government has decidedly turned conventional notions of “justice” and “fairness” on their heads.

Canada’s misguided, tiny imperfect Finance Minister has taken an ivory-tower myth and transformed it into a legislative club for destroying the financial well-being of millions of middle-class Canadians -- strictly for the benefit of Bay Street financial interests, and for assuaging the status concerns of Canada’s media and bureaucratic elite. And amazingly Canada's “socialist” political party, the NDP, have backed and encouraged the Finance Minister every step of the way.

Additionally, the current government has unintentionally planted the seeds for the sell-out of the Western Canadian oil patch to foreign private equity funds -- financial entities that ironically will never pay a cent of corporate tax to the Canadian government.

And why was this done? To ensure that Canadian investors can now only invest in the customary predatory investment options provided by Canada’s establishment banks and mutual funds.

Not only that, but big-business friends of the government can rest assured that, as corporate CEO’s, they can again conduct business as usual in Canada -- awarding themselves outrageous salaries and luxury perks, back-dating stock options, and wasting shareholders’ money on unprofitable mergers and buy-outs. And now without the threat of losing such self-interested opportunities if they were forced by shareholders to convert their companies into income trusts.

And that’s also without being shamed anymore by the example of penny-pinching income trusts which must, because of their legislated mandate, directly pay out as much of their revenues as possible to shareholders.

In other words, Stephen Harper’s alleged government of the “little people” has turned out to be just like most Canadian governments of the past -- the government of the wealthy, the privileged and the status quo. Government by and for the rich and influential.

Most outrageously, in the attempt to resolve the “problem” of income trusts, the Harper government has unintentionally guaranteed the future wealth of Canada’s financial establishment -- on the backs of millions of ordinary, less-privileged Canadians.

And it appears that the clueless political servants of Canada’s elite couldn’t care less.

Only in Canada, you say? Pity!

Friday, April 27, 2007



By Dirk Lever
Securities Analyst
RBC Capital Markets
April 27, 2007


A man and his wife had the good fortune to possess a goose which laid a golden egg every day. Lucky though they were, they soon began to think they were not getting rich fast enough; and, imagining the bird must be made of gold inside, they decided to kill it in order to secure the whole store of precious metal at once. But when they cut it open they found it was just like any other goose. Thus, they neither got rich all at once, as they had hoped, nor enjoyed any longer the daily addition to their wealth.
Source: Aesop and Wikipedia


A country had the good fortune to create a new business structure that allowed the tax department to collect siginificant income taxes from law abiding, taxpaying citizens. Lucky though they were, the Tax Department began to think they were not collecting taxes fast enough. And figuring the structure was to blame, they convinced the politicians to pass a law to kill the structure, thereby opening the store of by-passed income taxes.

But when they killed the structure, they found that the businesses were quickly acquired by others who knew a thing or two about how to avoid paying income taxes. Thus, the tax department did not see a rush of new tax collection, as they had hoped. And they no longer enjoyed the annual addition to their coffers from this structure.
Source: RBC Capital markets


When one compares apples and oranges, the comparison is flawed. There are other logic flaws. Some have assumed that trusts are like any other Canadian business and are therefore “part of the average.” So will this high level analysis, which is nothing better than extrapolation of averages, generate accurate information? No!

There is a world of mathematics (statistics) built around the idea that if one analyzes enough data from a population, then assumptions can be drawn about the population itself. However, specifics only provide details about the general. Unfortunately, the reverse process does not work. You cannot apply the general to the specific; that analysis is flawed.

But that is what many trust critics have done: applied tax collection data from the general population of businesses to the specific businesses of the trust sector, and deduced that not enough taxes are collected. So they encouraged killing the Golden Goose.

But what is happening? The very trust businesses they wish to convert to corporate form are predominantly “Golden Geese”; the Golden Eggs akin to cash flows.

As trusts, they provided Golden Eggs for everyone who wished to purchase a monthly allotment; and for the most part, income taxes poured in. (Nobody can deny this; significant personal taxes on trust distributions to investors were, and are, collected by the Canadian government.)

However, the Golden Geese are now being purchased by private equity or large pension funds, and getting levered up. And consequently, through a combination of interest deductions and tax shield from the very assets of the business itself, no significant taxes are or will be collected by the Tax Department for years.

Many of these trusts are not “ordinary” businesses, so analysis built around the assumption that they are “ordinary” is fundamentally flawed. And flawed analysis begets flawed policies.

How many more trusts need to be bought before those that are trying to kill the Golden Goose finally realize the impact of their actions? They were warned, they ignored the warnings; now we see the warnings unfolding. Why is this necessary?


Canadian taxpayers will get burned, because more taxes will have to be collected to cover the “shortfall” from declining tax revenues from now privatized income trusts [no longer generating taxes from indvidual investors].

Retired Canadians will also get burned; and that is because when a successful trust is taken over, and the retirees receive their final payment on the sale (and a nice one at that for many of the announced takeovers), they cannot replace the generous cash flow streams [income] they once received.

It is almost like a Yogi Bera quip: “I am going broke from all the trusts I am selling at a premium.” Most trust investors were not after the capital gain; they were after the monthly cash flows.

Where do they invest their retirement nest eggs now?

Not everybody has multi-million dollar retirement funds, allowing them to invest in highly diversified portfolios [nor the over-generous indexed pension funds held by politicians and Finance bureaucrats] . And some people want to manage their own retirement money -- it is a form of independence.

This is a very important issue for Canadians; because if it is not your issue, it must be your parents’ issue!


Now that great trusts are being bought at premium prices (so much for trusts being “grossly over-valued,” as charged by those that clung to flawed financial analysis), and it is clear taxes will be avoided by the newly privatized trust businesses, what do the Trust naysayers have to say now?

We can see where this ship is headed, and it is not to the Port of Increased Taxes and Lower Values. And what about that massive scare about large Canadian Golden Goose businesses turning into trusts, causing tax leakage, lack of productivity and creating Canadian cash distribution zombies?

Well, in reality, these mega businesses (e.g., BCE) are being gobbled up by Private Equity, Pension Funds and Large Corporations who will ensure they maximize after-tax returns on the newly-bought businesses [ie, pay less tax than previously].

Do not get us wrong; we believe it is everyone’s right to maximize their after-tax investment returns. We just wish more Canadian taxpayers could co-invest in the Golden Geese – and Canadian investors were happy to pay their trust taxes!

Wednesday, April 25, 2007

Fallout From Flaherty Trust Tax Never Seems To End!


Hmmm. Tax that how Canada's little Financial Napoleon (and Finance Minister) described his October "take no prisoners" assault on income trusts?

Fairness to whom, one would be inclined to ask -- after news of a private-equity/pension plan takeover of Thunder Energy Trust hit the business news the other day. A four dollar buyout price for an energy trust sporting a NAV (Net Asset Value) close to $5.00, and previously characterized as a projected $5.50 to $6.00 takeout candidate (according to several brokerage analysts).

A bargain for the buyers, but a disaster for ordinary income trust investors, it would seem.

Who else gains from this transaction? Well, Finance Minister Flaherty himself, for one, and all of the bungling Finance Department bureaucrats who instigated this whole mess. For you see, the main buyer will be the Ottawa public pension plan that represents public employees on Parliamentary Hill, including politicians and civil servants.

Thanks to the little Financial Napoleon's recent concerted attack on income trusts, the price of Thunder Energy Trust was pounded down to a bargain-basement price under $3.90. And now the the public pension plan (in cahoots with predatory private equity interests) has taken the opportunity to swoop down on poor Thunder, scoop it up at a ridiculously low premium (paying only $4.00), take it private, and then use tax loopholes -- provided by Mr. Flaherty to pension plans and private-equity interests in the new tax legislation -- to pay minimal or no tax on the company's revenues (cash flow which was previously paid out to individual trust investors who paid oodles of personal tax on the distribution of these trust revenues to them).

Of course, thanks to the bargain-basement buy-out price, and the Flaherty-created tax deductions on revenue generated by Thunder as a new privatized company, the Ottawa public pension plan (representing politicians like Mr. Flaherty and bureaucrats like the Finance gang that can't calculate straight) will be flush with new-found cash in coming years. And so the plan will be able to continue to pay out the obscenely-generous indexed pensions that go to our public "servants" (or pigs at the public trough, as it were), while ordinary Canadians struggle to barely survive economically in their senior years.

Advantage to Jim Flaherty and his bureaucratic minions, wouldn't you say? Disadvantage to Canada's tax coffers which will be short a few more million dollars in tax revenues lost to yet another trust privatization sparked by Mr. Flaherty's misguided (if not Machiavellian) trust tax policy.

Now that's real "tax leakage" (not the mythical kind talked about by the Finance Minister regarding trusts themselves). And it's tax leakage clumsily (if not purposefully) created by bungling (and perhaps self-interested) politicians and Finance bureaucrats in Ottawa.

Talk about "chutzpah". Another shameless implementation of the economic policy of 'Robbin The Hood' Harper's unprincipled regime -- take from the vulnerable (the rest of us) and transfer the spoils to the pockets of the privileged and affluent, the Ottawa, Bay Street and Wall Street establishments.

Yes, that right. Mr. Flaherty "steals" from struggling seniors who have no vested public or private pension plans (by destroying the income trust market) and then ends up filling the already brimming wallets of Ottawa politicians like himself, civil servants like the Finance bureaucrats who suggested the war on income trusts, and unprincipled Bay and Wall Street vulture capitalists.

Tax fairness indeed!


Canaccord Capital Newsletter
Februrary 25, 2007

Smart capitalists: 1; Flaherty's tax-grab: 0.

It has been a while since Thunder's data room was opened up and finally we have seen a bid, but this takeout bid will mark the first royalty trust to be taken down.

A consortium of pension, private money, and the publicly traded Overlord Financial (OFI) firm, has agreed to buy all of the issued and outstanding trust units of Thunder for $4 per unit as well as $101.00 for every $100 face value 7.25% convertible debenture.

As you well know, Canadian pension funds are exempt from paying taxes, while the private equity and corporate partners should enjoy at least a partial tax holiday as this deal is purchased with debt. [And after the deal closes, there will be no individual trust holders around to pay personal tax on distributions received from Thunder. That revenue will be converted into payouts that will go directly to the new buyers tax free.]

Despite Flaherty's public denials, his income trust tax proposal will usher in many more takeouts of Canadian oil and gas assets, most to be lost to pension and private-equity firms which will pay minimal or no tax to the Canadian government thanks to being able to write off the purchase costs.


By Tommy Schnurmacher,
The Montreal Suburban
April 25, 2007

As my loyal readers and listeners are undoubtedly aware, I am not generally in the habit of offering advice to the Liberal Party of Canada. However, if the Dion Liberals wish to prevent Stephen Harper from achieving his goal of obtaining a majority government, scary greenhouse gas, stats won’t do the trick. Environment Minister John Baird has warned all and sundry that full Kyoto compliance would result in a severe economic downturn.

That may well be true, but some of Finance Minister Jim Flaherty’s lame financial policies could land us all in hot water long before the melting of the polar ice caps. While Baird’s wondering about the weather, Flaherty is about to turn the country into one large garage sale.

As the left might put it, this is the hollowing out of Canada’s business and energy economy. Harper’s shameless about-face on income trusts is bad news not only for seniors but for every single Canadian taxpayer. By blatantly breaking his solemn promise to leave income trusts alone, Harper squandered his reputation for honesty and integrity.
Suggesting that Liberals didn’t mind raiding seniors’ assets, he did precisely that. Not only was the decision dishonest, it was ill-considered and dangerously short-sighted.

We already know that the seniors were very upset. But here’s the really worrisome part. They were not the only ones who noticed. Many of the well-heeled Bimmer-driving execs who burn the midnight oil at private equity firms and foreign-controlled companies have been also paying very close attention; and they like what they see.

Quietly and without much fanfare, they are slowly starting to pick up one good Canadian trust company after another at fire sale prices spurred by Mr. Flaherty’s new trust tax. They are about to drink Canada dry.

As they pick off our stronger companies — the ones with good assets and healthy cash flow — we lose out. We may very well end up with a sordid TSX filled with nothing but junior mines and oils.

What would that mean? It could send us hurtling back to the painful days of crippling deficits. Consider this: Our supposedly Conservative government has started spending money like water. As the crème de la crème of the income trusts are snapped up by foreign owners, this overspending government could soon find itself facing a substantial loss of tax revenue. Billions of dollars going out; billions less coming in. Not a pretty picture.

Many of the takeovers, it should be noted, will come in the form of leveraged buyouts, which is a fancy way of saying that savvy foreign investors will be buying us up on credit. They will pay off the debt using the company’s own money. You don’t have to be the finance minister to figure out that such companies won’t show much profit and won’t pay much tax to the Canadian government.

Liberal finance critic John McCallum and other senior Liberals like Ken Dryden and Bill Graham are smart enough to see that the income tax debacle will be a hot button issue during the next election campaign. If the public forgets, hundreds of ads in bus shelters and on billboards are about to remind them.

In 1992, political strategist James Carville coined the expression “It’s the economy, stupid.” The phrase helped Bill Clinton win against George Bush père. It was true then. It’s true now.

The Tommy Schnurmacher Show is heard weekdays 9 a.m. to noon on CJAD 800 Radio. His e-mail address is 2007-04-25 10:22:14

Saturday, April 21, 2007



--BCE Privatization Could Cost Him $800-Million In Tax Leakage; More Tax Loss Than From BCE & Telus As Trusts!

Paul Vieira,
Financial Post
Published: Wednesday, April 18, 2007

OTTAWA - Jim Flaherty, the Minister of Finance, could face another major tax loss headache --on the scale of what he attributed to income trusts -- should a buyout deal be reached between BCE Inc. and a consortium of private-equity investors.

Financing experts say a buyout of BCE -- led by tax-exempt pension funds Caisse de depot et placement du Quebec and the Canadian Pension Plan Investment Board -- would produce virtually the same results, taxwise, had the Montreal-based company converted to an income trust as planned.

"It is basically income trusts revisited," said Laurence Booth, an expert in structured finance at Toronto's Rotman School of Management. "And the implications for Ottawa are pretty much the same".

Yesterday, BCE confirmed it was in talks with the Caisse and CPPIB about taking the publicly traded company private. If successful, it would result in the largest buyout in Canadian corporate history.

It has been estimated the conversions of BCE and competitor Telus Corp. would, collectively, shrink corporate tax revenue by $800-million a year. David Lambert, a telecom analyst at Canaccord Adams, said yesterday he estimates that BCE alone pays, on a per-share basis, about $1 per share from its free cash flow toward taxes.

BCE has 808 million shares outstanding, which would translate into an annual $808-million tax bill under Mr. Lambert's calculations.

Last year, BCE had announced its intentions to convert to an income trust. But those plans were killed when Mr. Flaherty slapped a tax on income trust distributions to put an end to the popular corporate structure that allowed companies to avoid tax by dishing out most of the cash flow to investors [who paid the tax personally].

Mr. Flaherty said he decided to act because the investment vehicles were costing Ottawa $500-million in lost revenue annually, and warned that planned conversions would further threaten federal finances. [He failed to mention that individual trust investors would have paid even more taxes than the trusts would have, by way of the personal tax imposed on the distributions they received from the trusts.]

Under private-equity transactions, or leveraged buyouts, the investors finance the acquisition mostly with debt and a small equity component. The interest payments on that debt allow the private-equity investors to avoid, or greatly reduce, the amount of tax paid. [And there are no longer any trust investors to pay personal taxes on the revenues generated by the new company].

Further compounding possible problems for Mr. Flaherty is that pension funds can defer taxes owed. So if they own equity, dividends from those shares flow through without facing a tax hit.

"Financial markets are getting more innovative and you are getting some very low-risk businesses that can support more debt, and [investors] are finding ways of having them carry more debt in order to avoid the corporate income tax," Mr. Booth said.

He likened the Finance Minister's efforts to stem tax leakage to the title character in a Dutch legend. "[He] is a bit like the Dutch boy who has his finger in the dyke. He plugs one hole but then, bingo, another hole pops up."

Mr. Flaherty yesterday declined to comment on developments at BCE, or even mentioning the company's name. "I am not going to talk about anything that is subject to current market activity," he said.

But he dismissed suggestions that private-equity investors are, as Mr. Booth suggested, converting to a trust through the back door.

"That is nonsense," he said. "When you are talking about a company becoming an income trust under the old rules, you are talking about a company getting a preferred tax rate. When you are talking about a corporation continuing as a corporation but under different ownership, it is still taxable--at the same rate." [However, because of interest and other deductions for the new private-equity owner, little or no taxes are paid to the Canadian government by the new owner. And there are no longer individual trust investors to pay personal taxes on the generous revenues generated by the company.]

Mr. Flaherty has come under pressure, from corporate Canada and the Liberal party, for handicapping the business community with the trust tax and recent changes to interest deductibility of foreign financings by Canadian companies. These moves, his critics argue, will leave Canadian firms ripe for foreign takeovers and make them less competitive on a global scale.

John McCallum, the Liberal finance critic, said Canadians are starting to see the consequences of the trust tax.

"The effect of what he is doing is exactly the opposite of what he intended, because the holders of income trusts pay lots of tax," Mr. McCallum said. "All of these trusts are now being taken over in such a way so that the new owners will pay no tax.

"So, instead of a situation where a lot of personal taxes were being paid, you are having these induced takeovers by highly leveraged private-equity companies that will pay no tax."



-- Rich philanthropist backs Liberal move to repeal levy he likens to `hangnail'

by Sharda Prashad, Business Reporter
Toronto Star
Apr 21, 2007

TORONTO -- When the Conservative government dropped its Halloween income trust tax surprise, one of Canada's wealthiest philanthropists saw red – Liberal red.

"I was mad as hell," Seymour Schulich said about the income trust tax. "I've never seen capital destruction on this grand a scale in the whole 42 years I've been around this industry."

Yesterday, Schulich joined Liberal finance critic John McCallum to speak out against the tax and support a Liberal motion to repeal it and replace it with a 10 per cent tax that would be refundable to Canadian residents. The motion was tabled earlier this week in Parliament.

"I basically couldn't believe it," Schulich said of hearing about the tax last October. "These guys (the Conservatives) had come out and categorically stated they wouldn't (tax trusts)."

Most of his own trust holdings are in the Canadian Oil Sands Trust.

Schulich, who used to be a Conservative, says he is not a member of the Liberal Party, but does now sit under the Liberals' tent.

Politicians who make promises should put up 5 per cent of their net worth as a bond, he proposed. If the promise is broken, the money should go to charity.

"If you can't keep a promise, don't make a promise," he said.

Schulich was in feisty form yesterday. He bet this reporter that the income trust tax would be repealed, and bet McCallum the Liberals would win seats in Calgary during the next federal election.

In November, with the encouragement of Marcel Coutu, president and CEO of Canadian Oil Sands Trust, Schulich joined the Canadian Association of Income Trust Advisors to fight the tax.

The government should have stopped new trusts from forming and studied the issue before making its decision, he said.

"Killing the old trusts hurt a significant, substantial part of our capital markets," Schulich said, pointing to seniors who had invested heavily in trusts.

Schulich wants income trusts to be grandfathered and not immediately subject to a tax of 31.5 per cent.

"This (tax) is like a hangnail,” he insisted. "Instead of taking scissors and taking the hangnail out, you take off the finger."

Thursday, April 19, 2007


Flaherty’s Folly: In Bungling Bureaucrats We Trust

You have to leave it [unwanted trust conversions] alone, or fix it.” -- Finance Minister Jim Flaherty, quoted in the Globe & Mail.

And what a fix Canada’s tiny perfect Finance Minister put the nation’s retirees in on Halloween Eve 2006, not to mention Canada’s energy industry and future tax base. It was nothing short of what one retired civil servant typified as “the usual Finance bureaucracy f--k up.”

Metaphorically speaking, it’s what would happen if a plumber came to your home and fixed your leaking toilet the way Finance Minister Flaherty fixed the rush by corporate CEOs to convert to income trusts. Your entire toilet would be gone, your house would be completely flooded, and you would have to resort to, um, well you know, when you felt nature’s call.

Talk about throwing the baby out with the bath water, along with the rest of your family and most of your life savings.

Vanity, Thy Name Is Flaherty or Harper

But the most amazing thing is that Minister Flaherty was so badly briefed on this issue, and knows so little about income trusts, that the poor fool still doesn’t realize the damage he’s wrought. Nor will he acknowledge the further damage his proposed initiative is still inflicting, and will increasingly inflict in the future, on Canada’s home-grown energy industry, or on Canada’s future tax base.

Instead, Canada’s little financial Napoleon still struts proudly in front of the TV cameras and boasts proudly how the Conservative government saved Canada from financial disaster. And on that point, he’s proudly joined by the Canada’s Boss of Bosses, Prime Minister Stephen “Hit Man” Harper.

Yes, that’s correct. Both Tory fiscal masters of disaster are still willing to tell all and sundry what savvy and brave guys they were to break a popular election promise, without prior consultation, and to cumulatively relieve millions of Canadian investors of 25 billion dollars in savings -- not to mention making cat food the dinner of choice for many retired seniors.

And is anyone in the Conservative Party courageous enough to bring the two deluded amigos back to reality by pointing out all the damage they are about to wreak in Western Canada’s previously prosperous oil patch? Or inform them of the irony that this onerous Tory tax initiative will likely result in less tax revenues for future governments? Not likely.

Panic In The Ministerial Corridors

Okay, so what were the events preceding Halloween eve that so panicked Canada’s ruling Conservative government that they approved a draconian legislative measure that Paul Martin’s stumbling Liberal government had refused to sign onto one year previously?

Why did the Conservative political gang that can’t shoot straight (just look at their attempts to clean up the environment) eagerly sign onto yet another lame initiative from the gang in Finance that can’t calculate straight?

According to the Finance oligarchy’s media ally, The Globe & Mail, there was only one reason -- panic whipped up by, er, the Globe & Mail, regarding a perceived catastrophic loss of government tax revenues, resulting from Telus, BCE and other publicly-traded Canadian corporations converting into income trusts.

But wait a minute, how could the government lose further tax revenues from the conversion of Telus, for example, into an income trust in the autumn of 2006? At that point in time, Telus -- as a public corporation -- hadn’t paid a cent of corporate taxes to the government of Canada since the year 2000.

That’s correct: Zilch. Nothing. Nada. Not a cent of corporate taxes from Telus in the five years before the company decided to convert into an income trust.

But under the pre-Halloween tax rules, once Telus became an income trust, investors in the new Telus trust would have had to pay personal income tax on the income they received from Telus as an income trust.

Not only that, but since the posted pre-Halloween corporate taxation rate was well under 35%, and the highest personal tax rate maxed out at around 47%, government coffers would have been filled with more tax revenues if Telus had converted to a trust -- even if Telus had been paying the maximum corporate tax rate before the Halloween debacle (which they weren’t).

What About BCE?

But what about the calamitous conversion of BCE into an income trust, you say? Surely, in this case, the barbarians were at the gates, taxwise. Surely Canada was doomed.

After all, you might argue, where would the federal Arts Council otherwise get the tax money to fund such enlightening public art exhibits by Quebec artist Cesar Saez as the giant-sized yellow banana dirigible circling around the skies of Texas, to make a symbolic statement about…er, uh, um…well, damned if we know what?

But actually, there were a few things that the bureaucrats forget to tell our tiny perfect Finance Minister and his dour boss about corporations like BCE and Telus.

For example, even prior to the recent “for sale to private equity firms” announcement by BCE, the company's CEO had made it clear that the corporation as a (non-trust) common stock would pay minimal or no income taxes until 2010 (thanks to a number of bookkeeping hijinks permitted by the Finance Ministry).

And once private equity interests (Canadian or American) buy BCE, they will be able to escape paying any tax to the Canadian government for many years -- thanks to being able to write off borrowing costs for the takeover against current and future revenue.

But had Telus or BCE been allowed to turn themselves into trusts, the immediate tax haul, in terms of capital gains (“deemed dispositions”) collected from investors in the Telus and BCE common stock conversions (the “paper” gains Telus and BCE investors would have made when these stocks converted into income trusts), would have poured hundreds of millions of dollars of new tax revenue into government coffers.

Not only that, but individual trust owners would have been taxed for up to 47% of the income from distributions they received from these companies as trusts.

For example, CAITI’s accountants have calculated that the federal government would have collected 793 million dollars a year in taxes, on income distributions collected by individual investors from BCE alone, if Mr. Flaherty had permitted BCE to convert to an income trust.

Or to put it in another way, that’s 3.17 billion dollars in tax leakage unintentionally created by Canada’s Minister of Fiscal Bungling for the next four years.

Not to mention that Telus, as a common stock, is confident that its lawyers and accountants will be able to find sufficient tax loopholes in the coming years to continue to pay NO corporate taxes to the federal government.

In Harm’s Way: Harper’s Way, Or The Highway

Ooops! Did someone just mention alarming tax leakage -- and from publicly-traded corporations, not from income trusts?

By golly, is this how Jim Flaherty and Stephen Harper saved Canada from financial ruin? Just like Rona and Stephen saved Canada from environmental disaster?

Hmmm. Just how up-to-speed on this issue were the tiny perfect one and his brooding boss when they made their Halloween-eve decision?

Did someone -- perhaps a Finance bureaucrat, or two, or three -- kinda leave out a few pertinent facts about the reality of existing corporate tax avoidance in Canada, and about the hundreds of million dollars in personal tax revenue pouring in from income-trust investors?

Is it possible that the Finance bureaucracy -- the gang that can’t calculate straight -- made the mistake of making calculations and presentations, to their political masters, based on the posted (maximum) rate of corporate tax that could be collected from existing common stocks -- versus the reality of how much corporate tax the federal government was actually collecting from those public entities after their efforts at tax avoidance?

Perhaps, Canada’s beloved tax collectors forgot to inform the Finance Minister, and his Big Boss, that many Canadian publicly-traded corporations typically “run their books” annually to create tax write-offs that are so large, you could even ram a Cabinet Minister’s mammoth pension through them.

Well, yes, you argue, but what if almost every publicly-traded corporation in Canada had turned itself into an income trust, if the government hadn’t acted? Wouldn’t this still have resulted in a harmful distortion of the Canadian capital markets, since many common stocks just aren’t meant to be income trusts?

Indeed. But who said the government shouldn’t have acted to squelch the conversion of inappropriate common stocks into income trusts? We certainly didn’t.

And what if by Halloween 2006, the capital markets had already become corrupted by greedy paper pushers on Bay Street -- earning tons of dough from creating income trusts that shouldn’t have been income trusts? Shouldn’t the government have acted then?

Yes, they should have, is our answer. If this were the case, then the Harper government would have been justified in immediately stopping the creation of new income trusts, or the conversion of common stocks into new income trusts -- and then engaging in public consultation to discover a means of reasonably stemming such excesses -- without destroying the entire income trust industry, or extinguishing the savings of millions of trust investors.

That’s what Paul Martin’s Liberal government was inclined to do in 2005, before having second thoughts. But why the overkill, by the Conservatives, when it came to dealing with income-trust conversions in 2006? Why the onerous “all-fits-one” Flaherty tax on trusts that appears designed to kill the income-trust industry entirely, and to arbitrarily shift investment capital to less deserving -- and sometimes riskier -- common stocks?

Were there no other fiscal “remedies” open to Jim Flaherty and the Harper government?

Other Remedies? What Other Remedies?

Actually there were plenty of other fiscal “fixes” open to Jim and Stevie.

As suggested above, a reasonable remedy by the Harper government might well have been to stop the creation of further new income trusts, and/or stop the further conversion of common stocks into income trusts -- and then engage in a public consultation to discover a reasonable structural remedy for stemming the Bay Street excesses that had been identified -- without destroying the entire income trust industry, or the savings of millions of income-trust investors.

Or to fulfil their desire to appear to take “decisive action,” the Harper government could have immediately ended the creation of new income trusts, but “grandfathered” (exempted) existing trusts from any new tax measures -- ensuring the viability of existing trusts and investors’ savings in them.

The dynamic duo either didn’t hear about such “moderate” alternatives from their bureaucratic advisers; or they were so panicked about what they had read about income trusts in the Globe & Mail, they felt they needed to something, anything, to look like they were still in charge.

How to sum up this Keystone Cops maneuvering of a new government and Finance Minister clearly out of their depth? How about the following comments from respected financial columnist, Diane Francis, writing in the Financial Post on December 2, 2006:

"It's obvious that Prime Minister Stephen Harper, Finance Minister Jim Flaherty and the civil service simply did not do their homework before wreaking $30-billion worth of havoc on the income trust sector. Even worse than the immorality of breaking a promise people made financial bets on, the Prime Minister et al are absolutely incorrect in assuming their proposal will enhance tax fairness, eliminate tax leakage and increase productivity. It will do the opposite.

The policy is so naive that there should be a full-blown hearing by the Senate into the matter before it's approved. To rush it through, without sufficient examination, would be to exacerbate what can only be described as a massive policy blunder by politicians that clearly don't understand capital markets…

New proposed taxes on income trusts will force them to restructure back into traditional corporations. This will increase the tax leakage...

Why wouldn't the Department of Finance, the Minister and Prime Minister understand this? Because Ottawa's analysis dealt with posted tax rates, not with the actual tax rates paid after all the accounting tricks are used [by public corporations]. Corporations duck taxes while income trusts are tax-generating machines…

Finally, the biggest blunder of all is that this policy announcement has discounted the income trust sector by $30-billion which represents a huge whack of the economic base of Canada. This confiscation of value will pave the way for traditional corporations and private equity outfits to pick them [income trusts] off cheaply. These potential buyers, often foreign, will turn around and borrow huge sums to buy them [income trusts] - money which will be written off against profits for tax purposes. The resulting leveraged buyout of the income trust sector will cost Ottawa dearly [in terms of the taxes they can no longer collect], thus putting more pressure on taxes from ordinary Canadian families.

How prophetic Diane Francis has turned out to be, as we now watch income trust after income trust being summarily taken out at bargain basement prices (created by the actions of Jim Flaherty) by foreign buy-out vultures. And don’t expect these foreign buyers to pay a cent of taxes to the Canadian government. Any taxes paid will go their foreign domiciles.

Talk about billions of dollars of government-created tax leakage, which this country cannot afford. Talk about over-the-top prevarication and fiscal bungling that defies belief. And talk about a Finance Minister who still appears hell bent on destroying Canada’s current economic prosperity by selling out Canada to foreigners -- and all for the sake of avoiding saying he’s sorry and admitting he made a huge fiscal mistake (and a very, very huge one, at that).


INCOME TRUST IMBROGLIO: Tories Throw (Baby) Investors Out With Bathwater

-- What could be wrong with the Tory plan to tax income trusts? What indeed...

By Roel Meijer
April 19th, 2007

On Oct. 31, 2006, Halloween, Finance Minister Jim Flaherty announced an abrupt change in taxation for income trusts. Investors were outraged: The Conservatives' election platform had promised they wouldn't touch the trusts.

Income trusts in Canada are relatively small - most have a market capitalization under $1-billion (they first appeared in 1986 in the energy sector, and later in other industries). They are interesting for small investors because they pay high dividends (distributions). The trust itself pays few taxes; the government gets its revenues from taxing the shareholders' dividends. However, many shareholders, like pensioners, are - almost - tax exempt. Most trusts are too small to be interesting for institutional investors. Therefore, most shareholders are small and, importantly, Canadian.

Flaherty argued Canada was losing too much tax revenue through the income trust structures.

Taxing them like "normal" corporations was supposed to add $1-billion to Ottawa's coffers. Despite the outrage, many analysts agreed the government should "stop the bleeding." But not all.

In early November, the trusts lost $30-billion in value after investors bailed. A Nov. 2 report from Canadian investment firm Canaccord Adams said: "If the tax proposal is enacted as presented, we believe that Canada will lose control of its energy sector and investment activity will decline in conventional oil and gas production," and, "We believe this tax reform will reduce the standard of living for current and Become a member future retirees."

Wall Street "rebel" investment group Agora Financial's Eric Fry wrote on Nov. 3: "Seems fairly moronic to torch $30-billion of shareholder wealth for the benefit of capturing a couple billion dollars of taxes. The opportunity costs for the country of Canada could run into the tens of billions of dollars, if not hundreds of billions." The change in the trusts' taxation status, and the predictable loss in value that ensued, made them prime targets for large private equity groups and hedge funds, which are mostly American. And pay few taxes in Canada.

On April 9, The Globe and Mail reported that Flaherty's tax changes, which were supposed to have brought Ottawa more revenue, are having the opposite effect. Not only is revenue lost instead of gained, Canada is losing ownership of its resources in the process, and investment in the energy sector is decreasing. "It would only take slightly more than 15 per cent of the trust sector to be bought out by foreign private equity, and non-Canadian firms, before Ottawa was losing annual tax revenue equivalent to what it said eluded its grasp before the trust tax." In other words, Ottawa could lose

$5- to $6-billion annually. The article quotes Sandy McIntyre of Sentry Select Capital Corporation: "If so-called tax fairness was intended to accelerate the sale of Canadian companies to foreign entities, then it is a success. If it was intended to increase Canadian tax revenues, it is a failure."

Asked by Hour for comment, economist Tom Velk, Chairman of North American Studies at McGill, agrees the changes hurt Canada. He implies Harper and Flaherty were out of their league: "They should have thought it through more deeply," and, "They had no idea who was invested in income trusts."

Velk is a free-trade supporter who nevertheless has difficulties explaining how, with respect to income trusts, free trade is positive for Canada, but claims, "The foreign investors who are now buying up Canada's trusts may have a positive effect by making them more efficient." Yet these funds typically take the prime assets out and sell off the less-profitable remains. And, as Velk volunteers, often raid a company's pension plans.

What is increasingly clear is that what was sold to Canadians by the Harper Conservatives as an increase in tax revenues has turned into a fire sale of Canadian companies to foreign investors, a fire sale which may cost Canada billions in revenue for years to come, never mind stewardship of our own natural resources.

Monday, April 16, 2007


Tax Leakage From Income Trusts??? Er, Would You Like To Talk About The Environment? ....

On Halloween Eve 2006, Canada’s Finance Minister introduced the framework for a draconian new tax scheme obviously intended to destroy the booming income trust industry. Ultimately, that “Made In Haste” initiative would lop off 25 billion dollars from the hard-earned savings of millions of Canadians who had invested in income trusts.

In fact, based on a national November 2006 poll, Ispsos-Reid estimated that four million Canadians actually suffered losses from the government’s actions. However, many Canadians didn’t realize that they were affected until they viewed their mid-January mutual fund statements.

Regardless, there must have been the equivalent of a national financial crisis for the Conservative government to act in such an arbitrary and draconian manner. After all, it was only about a year previously that Tory leader Stephen Harper had promised Canadian voters that if elected, he would “protect seniors” and “NOT tax income trusts.” Period. No qualifiers.

Um, now about the national emergency that provoked such Big Brother intervention in the financial markets by Mr. Harper and his minions. Er, well, it, um, er, you see, uh…perhaps we should let Rona Ambrose explain the whole matter…Oh, nix that idea; she’s no longer one of the P.M.'s favoured...

Instead, let’s talk about tax leakage from those vile dreaded, horrible income trusts -- the worst thing to afflict Canada since Belinda Stronach changed her hair colour.

Tax Leakage Research: Where’s The Beef?

Where were we? Oh yes, tax leakage from income trusts. That’s the terrible revenue deficit (allegedly lost taxes) suddenly experienced by Canada’s beloved tax collectors on Halloween Eve 2006. According to Finance Department studies…Oh dear, that’s right, there are NO Finance Department studies on this subject that anyone in the government is willing to produce.

In fact, here’s what John Dielwart, head of CCET (the Canadian Coalition of Energy Trusts), surprisingly discovered. When that group used Canada's Access to Information laws to obtain the analysis and research studies that Ottawa used before deciding to drastically change the tax status of income trusts, CAIF was told that “no such studies exist.”

Well, um, er…where’s Rona? Rona, maybe you could come forward and distract the reporters with that neat hair toss you always executed so perfectly every time you insisted that global warming doesn’t exist…Oh, dear, that’s right. Stephen says that global warming does exist now, and the Conservative Party is now greener than a bar of Irish Spring bath soap.

How can Canada’s Prime Minister indulge in such a blatant policy flip-flop? Well, you know what he always reminds the Cabinet. God can change his mind…

Never mind, let’s get back to income trusts…So about all that Finance Department research on tax leakage from income trusts…well, maybe it wasn’t Finance Department research. Maybe it was all that ‘sort-of’ research, guesstimates really, from Professor Jack Mintz and his cronies -- the “kind-of, sort-of’ studies that Finance bureaucrats read about in the Globe & Mail.

Well, here’s the scoop from Finance, by way of the Globe & Mail ROB section, by way of Jack Mintz and other ‘experts’ whose very flawed calculations on lost tax revenues ignited the recent government fatwah against income trusts: At least 500 million tax dollars were lost annually from income trusts…well maybe really only 320 million dollars…well no-one can really be certain, so …Rona! Help us out here, Rona! We need another distracting hair toss! Oh, never mind!

The Plan: Destroy 25 Billion of Canadians’ Savings & Collect 500 Million Dollars In Taxes

Anyway, for argument’s sake, let’s just say the tax loss to Finance Department coffers is 500 million dollars annually (well, that’s what the Finance guys originally said before publicly admitting that they had no concrete evidence to back up that brazen exaggeration). Not to mention that it was at a time when the federal government was experiencing the onerous financial burden of annual four-billion-dollar budget surpluses!

Imagine, 500 million dollars in lost taxes at such a time! It’s just such a terrible, frightening loss of government revenue which otherwise could have been wasted, er, invested in such high-priority government initiatives as bailing out money-losing, Quebec-based Bombardier yet again. Or perhaps buying some new multi-million dollar fighter jets to help out George Bush.

With these grave considerations in mind, who can blame Canada’s ruling minority government for resorting to a last-ditch emergency measure to recoup that alleged 500 million dollar loss in government tax revenues?

Who could argue with the Harper administration arbitrarily -- without any prior consultation -- intervening in the financial markets and causing a loss of 25 billion dollars of Canadians’ savings in order to get back that precious 500 million in tax revenues for the government?

After all, what is a twenty billion dollar haircut for Canadian investors, as compared to the tax department of Canada possibly losing up to 500 million dollars in taxes, even if Finance bureaucrats likely used the Globe & Mail as their research tool to come up with such fanciful numbers?

The Real Story: Red Herrings, Flawed Stats & Media Myth Making

So what’s the real scoop about all this alleged tax leakage from income trusts? Well, boys and girls, let’s go back in time when a noted business professor, Jack Mintz, wrote a series of policy papers urging the government to practice “tax fairness” and to “even the playing field” between public corporations (that is, corporate stocks like BCE and Telus) and income trusts.

However, as Professor Mintz has emphasized on more than one occasion, his original goal was to encourage the federal government to sufficiently reduce the tax on corporate dividends to make Canadian dividend-paying stocks just as attractive to income-hungry investors as income trusts.

That was the equal playing field Professor Mintz was advocating. Nowhere in his obtuse academic policy discussions did Professor Mintz suggest that the government should impose an additional tax on income trusts.

And nowhere did Professor Mintz criticize the tax-free “flow-through” structure that government legislation had originally mandated for the original royalty (energy) trusts and real-estate investment trusts.

Flow Through, Shmow Through? Who Cares?

By the way, here’s what was intended by the “flow-through” structure of the original government-legislated income trusts. Unlike public corporations, income trusts themselves were not to be subject to any tax. Instead they were mandated to directly “flow through” as much of their earnings as possible to income-trust investors (holding back sufficient funds to keep their businesses thriving, but not for spending on perks like executive jets, rigged stock options and ego-driven corporate buyouts).

Investors in income trusts would themselves pay tax on the income (distributions) they received from such trusts. But because of the direct “flow-through” nature of income trusts, more income would be paid to investors from income trusts than from comparable corporate equities (dividend-paying stocks).

That’s because conventional stock companies can retain most of their earnings for further expansion schemes and executive perks. For example, instead of paying out the bulk of their earnings to shareholders in the form of income (as must income trusts), corporate stock entities can use that cash to buy up other companies in totally unrelated business sectors -- buyouts which often turn out to be money-losing investments (just ask BCE about CTV). Or they can use it to pay for over-generous executive salaries, stock options or other executive perks. And they can also use “surplus” earnings to buy back shares of the company in the open market.

In other words, unlike income-trust CEO’s, executives of public corporations have long been permitted to use company earnings for just about any purpose other than directly paying out generous income payments to shareholders who theoretically own the company.

A Boon To Energy Producers

But why give such a generous “flow through” tax break to income trusts? Because initially this financial structure was to be used by energy producers (and later pipelines and other resource producers) to raise capital in a very depressed energy/resource market.

In particular, the income trust structure was designed as a unique way to attract investor money to the Western oil patch (and later the industrial real-estate industry), while providing investors in these financial instruments with more income in return for taking a higher investment risk than usual.

However, the one risk that no-one could have envisaged in 2006 -- from a government that had promised not to tax income trusts -- was an onerous new trust tax that ultimately will destroy the entire trust industry and result in the sell-out of uniquely Canadian trust companies to domestic and foreign private equity interests who have no intention of paying a cent in taxes to the Canadian government.

Regardless, let’s make one thing clear. Even if income trusts were paying no taxes to the federal government in October 2006, income-trust investors were paying hefty taxes on the income they received from their investments in trusts. And if these investors were affluent enough to be in the middle or highest tax brackets, they likely paid more tax, percentage-wise, to the government than any income trust would have paid if it had been taxed like a public corporation (common stock). Today, for example, the average corporate tax rate for major Canadian non-trust energy stocks is only about 16% (not the 30% figure bandied about by the Finance Minister), and there are some publicly-traded foreign energy subsidiaries that pay little or no tax to the Canadian government.

Talk about a massive “tax leakage” that politicians and bureaucrats don’t seem to care about -- in contrast to the current obsession with alleged “tax leakage” from income trusts!

Woops! Back To Professor Mintz

Anyway, back to Professor Jack Mintz and his trust policy papers. They were destined to end up in the garbage bin of policy-paper history if some enterprising business reporters hadn’t stumbled on one particular guesstimate of the good professor -- regarding how much tax loss the federal government was purportedly suffering from income trusts.

Welcome to the origins of the myth of income-trust “tax leakage.” Using a very flawed analytical model, Professor Mintz originally estimated that there was a tax leakage of more than 300 million dollars from income trusts, as compared to what would happen if trusts were treated taxwise as regular common stocks.

Suffice it to say that one of the biggest criticisms of Professor Mintz’s approach to the subject of income trusts was that he treated tax-deferred RSP income from income trusts as lost government tax -- because in the year that such income is received in a personal RSP, it is exempt from taxation.

That’s what’s called a present-value analytical model, ignoring future tax implications of such income. However, what is really needed to gauge tax reality is an analytical model that additionally calculates the deferred (future) taxes that the government will ultimately collect when RSP trust investors withdraw that same money from an RSP.

In fact, current untaxed RSP income actually represents a locked-in savings plan for the future, for government. Our politicians can’t immediately spend that trust tax money on the latest wasteful government boondoggles. Instead they must practice financial discipline and wait for the taxes to be paid out in future years (via mandated RSP withdrawals) when the government may have greater need for those tax revenues -- for example, in the next decade, when health and social services costs will likely spiral as Canada’s baby-boomer population ages.

So forget the Mintz-inspired “tax leakage” myth. Because of the good professor’s flawed analytical model -- and we’ve only dealt with one of this model’s shortcomings -- his and similar studies have generated an amazing amount of newspaper fiction writing, with regard to the alleged discovery of shortfalls in government tax revenue from income trusts.

The Myth That Won’t Go Away -- Flaherty’s Folly

The trouble is that the media (can you say, “The Globe & Mail,” kiddies?) and Finance Department bureaucrats won’t forget these income-trust tax studies. They have “reified” these outside findings -- treating questionable statistics on “tax leakage” as if these flawed numerical ‘guesstimates’ represent something that exists in reality, rather than in the minds of those who popularize such distorted research.

And then using this misinformation, on two occasions, Finance bureaucrats appear to have formulated government policy on the go. For example, in October 2006, they used a media-defined income-trust “crisis” as the excuse to advise Canada’s Finance Minister to take draconian action to stem an alleged “tax-leakage” tsunami which did not even exist.

In fact, as we shall discuss in a subsequent blog entry, there were plenty of good reasons for the government to take some action (though not necessarily for the reasons provided by the Finance Department). But there was NO reason for implementing the disastrous “take no prisoners” approach undertaken by the Finance Minister toward income trusts -- to destroy the existing income-trust market, as well as the ‘mom & pop’ investors who had invested in these financial instruments.

Closing Thoughts

Now, knowing what you now know about the tax leakage myth, what would you think of a Cabinet Minister whose policy decisions on income trusts were based on financial myths? Despite rave reviews from the Globe & Mail, couldn’t one definitely question whether Canada’s tiny perfect Finance Minister is the sharpest blade in Ottawa?

Additionally, do we really want the fate of some of Canada’s most valuable Western oil-patch reserves depending upon the alleged expertise of Ottawa bureaucrats who couldn’t distinguish a productive energy holding from an expense-account lunch chit?

And what would you think of a national leader who encouraged his Members of Parliament to defend his government’s flawed decision making with fabrications that would make the late Richard Nixon blush?

Rona, where are you, Rona? Rona?

Er, did we tell you about the latest eco-environmental initiatives that John Baird has implemented in the Prime Minister’s executive washroom?

Sunday, April 15, 2007



The Rodney Dangerfields Of Canadian Investing

Pity the poor income trust, the popular income-producing investment vehicle that just can’t get “no respect” from Canadian politicians or the media. Income trusts are held in about as high esteem, by Canadian politicos and journalists, as the idea of Belinda Stronach attending a Mensa convention. And unfortunately investment vehicles can’t change their hair colour or date a hockey player to try and change their public image.

But what is the real truth about income trusts -- still simultaneously hailed as the next best financial thing by income-starved retirees and GIC refugees, but politically maligned by two successive Canadian governments misled by ill-informed Finance Department bureaucrats?

In fact, like most things in life -- including flavoured latte confections and an underwear-challenged Britney Spears -- income trusts have their good and bad sides.

Fortunately, when it comes to income trusts, the good outweighs the bad by a long shot -- contrary to what you’ve heard from Canada’s misguided Finance Minister, or from ambitious would-be financial “experts” looking for their fifteen minutes of media notoriety.

The Good, The Bad & The Sometimes Ugly

Income trusts have been good for Canada. They have been good for investors who understood the risk involved in investing in these financial entities. And despite the bad rap trusts have been getting lately, they are superior generators of tax revenues to government -- it’s just that the tax is paid by the individual investors who receive income-trust income, rather than by the trusts themselves.

First off, it’s important to understand that there are several kinds of income trusts, including the original royalty trusts (energy trusts), real-estate investment trusts (REITs), infrastructure trusts (eg., pipelines and power generators) and today’s varied business trusts.

The very first form of income trusts, sanctioned by federal legislation, were royalty energy trusts. Talk about being good for Canada. By way of a unique confluence of economic factors, the first energy trusts sparked a productive wave of increased energy production, job creation, resource optimization, and government tax royalties for Canada’s Western provinces, particularly Alberta.

And along the way, this unique investment structure for generating investment capital and income -- an unprecedented fruition of the meeting of minds of government and the free market -- managed to provide individual investors (such as retirees and self-employed RSP contributors) with the enhanced income they needed to cope with inflationary pressures in today’s low-interest-rate income environment.

In other words, in an emerging new economic era -- in which five-year bank GICs paid under 4% per annum, and electricity, heating, real-estate tax and other costs of living soared -- investing in royalty (and later all) income trusts provided millions of Canadians with the income required to “scrape by” in retirement, or to save up for their future retirement.

This is an economic fact of life which today’s pampered Finance Department bureaucrats -- with their inflated six-figure salaries and guaranteed indexed pensions -- have never been able to grasp. But then again, when your work life revolves around indulgent expense-account lunches -- dedicated to finding new ways of squeezing hard-earned dollars out of taxpayers to pay for the excesses and perks of government -- why would you be aware of the struggle by ordinary Canadians to simply survive?

Oops! Business Trusts!

But speaking of the bad (and we certainly believe revenue-hungry federal bureaucrats are bad for the country), let’s get back to the history of income trust themselves. Because after the success of energy trusts, and then real-estate investment trusts, Bay Street came up with a new twist on trusts -- business trusts.

Not that there aren’t some good business trusts. There are in fact a lot of them. But in the rush to “cash in” on the trust “golden cow,” Bay Street financiers, brokerage houses and corporate lawyers were not unwilling to take loser businesses, dress up their spreadsheets, and present them to the investing public as the newest and best thing in income trusts.

Not that these same Bay Street interests haven’t followed that same greedy and unethical M.O. in taking lame private businesses and converting them into conventional corporate stocks (the kind our current Finance Minister reveres, even if these businesses are total turkeys, lose most of their investors’ money, and pay little tax to the government).

There have been, and still are, plenty of rotten apples like these in the conventional stock market. But unlike with income trusts, accounting experts and government bureaucrats don’t seem to mind, even if the Bay Street denizens have long been getting filthy rich sponsoring this kind of stock-market flim flam.

Regardless, welcome to the world of bad business trusts, the poster boys for what can go wrong, but usually doesn’t, with income trusts. These are the bad trust apples that have been used by critics to misrepresent the true nature of income trusts in general -- without ever mentioning the bad apples among conventional stock-market equities.

As for the ugly, would you buy a used car from a Bay Street paper pusher who garnered millions of dollars in fees, bonuses and commissions from churning out business lemons? It may not be a bad way for these guys (and gals) to help pay for a new Porsche, Muskoka vacation home or Rosedale mansion, but it still has the ugly whiff of greed gone wild.

But let us emphasize one key point. This is the exception not the rule when it comes to income trusts. Most income trusts are well-run, money-making enterprises that benefit their unitholders and the geographic locales in which they are situated.

Yet, when today’s panic-stricken government leaders have stumbled and succumbed to the mistaken advice of their bureaucratic advisors on trusts, it is usually because our politicians have bought this exaggerated stereotype of trusts, hook, line and sinker. And consequently, they believe that all income trusts operate this way.

Nor do they usually have any idea that income trusts have become an essential income source for millions of ordinary Canadian retirees and savers who are struggling to keep up with increasing costs of living in Canada. But after taking bad advice from bureaucrats with a hidden agenda, government leaders would prefer to believe that any damage created by their mistaken actions on trusts has only impacted the rich.

Then there’s the issue of “tax leakage” -- taxes which income trusts allegedly don’t pay to the government, in contrast allegedly to conventional business corporations like Telus (which incidentally has paid no tax to the Canadian government since 2000). Unfortunately, the myth of tax leakage is a complex and nuanced subject which we’ll have to leave for a subsequent blog. But be assured that there is more tax leakage from many celebrated non-trust, large-cap stocks (such as Telus and BCE) than from almost any income trust.

Final Thoughts

In the meantime, please remember that it’s not wealthy “coupon clippers” who primarily benefited, and still benefit, from the income-generating capabilities of income trusts. It’s the millions of ordinary Canadians (particularly pensionless retirees) who have had trouble living on reduced income from G.I.C.’s, bonds and other conventional savings instruments in today’s high-cost world.

And contrary to what your favourite Finance Minister has been mistakenly telling you, income trusts (and particularly energy trusts) have been good for Canada. Without them, much of the thriving energy bonanza in the Western oil patch, and profitable real estate developments right across Canada, would not have happened.

Thousands of jobs would not have been created, local economies would not have been invigorated, trust investors themselves would not have paid billions of dollars in taxes to various governments, and the nation would have been poorer for it had trusts not existed -- a few rotten apples notwithstanding.

That’s the truth about income trusts. And the whole truth (though condensed somewhat).

Not what you usually hear or read these days. But then again, if you were a politician, and if -- for political expediency -- you cynically broke a promise to the electorate for the wrong reasons, would you be telling the truth?

Not likely.




The Edmonton Journal
Sun 05 Nov 2006
Page: A18 Section
Opinion Byline: Lorne Gunter

On Friday, I wrote that the federal Conservatives had made a necessary decision regarding income trusts.

Imposing the same taxes on companies that convert to trusts, as are currently imposed on corporations, was not their only option.

To be sure, they needed to equalize the two tax rates. But equity could have been achieved just as well -- or better -- by lowering the taxes on corporations rather than raising the taxes on trusts.

The way trusts are taxed gets around the double taxation inherent in the taxation of corporate dividends.

Corporations pay dividends to shareholders on after-tax profits. And shareholders pay taxes on the dividends they receive. A tax double-hit on the same money.

Income trusts and other "cash-flow entities" get around this by paying out income as it is earned by the company. The company "flows through" its income to trust holders and pays no tax since it never retains the income. Trust holders pay tax on the monies they receive, but often at a lower rate than on earned income. As such, trusts are very attractive to investors and corporations alike.

The Conservatives could have eliminated most corporate income tax rather than imposing new income taxes on income trusts. That would have made Canada the one of the most attractive investment destinations in the industrialized world.

Rather than slashing billions from the value of trusts, it would have added billions to the value of corporations.

But the tax inequity was becoming a political, if not an economic problem. It didn't have to be solved by imposing the same double taxation on trusts as is imposed on corporations. Yet at least the Conservatives did something.

My Friday piece, though, prompted several thoughtful, informed replies offering alternative viewpoints.

"You're simply wrong that the trust option was exploited only or even mainly by very large companies," wrote one analyst from Calgary. Sleep Country, small breweries, Atlas Cold Storage are all trusts and none of them (with the possible exception of Sleep Country) is a huge company. I stand corrected.

"Oil companies with production of 10,000 barrels per day? Come on. The trust market was almost entirely medium-sized companies. Literally none of the large energy producers or giant pipeline companies had converted. The largest two trusts produce about 100,000 barrels per day, far less than even the smallest of the integrated producers."

This second point reveals the one miscalculation the Conservatives may have made in their decision to tax trusts: They forgot about trusts' role in the recent oil and gas boom in Alberta.

They anticipated well the reaction of seniors to the trust change by permitting income splitting on retirement income and extending other deductions. And they knew they would take a serious hit from near-retirees who would see some of their investments diminished and for whom little compensatory action was possible.

So the government resolved to brace themselves against that storm.

But they seem not to have recalled that many oil and gas producers in Alberta were income trusts. With a prime minister -- an economist -- from Calgary, you might imagine this would not have escaped their notice. Yet it appears it did.

A director of one of the trusts wrote to Prime Minister Stephen Harper: "Brilliant. With the stroke of a pen you have wiped out $35 billion in market value and ripped the heart out of the number one growth industry in Canada." He claimed to have torn up his Conservative membership card and promised to vote Liberal in the next election.

Another reader asked why I thought the Conservatives' action was courageous, since it was the predictable, big-government option? It increased the tax revenues flowing to Ottawa. It preserved the lifeblood of the state.

"Don't we want government to have less revenue," he chided, "so they have less money to spend? Any argument for why we needed the revenue is just an argument for more big government."

And he's right.

The truly courageous thing for the Conservatives would have been to lower all corporate taxes, take the risk that the increased economic activity that resulted would have replaced the foregone tax revenues and be prepared to make government smaller if the new revenues never materialized.

That would have been the bold -- and conservative -- thing to do.

Finally, to all those readers who wrote or called and asked whether I knew that the federal finance minister is Jim Flaherty and not Joe (as I mistakenly wrote Friday)? Yes, thanks. I do know Canada's public finances are in the hands of the former Ontario cabinet minister Jim Flaherty rather than Joe Flaherty, the zany comedic talent of SCTV fame (Count Floyd, anchorman Floyd Robertson, smarmy talk show host Sammy Maudlin).

As Dave from St. Albert pointed out, "At least if Joe Flaherty, rather than Jim, had wiped out $40,000 in my retirement account overnight, he might have made me laugh about it."