THE TRUTH ABOUT INCOME TRUSTS #4

Class Conflict & Status Snobbery: The War On Income Trusts

“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 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 between 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? Independent 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, 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 blue chip equities.

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 Underclass’ Gain Is The Establishment’s Loss

Aha! 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 these privileged individuals 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 set aside for them shares 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 more tax money from Canada’s obliging taxpayers, to finance higher 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 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 royalty 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, and family background) 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 easy 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 in 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. Then as they were proven wrong over and over again, the 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).

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 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 previous issues, we’ve already deconstructed the media (and then bureaucratic) 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 in previous issues, we’ve already dealt with this nasty libel against income trusts. So let’s get right to the point of this issue’s storyline. 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 perfect 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 to the benefit of Bay Street financial interests, and the vanities of the bureaucratic and media elite.

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 banks and mutual funds.

Not only that, but big-business friends of the government, like Gwyn Morgan, Paul Desmarais Jr. (Power Corporation) and Michael Sabia (BCE), 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 that’s 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 these clueless political pawns of Canada’s elite couldn’t care less.

Only in Canada, you say? Pity!

We’ll be back in future issues to bring you more real-life truths about income trusts.