Income Trust Truth

PLEASE PASS AROUND THIS NEW PETITION TO REVOKE TRUST TAX

2007-05-10T10:06:00.000-05:00

Petition to the Government of Canada - Income Trust Broken Promise

PETITION TO THE GOVERNMENT OF CANADA

INCOME TRUSTS 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)

Vulture Capitalists Circle Flaherty's Energy Prey!

2007-05-08T09:57:00.000-05:00

FEDERAL TAX 'LOOPHOLE' MAKES TRUSTS TASTY TARGETS

-- 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."

spolczer@theherald.canwest.com

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

2007-05-02T14:29:00.000-05:00

DODGE FRETS WHILE CANADA STUMBLES

-- 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?

Flaherty's War On The Less Privileged!

2007-04-28T16:48:00.000-05:00

CLASS CONFLICT & STATUS SNOBBERY:
THE NEVER-ENDING 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 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!

EVEN AESOP PROVES FLAHERTY WRONG ON TRUSTS!

2007-04-27T10:43:00.000-05:00

INCOME & ROYALTY TRUSTS:
AESOP'S WARNING IGNORED BY MR. FLAHERTY

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

KILLING THE GOLDEN GOOSE

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

KILLING A SECTOR OF THE ECONOMY

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

FLAWED ANALYSIS BEGETS FLAWED POLICIES

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?

WHO GETS BURNED?

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!

WHAT SAY THE TRUST NAYSAYERS NOW?

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!

Fallout From Flaherty Trust Tax Never Seems To End!

2007-04-25T15:10:00.000-05:00

THUNDER ENERGY TRUST: MORE FLAHERTY-ASSISTED TAX LEAKAGE

Hmmm. Tax fairness...is 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!

FURTHER READING ON FLAHERTY 'TAX UNFAIRNESS'

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.

HARPER WALKING A THIN LINE

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 tommys@vdn.ca. 2007-04-25 10:22:14

FINANCIAL POST HITS FLAHERTY'S TRUST TAX IDOCY!

2007-04-21T10:02:00.000-05:00

FLAHERTY'S TAX CONUNDRUM

--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."

ANGRY BILLIONAIRE TEARS INTO FLAHERTY & TRUST TAX

2007-04-21T09:33:00.000-05:00

SCHULICH TAKES AIM AT INCOME TRUST 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."

FLAHERTY'S 3.17 BILLION DOLLAR BLUNDER!

2007-04-19T14:39:00.000-05:00

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).

FUROR BUILDS OVER FLAHERTY SELL-OUT OF CANADA

2007-04-19T13:50:00.000-05:00

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
OTTAWA EXPRESS
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.

TAX LEAKAGE FROM INCOME TRUSTS -- HARPER’S BIGGEST WHOPPER!

2007-04-16T14:00:00.000-05:00

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?

INCOME TRUSTS ARE A GOOD THING!

2007-04-15T10:06:00.000-05:00

THE REAL TRUTH ABOUT INCOME TRUSTS

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.

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SOME BONUS INCOME TRUST READING:
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TAXING TRUSTS NOT THE ONLY OPTION:
HARPER COULD HAVE CUT CORPORATE TAXES & SHRUNK HIS BIG GOVERNMENT BUDGET

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."

RENOWNED BROKERAGE FIRM CONDEMNS FLAHERTY'S FOLLY

2007-04-14T07:59:00.000-05:00

FAIRNESS, SCHMAIRNESS -- FLAHERTY EXPOSING CANADIAN BUSINESSES TO FOREIGN TAKE-OVERS

-- Special Report, RBC Dominion Securities, April 10, 2007

THE FEDERAL GOVERNMENT APPEARS BENT ON CREATING ITS OWN VERSION OF TAX FAIRNESS, AT THE EXPENSE OF MAKING CANADIAN BUSINESSES MORE VULNERABLE THAN EVER TO FOREIGN TAKEOVERS. AND AT THE EXPENSE OF FUTURE TAX REVENUES.

• TWO RECENT TAX CHANGES OPEN THE FLOODGATES – ALTHOUGH MAIN STREET MAY NOT KNOW IT, MANY CAN SEE THE WRITING ON THE WALL. TRUST TAXATION COUPLED WITH THE ELIMINATION OF DOUBLE-DIP INTEREST DEDUCTIBILITY LEAVES CANADIAN BUSINESSES ATTRACTIVE TO FOREIGN BUYERS. AND WE KNOW HOW FOREIGNERS LOVE TO PAY CANADIAN INCOME TAXES…. NOT.

• KILLING THE TRUSTS OFF – OCTOBER 31, 2006 WAS THE BEGINNING OF THE END AND ENOUGH HAS BEEN WRITTEN ON THIS TO KNOW THE FEDS ARE OUT TO ELIMINATE THE TRUSTS BY DECEMBER 31, 2010. THE PROPOSED LEGISLATION IS WELL ON ITS WAY THROUGH PARLIAMENT.

• KILLING THE DOUBLE DIP – IN THE FEDERAL BUDGET OF MARCH 2007, THE FEDERAL GOVERNMENT EFFECTIVELY ELIMINATED DOUBLE-DIP INTEREST DEDUCTIONS FOR CANADIAN CORPORATIONS ACQUIRING FOREIGN BUSINESSES. UNFORTUNATELY, THE RULES DO NOT STOP FOREIGN CORPORATIONS FROM USING THAT SAME TOOL TO ACQUIRE CANADIAN BUSINESSES. AS A RESULT, CANADIANS HAVE BEEN STRIPPED OF AN INVESTMENT TOOL THAT FOREIGNERS CAN USE TO ACQUIRE CANADIAN BUSINESSES.

• INTO THE CORPORATE RING WITH HANDS TIED SECURELY AT OUR BACKS – YOU WOULD THINK THAT THE FEDERAL GOVERNMENT WOULD TRY TO SUPPORT CANADIAN BUSINESSES (THE HOME-GROWN VARIETY) AS MUCH AS POSSIBLE, SO THEY ARE PREPARED TO TAKE ON GLOBAL COMPETITORS. INSTEAD, WE EFFECTIVELY TIE THE HANDS OF CANADIAN BUSINESSES BEHIND THEIR BACKS AND THROW THEM INTO THE GLOBAL RING. MANY WILL SURVIVE, BUT MANY WILL NOT IN A WORLD OF LOW INTEREST RATES AND INCREASING GLOBALIZATION.

• FAIR? TO WHOM? – ALL THIS DONE IN THE NAME OF TAX “FAIRNESS” WITHIN CANADA. BUT IF OTHER COUNTRIES DO NOT FOLLOW SUIT, THEN CANADIAN BUSINESSES AND INVESTORS ARE AT A GLOBAL DISADVANTAGE. THE CANADIAN FEDERAL GOVERNMENT CANNOT SET TAX POLICY IN OTHER COUNTRIES, AND CANADA CONTINUES TO HAVE ONE OF THE HIGHEST INCOME TAX RATES IN THE G-7.

HYPOCRITICAL HARPER'S SELL-OUT OF THE WESTERN OIL PATCH

2007-04-14T07:55:00.000-05:00

TAX UNFAIRNESS: ENERGY TRUSTS RIPE FOR PICKING THANKS TO TORIES

by Lisa Schmidt,
The Calgary Herald
Published: Friday, April 13, 2007

The Harper government plan to tax income trusts has left Canadian energy trusts "sitting ducks" for foreign takeovers, federal Liberal finance critic John McCallum said yesterday.

Speaking to a town hall meeting in Calgary - where the Liberals hope to capitalize on investor anger in the wake of major stock market losses after the new trust tax was announced last fall - McCallum said the trust tax will contribute to the "hollowing out" of corporate Canada.

"Far from being a tax fairness proposition, which benefits the individual Canadians and make corporations pay their fair share - that's the language - it does the opposite," McCallum told about 200 people. "It makes the energy-trust sector sitting ducks to be acquired by foreigners, which pay no tax. That's not tax fairness, that's tax unfairness and it's stupidity."

The trust tax change affects ordinary Canadians: Liberal finance critic John McCallum.

The new tax rules kick in four years from now, but already many oil and gas trusts and business trusts are openly considering their options, including privatization.

Since the new rules were announced, there have been 12 income-trust deals with total enterprise value of $7.3 billion, according to Canaccord Adams. Of the 12, nine will see income trusts end up in the hands of foreign private-equity shops, foreign corporations, Canadian private equity or Canadian pension funds, none of whom pay taxes in Canada.

A Liberal government would address the trust issue as one of its first orders of business, McCallum said. Instead of the

31-per-cent corporate tax rate, the Liberals would set a 10-per- cent tax on trusts, which would be refundable to Canadians, and continue the moratorium on new trust conversions. "This is not a fat cat corporate issue, this is an ordinary Canadian issue for the one million-plus of Canadians that have a real dent in their life savings," he said.

John Dielwart, chief executive of ARC Energy Trust and a co-chairman of a coalition of Calgary-based oilpatch trusts that have been fighting the tax, said that only a change of government could derail the new rules, which were included in the budget bill last month.

FLAHERTY INCOMPETENCE DAMAGING CANADA!

2007-04-13T09:46:00.000-05:00

'OUR TAX POLICY IS WRONG-HEADED'
--New Tory policies make things worse, tax lawyer says

by Diane Francis,
Financial Post
Published: Friday, April 13, 2007

John Brussa is one of Canada's top tax lawyers and, like most knowledgeable people, is furious about the Stephen Harper and Jim Flaherty tax policies.

He wrote to me recently with some observations about the state of Canada's economy and how the Tories are making problems worse. This is Economics 101.

"The tax policy in this country is wrong-headed under the current regime, and anyone, capitalist or socialist, nationalist or internationalist, should be concerned," he said.

Sound economic management should aim to keep the cost of capital as low as possible.

By breaking a promise to leave income trusts and oilsands taxation alone, the Prime Minister has introduced doubt into investors' minds.

"The question of how reliable our policies are must now be asked. It will undoubtedly raise the 'risk' premium demanded of Canadian investment," he said.

This makes a huge difference in Alberta, Saskatchewan and B.C. "In the Canadian oilpatch, we operate in a pretty marginal geological basin. What we have over places like Russia or Venezuela [where the geology is much more promising] is the comfort that investors take that the rules of the game will not be changed after an investment decision is made," he said.

"You would think that this level of comfort should be jealously guarded by our politicians since it directly ties to our level of prosperity. To blithely risk this based on dubious rationales seems the height of reckless and thoughtless behaviour."

Another key to growth is policies that reward equity investment and not debt leveraging. Harper and Flaherty flunk in that regard, too.

"That is just good sense in that debt increases systemic risk and equity is 'real' capital formation. It is the shock absorber for the system so that, in bad times, forced liquidations are not produced and prudent levels of capital investment can be maintained," Mr. Brussa said.

Ottawa's recent tax rule changes do the opposite.

"The government penalizes equity investment by imposing a 31.5% tax on equity investments in trust units. It therefore sets up a real incentive to capitalize enterprises with debt. Why? Because interest return is only taxed once while equity return is taxed twice," he said.

"Investments in trust units were equity investments; yes the investor took the risk, which was commensurate with his return, but the system was better served by encouraging permanent capital," he said. "The government's actions will encourage many trust assets to go into private hands [10% have already done so] as purchases are structured with maximum debt leverage and trust distributions are replaced with high-yield debt payment."

The Tories are encouraging foreign takeovers with their unfair measures.

"If an enterprise's free cash flow can go from being taxed at 31.5% to being taxed at zero, it does not take a Princeton undergraduate to realize that the assets and business will migrate to high-leveraged foreign ownership," he said.

Worst of all is the interest deductibility restriction on Canadian businesses buying foreign assets: "The recent budget discourages Canadian outbound investment by putting Canadian multi-nationals at a severe competitive disadvantage by making interest on money borrowed to fund foreign expansion non-deductible while encouraging nonresident inbound borrowing by removing the withholding tax on interest." Arguments that by preventing Canadian companies from expanding overseas they will do more in Canada are bogus:

"Canada is a very small market by international standards and if you follow this mercantilist approach, it will naturally result in size limitations for Canadian multinationals. Canada will be less likely to develop outwardly looking companies. Then you couple this with the enhanced ability to debt finance out of Canada by foreign multinationals operating in Canada by removing the Canadian withholding tax on interest paid to non-residents," he said.

"The result? Well, basically you produce formidable foreign competitors in the Canadian market, competitors who have a tremendous advantage in not only operating in Canada but in buying up Canadian enterprises. Canadian companies face the double whammy of being hamstrung from expanding out of Canada while simultaneously facing increased competition from foreign competitors operating in Canada with a cost of capital advantage," Mr. Brussa said.

"This is the opposite of what should be done."

dfrancis@nationalpost.com

Selling Out Canada & Canada's Seniors -- The Butler Did It!

2007-04-12T16:06:00.000-05:00

"TAX LEAKAGE" TURNS INTO A CALAMATIOUS FLOOD
- THANKS TO CANADA'S BUNGLING BUDGET BUFFOON!

Guest editorial by Brent Fullard, CAITI

"Trust buyouts not my fault!" -- Jim "What Me Worry?" Flaherty, Canada's Finance Minister

Not familiar with the Walkerton Water Disaster? (Check out: http://www.cbc.ca/news/background/walkerton/)

Well, Jim Flaherty is truly giving Walkerton's Stan Koebel a run for his money as Canada’s most inept and remiss custodian of the public good. No doubt Stan Koebel began his self defense with the words “it’s not my fault”. That’s usually the first indication that someone doesn’t understand the essence of accountability.

Unlike perhaps Stan Koebel, Jim Flaherty had plenty of warning about the inevitable “unintended” consequences of his taxation of income trusts including the foreign private equity takeovers. But then, Jim Flaherty’s actions were not singular in nature. His actions that led to this inevitable outcome had to have been deliberate because they were three fold in nature:

(1) impose a tax on public trusts, but no other trusts including private trusts held by pension plans

(2) impose restrictive growth constraints on the trusts’ businesses, but no other businesses and

(3) make foreign leveraged buyouts more economically attractive and achievable on much grander scales (read: BCE) by eliminating the withholding tax paid by foreigners on interest. BCE’s takeout will be predominantly funded by debt as will be the case with all the income trust takeouts, thereby INDUCING THE VERY outcome that Flaherty’s policy was OSTENSIBLY designed to avert: namely so called tax leakage.
How much more ill-conceived can one policy be if it simply induces the very outcome it professes to avert?

Here’s what others have to say about Flaherty’s performance in office on this and other matters:

On income trusts:

“Canadian Finance Minister, Jim Flaherty (he of the idiotic “trust” taxation decision rendered last October 31st, which we still believe ranks as one of the worst decisions ever rendered by a person in a position of monetary authority” Dennis Gartman who publishes The Gartman Letter from London.

“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.” Diane Francis, National Post

“Thinks it is the most ill conceived legislative move he has ever seen, from a tax perspective, in his 25 years as a tax lawyer.” Comments attributed to prominent tax lawyer John Brussa

“This is a disaster for Jim Flaherty, Canada’s Finance Minister” Eric Reguly, Globe and Mail

On interest deductibility:

“I've been practising tax for 35 years – this is the single most misguided proposal I've seen out of Ottawa in 35 years”, Allan Lanthier, a retired senior partner of Ernst & Young and immediate past chairman of the Canadian Tax Foundation

"This is unbelievable,I don't know who in Finance looked at this. I can't believe any sensible person would do this." Claude Lamoureux, chief executive of Canada's second-largest pension fund, the $106-billion Ontario Teachers' Pension Plan

On Accountability:

“Trust buyouts are not my fault” Jim Flaherty

HARPER'S ODOROUS SELL OUT OF CANADA!

2007-04-12T10:24:00.000-05:00

TRUST FIASCO HELPS HOLLOW OUT CANADA

by George Kesteven,
Financial Post
Published: Thursday, April 12, 2007

Last week, Finance Minister Jim Flaherty was quoted as saying that the current sale of income trusts to foreign entities and private-equity buyers was "not something that has to do with a particular tax policy." After months of staunchly defending his policy on income trusts, the Finance Minister ducked as the long-term impact of his plan began to emerge.

Is this how Mr. Flaherty demonstrates accountability to Canadians? With Parliament about to take up income trust legislation, the time has come for a reality check at the Department of Finance.

The Conservative government deliberately went ahead with its punitive tax on the distribution payments of income trusts despite repeated warnings from financial analysts, investors, opposition politicians and income trust executives about the devastating impact the new tax would have on this vital economic sector.

It was also pointed out to the Finance Minister that the Conservative policy could push trust assets into other accepted corporate tax structures -- domestic or foreign -- that would generate less revenue for federal and provincial governments. Now these warnings have come true and the government denies any fault.

The fallout from the government's proposed tax on income trusts was clear and immediate. The Toronto Stock Exchange recorded its biggest loss in more than two years the day after the income trust tax was announced. Within three days, more than $25-billion of capital had been erased from Canadian financial markets. Trust valuations were reduced, access to capital was cut off, and opportunistic acquisitors began to circle the trust sector like vultures. The editorial pages of leading newspapers began sounding the death knell for the income trust sector within a week of the tax being announced.

But now, as a growing number of income trusts fall into foreign hands and the hollowing out of Corporate Canada escalates, the Finance Minister has the audacity to tell the national media that the loss of Canadian income trusts "is not something that has to do

HARPER WRONG TO TAX TRUSTS -- GREEN PARTY

2007-04-11T14:37:00.000-05:00

TAXING INCOME TRUSTS A TORY MISTAKE, SAYS GREEN PARTY

OTTAWA – The Conservative government’s decision to tax income trusts has left seniors and many other Canadians in the lurch despite knowing that adhering to a budget is a major concern for pensioners.

The Green Party of Canada believes Minister Flaherty's decision was not only a promise broken, but lacked any evidence to justify the decision. In other words, the case for "tax leakage" was full of holes.

More than one million Canadians invested in income trusts following the 2006 Conservative campaign promise to leave income trusts alone. The Conservative’s hasty and contrary decision to then tax income trusts led to an exaggerated devaluation of this type of investment. In many cases seniors lost their entire retirement savings within hours as part of the overall $30 billion loss to individuals.

Green Party Finance Critic, Peter Graham, expressed disbelief at the careless attitude demonstrated towards senior citizens and many other Canadians. “These trusts were already taxed when dividends were paid out to individual investors. The government’s sudden decision to levy another tax on these funds that hold investors legally liable was reckless and inconsiderate. I’m sure they knew what the effects of this tax grab would be.”

In addition, and according to an April 2007 CIBC World Markets report, the new tax structure has the further effect of taking investments out of the hands of individuals and putting it into the hands of large cap foreign equity firms who will pay little or no Canadian tax.

The report states: “It is now quite obvious that trusts taken private will in all likelihood adopt capital structures that recreate the tax position present in the trust prior to the October 31st tax changes. The likely effect of trust taxation reform, therefore, will not be to reduce tax leakage, but rather to transfer the benefits of a tax-advantaged capital structure from small individual investors (largely Canadian) to large, sophisticated institutional pools of capital (largely foreign).”

The Green Party is calling for the government to redress the significant damage done to Canadians and adjust tax rates in light of that error and ensure foreign holders of trusts are taxed at a higher rate.

“It seems to me the Conservatives have a lot to learn about responsible governance, in a corporate and political sense,” said Graham.

Contact: Camille Labchuk

EMAIL: clabchuk@greenparty.ca

http://www.greenparty.ca/en/www.greenparty.ca/en/releases/10.04.2007

REVENGE OF THE SENIORS! PART ONE?

2007-03-09T10:26:00.000-05:00

ALL IS NOT WELL IN THE TORY HEARTLAND
-- Income-Trust Tax Leading To Talk Of 'Spoiler' Candidates!

Diane Francis,
Financial Post
Friday, March 09, 2007

There's lots of anger in Tory Land, as Calgary MP Diane Ablonczy discovered this week.

Things are getting ugly. Ablonczy's little town hall meeting in her Calgary riding this week turned into a booing session by victims of the ill-advised income-trust debacle.

No media were there, but this is from a witness: "I'm guessing there were about 400 to 500 people there split 50% invited family and friends and 50% furious investors. I was surprised at the number of protesters and how vocal they were. This issue seems to be bigger here than the party wants to admit. The party has greatly upset their foundation. I walked away with a sense that there is more trouble for the Conservatives in the heartland than I had expected."

The vast majority of investors, and successful people, in this country are Tories. So rather than holding their nose and voting for another party, there's talk of running "spoiler" candidates in key, or vulnerable ridings, simply to provide the disenchanted investors with a means of registering their protests and take away enough votes to defeat Tory candidates.

Another suggestion by a New York investment counsellor, whose clients took a bath, is for the energy-trust coalition to field candidates in key Alberta ridings against the Tories.

"I know that employees and unit holders of the energy trusts have been very active and vocal in communicating to their MPs -- via post, faxes, phone calls, and e-mails as well as in person at town meetings -- their profound distress and anger at this proposed legislation," wrote Bob Siegel of Cabot Capital Group in New York City.

"I would recommend that the coalition step up its campaign against Albertan Conservative MPs beyond mere voicing of intense opposition," he said. "Specifically, I would propose that the energy trusts, given their economic and political clout within the province of Alberta, recruit and put forth a slate of candidates who will run against any sitting Conservative MP in Alberta who follows the Party line and votes for this measure."

"The province of Alberta is the backbone of Conservative Party strength. If the Energy Trusts muster their considerable strength in Alberta to make known to Conservative MPs --in this kind of direct, immediate, 'in-your-face' electoral way -- that a vote for this measure will cost them their jobs and, thereby, cause at least some erosion in legislative support for this measure in Canada's Conservative stronghold," he concluded.

But Alberta is not the only hotbed. Plenty of ridings in Ontario -- where the Tories barely won -- could be attacked successfully by independent "income trust spoiler" candidates. Tony Clement won by 28 votes. Others are equally vulnerable. Same applies in B.C.'s retirement communities.

Another victim e-mailed me his reaction to the "dissenting opinion" posted by the Tories and written by the handful of Conservative members of the finance committee. That committee recently held hearings into the income-trust tax proposal and concluded that it was flawed and should be scrapped.

Obviously, the Tories kept to the party line.

"My family and I are lifelong conservative votes. Not any longer!!" wrote Les Parsneau in an e-mail. "Regarding Tax Leakage? The trusts don't pay taxes, the investors do. And how dare the Ministry of Finance refer to me [RRSPs and RRIFs] as 'tax exempt'. I have just taken more money out of my RRSP to live. I pay individual tax rates on that money."

Last week, another blow to the Tories was delivered by the Canadian Association of Retired Persons, which attacked the tax. It has 400,000 members.

"Seniors are actually enraged, frightened and panicked about potentially losing retirement savings that they count on for the essentials of daily living," said an association statement.

It's reminiscent of the 1980s, when Michael Wilson's proposal to tamper with the Old Age Security met with a firestorm of protest and his Prime Minister was forced to back off from the decision. And they had a majority government.

Instead, this minority government has steamrollered and stonewalled, aided and abetted by a pliant press and in the belief that Tory voters have nowhere else to vote.

But the Internet and imagination are formidable foes. And investors are smarter than politicians.

CAMBRIDGE TIMES QUESTIONS HARPER TRUST INITIATIVE

2007-03-08T13:13:00.000-05:00

FINANCE MINISTER DEVASTATING SENIORS
-- Yet No Basis For Vicious Attack On Income Trusts!

The Cambridge Times
Mar 8, 2007

By John Power

I am reminded on a daily basis, every time I check my financial position on my computer, of the devastating effects of the Finance Minister's Halloween announcement on income trusts.

The rationale for this move was that Telus and BCE were about to apply for income trust status and the government could not afford the tax loss. Subsequent inquiries revealed that neither company was paying significant corporate tax to the government before deciding to become an income trust (and neither will pay any tax in the immediate future even though both have chosen to retain their conventional corporate structure and not convert to income trust status).

As the parliamentary hearings and debates on income trusts continue, the opposition parties are experiencing difficulty in obtaining the financial figures upon which the finance minister based his original decision. So far, he has not released any evidence that backs up his contention that the government was experiencing tax “leakage” (loss of tax revenues) because of income trusts.

Certainly his feet need to be held to the fire on this issue.

However, the effects of the Finance Minister’s actions, on seniors, are more crucial, since many investors lost hard earned dollars which they had invested in legitimate Canadian companies based on the Harper election promise that income trusts would not be touched.

With few exceptions, seniors are no longer employed or running businesses -- so our loss, as a result of the government’s irresponsible actions, is a permanent and lasting one. Also, since our incomes have been lowered, any so-called benefit for tax relief is of absolutely no value to those holding income trusts.

The Prime Minister promised to “protect seniors” and “NOT tax income trusts.” Now his government has broken that promise and caused irreparable financial harm to those Canadians who believed that promise and continued to buy and hold income trusts.

In the Enron scandal, senior executives who misled their shareholders paid a high price, including jail time.

In Canadian politics, it seems, one can misrepresent all kinds of financial matters and they are usually rewarded in some manner. Where does the PM’s much ballyhooed Accountability Act come into play? Or is this act exempt from such obligation?

How much advance consideration was given to this decision? Or was it just a improvised effort to destroy the income trust sector?

Why not limit the time frame a company could use the income trust structure to say 10 years, allowing the company to start up, and solidify its market and products, before it had to start paying corporate taxes?

Or, why not put a financial limit on the size such firms could grow to, and still let the income trust sector live on?

I'm certain there are a number of other solutions that would have satisfied the government’s purported aims (to stop further conversions of Canadian companies to income trusts strictly for tax benefits) and still have benefited trust investors, particularly seniors. But the more one follows the Commons hearings and debates on the income trust issue, the more one realizes that this Finance decision was hastily arrived at on the back of an envelope.

If the Conservatives expect the support of seniors in the coming election, major adjustments to this initial trust tax proposal of the Finance Minister's will be required -- not the inflexible stance he is presently taking.

CANADIAN ASSOCIATION OF RETIRED PEOPLE ENDORSES LIBERAL 10% SOLUTION

2007-03-06T13:07:00.000-05:00

THE LIBERAL "TEN PERCENT SOLUTION":
A STEP IN THE RIGHT DIRECTION

CARP Press Release

Toronto, February 27, 2007 - The loss of $25 billion as a result of the Conservative Government’s unexpected action against Income Trusts continues to haunt Canadian investors and keeps CARP’s phones ringing off the hook with calls from seniors whose lives have been turned upside down by this action.

That is why this Association, representing 400,000 members, working on behalf of 11 million older Canadians, strongly supports the federal Liberal Party’s “ten percent solution.” The Liberal proposal to reduce the tax on current Income Trusts from the government's proposed 31.5% to 10% is a step in the right direction -- as is their proposal to grandfather current Income Trusts without adding new ones.

CARP notes that the severe impact of the tremendous losses of retirement income due to the Conservatives’ Income Trust policy can be eased with the Liberal proposal. Losses ranging from $10,000 to $100,000, by retirees, have been reported to CARP.

Regardless of the amount, such losses can create social and health crises, especially with the reduced market value of income trusts, and in some cases, lower monthly distributions -- a problem which is expected to increase as the four-year tax holiday comes to an end. This translates into lower spending power, which, in turn, affects the economy and the country's productivity.

Grandfathering current Income Trusts would, at least, ensure that investors get a better monthly distribution and the opportunity to significantly reverse their losses.

HOW DO THE NDP & TORIES SLEEP AT NIGHT?

2007-03-01T15:17:00.000-05:00

CONSERVATIVE GOVERNMENT’S DECISION ON INCOME TRUSTS WRONG!
-- COMMONS STANDING COMMITTEE ON FINANCE

Ottawa – The Conservative government must immediately follow the Finance Committee’s recommendations to implement a fully-refundable 10 per cent tax on income trusts in place of its destructive 31.5 per cent tax, Liberal Finance Critic John McCallum said today.

“The 10 per cent plan is good public policy that would help investors hurt by the Conservatives’ broken promise, level the tax playing field, protect an income stream that seniors have come to depend on, and help to prevent the decimated income trust sector from being bought up by foreign interests,” said Mr. McCallum. Mr. McCallum was referring to a report tabled today by the Standing Committee on Finance, which urges the government to drop its proposal for a 31.5 per cent tax on income trusts beginning in 2011. The report advocates the implementation of a 10 per cent tax – fully refundable to Canadian investors – in place of the highly destructive Conservative plan. This follows a similar recommendation put forward by Liberal Leader Stéphane Dion on February 13.

The 10 per cent plan has received support from both the Canadian Association of Retired Persons and the Canadian Retired & Income Investors' Association. Both RBC Dominion Securities and BMO analyst Gordon Tait have confirmed that such a plan would return two-thirds of the $25 billion that investors lost the day after the Conservative announcement. CIBC World Markets called the plan a “balanced approach” to income trusts. “Prime Minister Stephen Harper gave his word that he would not tax income trusts and when he broke that promise $25 billion of investors’ money went up in smoke. Now it’s time for Mr. Harper to swallow his pride, listen to the advice of the Finance Committee and Canadians, admit that his policy is wrong, and move to do what is right for Canada,” said Mr. McCallum.

The Committee report recommended that the Conservative government:

• Table any legislation dealing with tax income trusts in a stand alone Bill;

• Release the data and methodology it used to calculate the tax leakage it has alleged occurs due to the income trust sector; and

• Consider the 10 per cent plan and extending the phase-out period to 10 years.

Mr. McCallum also noted that the NDP has supported the Conservative government’s policy on income trusts, despite the number of low- and middle-income Canadians who depend on these investments for income. “The NDP must realize that they have an opportunity to live up to their motto and actually get results for people by endorsing the 10 per cent plan,” said Mr. McCallum.

For more information contact: Office of the Hon. John McCallum Liberal Finance Critic (613) 996-3374

FINANCE COMMITTEE CALLS FOR CHANGES ON TRUST TAX

2007-02-28T18:27:00.000-05:00

REPORT TO THE HOUSE OF COMMONS
ON THE DECISION TO TAX INCOME TRUSTS

RECOMMENDATION 1

It is imperative that a democratic government be as transparent as possible when levying a new tax so that it can be held to account by its citizens. The Committee, therefore, recommends that the federal government release the data and methodology it used to estimate the amount of federal tax revenue loss caused by the income trust sector.

RECOMMENDATION 2

The proposal to tax income trusts is of such significance and has had such a devastating effect on Canadian investors that Members of Parliament deserve a clear vote to best represent the interests of their constituents. The federal government should, therefore, separate it from the other sections of the Ways and Means Motion and table it in a stand-alone piece of legislation. The pension income splitting, the 0.5% reduction in the corporate tax rate in 2011 and the increase in the age credit amount should proceed as quickly as possible in their own separate piece of legislation.

RECOMMENDATION 3

Overwhelming evidence indicates that superior and far less damaging alternatives were available to the federal government. The Committee urges the government to consider implementing one of two such alternative strategies:

a)the federal government reduce its proposed 31.5% Distribution Tax on income trusts to 10%. This tax should be instituted immediately and should be made refundable to all Canadian investors. Furthermore, the government should continue the moratorium on new income trust conversions while remaining open to representations from sectors that feel they are well suited to the income trust structure; or

b) the federal government extend the proposed transition period from 4 years to 10 years.

LIBERAL OPINION

Having listened to all the witnesses, the Liberal Members of the Finance Committee believe that the government’s decision to tax income trusts was reactionary and ill conceived and reflects a poorly executed policy initiative.

The Committee heard from witnesses who made investment decisions based on a promise made by the Prime Minister not to tax income trusts, and lost substantial amounts of their savings when the Prime Minister broke that promise. The Liberal Members of the committee believe that the government acted recklessly and as a result ordinary Canadians have suffered unnecessarily.

The Finance Minister was unable to confirm that an impact analysis was conducted on the effect the new tax on income trusts would have on investors. Liberal Members of the committee believe that such a study should have been conducted and the results of that study considered when developing the government’s policy on income trusts.

The Minister of Finance justified the exemption of Canadian Real Estate Income Trusts by pointing out that they were exempted in the United States, but dismissed a similar American exemption for the energy income trust sector as irrelevant. The Liberal Members of the committee are concerned that such a contradictory approach to public policy is dangerous and not in the best economic interests of Canadians.

The Liberal Members of the committee are deeply concerned about the Minister of Finance refusal to release the data that supports his assertions regarding tax leakage, despite the Committee’s repeated requests for it. In the absence of such data, committee Members have had to rely solely on the advice of outside experts, who have calculated the amount of ‘tax leakage’ to be as low as $32 million or 14 times less than the Minister’s estimate.

While 70% of Canadians are not part of a defined benefit pension plan, the Liberal Members of the Committee recognize that income trust distributions provided many seniors with the regular income they require to maintain their lifestyle. There is no other high-yield investment vehicle available to average Canadian investors. (I’m not sure where John wanted the following comment added in, but he did remark: “The contrast of 25 billion market loss is painful and incomprehensible to investors.”

The Liberal Members of the committee recognize that not all corporations are well suited to the income trust structure. That said, several witnesses clearly indicated that certain sectors have used the income trust structure successfully to make reinvestments and increase their productivity. The Governor of the Bank of Canada has suggested that income trusts have been useful as a high yield savings vehicle, especially for seniors, and in contributing to the success and productivity of certain industries, notably in the energy sector.

The Liberal Members of the committee believe that reducing the 31.5 % tax to 10 % and making it refundable to Canadian investors is a better alternative to the plan proposed by the Minister, and the other alternatives discussed in committee. While a ten year “grandfathering” or extension would return some of the value to hurt investors’ portfolios, the former proposal would return far more of that which was lost.

Furthermore, the 10 % proposal would ensure that entities that are well suited to the income trust structure can continue to grow and invest in themselves, while the 10 year phase out would simply delay their death sentence.

As compared to the government proposal, the 10 % tax proposal is clearly superior. Experts agree that it would return some two thirds of the losses suffered by investors, would preserve Canada’s only high yield savings vehicle that is so valuable to seniors, and it would preserve a productivity-enhancing energy-sector. At the same time, expert testimony confirms that a 10 per cent tax that is refundable to Canadians would be enough to capture off shore leakage and ensure tax fairness. The income trust sector would not reduce government revenues or impose a higher tax burden on Canadian households.

Finally, under this proposal the moratorium on new trusts would be maintained for the time being while the government began consultations with sectors that feel they are well suited to the income trust structure. It is clear to the Liberal Members of the committee that the government did not think through the consequences of its ill-advised policy before taking action.

BLOC QUÉBÉCOIS
COMPLEMENTARY OPINION

The report does not take into account the Bloc Québécois’s recommendation

While the Bloc Québécois agrees with the report’s general direction as regards changes to the way income trusts are taxed, it stands firm on its position that the proposed four-year transition period should be extended to ten years. The Bloc maintains that the Conservatives’ election promise not to tax income trusts was irresponsible, given the structure of the Canadian economy. As a result of the Conservatives’ sudden policy shift on October 31, 2006, countless investors, caught by surprise, suffered major losses when unit values plummeted. Given this scenario, the Bloc Québécois would have recommended a transition period of ten years rather than four in order to mitigate the impact on small investors. This impact was artificially inflated by the Conservative’s decision to renege on their election promise.

The trust structure as a tax loophole: a threat to Canada’s economic growth

The Bloc acknowledges the importance of changing the way income trusts are taxed. At the outset, the income trust structure was intended to be used for mature asset classes that required little or no new capital; the reason being that all of a trust’s annual income must be distributed to unitholders, otherwise it is taxed at the highest marginal rate.

Because of the tax rates applicable to income trusts, corporations operating in fields that often require new capital investments started turning to the trust structure. Certain companies decided to convert to income trusts, not out of consideration for long-term growth but in order to take advantage, in the short term, of the beneficial tax rates that apply to trusts.

To avoid seriously compromising Canada’s potential for long-term economic growth, the government should definitely put an end to the open-ended opportunity of corporate conversions to income trusts. The Bloc acknowledges the appropriateness of this measure.

A four-year transition period penalizes small investors who trusted the Conservatives

The Conservatives made an irresponsible election promise that they would not touch income trusts during their term in office. The announcement that two key players, Bell and Telus, were planning to convert to income trusts changed things. The government had to take action, not only to preserve Canada's potential for economic growth, but also to avert what could amount to significant revenue leakages for the federal and provincial governments.

Nonetheless, the Bloc deplores the fact that the Conservatives chose to impose a transition period of only four years for existing trusts, rather than the ten-year period recommended by the Bloc Québécois. Given the election promise that income trusts would not be touched, this investment vehicle continued to be a relatively safe option, at least while the minority government was in power. That is why the value of income trust units remained so high. The Conservatives' surprise announcement, together with such a short transition period, magnified the effect of the market adjustment that struck the income trust sector.

That is why the least that could have been done in this situation would have been to allow a longer transition period, so as to somewhat mitigate the drop in the value of income trust units.

The argument that extending the transition period by six years would involve an enormous revenue loss—in the order of $3 billion, according to the Finance Minister—became unconvincing when we discovered that the Finance Minister was including tax deferred losses associated with RRSPs and RRIFs in this figure. Dennis Bruce, Vice President of HDR-HLB Decision Economics Inc., estimates this tax leakage to existing income trusts at $32 million a year. According to Mr. Bruce, extending the transition period to ten years would result in a federal revenue loss of $192 million. While the actual loss is probably higher, the Finance Minister has grossly exaggerated his tax leakage estimates.

Québec's Finance Minister, Michel Audet, acknowledged this fact in a letter to the federal Minister of Finance, in which he wrote, “In this regard, although until now Quebec has largely been spared tax losses resulting from conversions of corporations to flow-through entities, the conversions announced by certain large corporations that are more prominent in Quebec would have increased these losses to $150 million annually”.

Therefore, the Bloc Québécois believes that, while putting an end to conversions to income trusts, the government has the financial means to extend the transition period from four to 10 years, so as to allow some 2.5 million individuals who have invested in income trusts—thousands of whom are small unitholders—to mitigate the impact of the October 31, 2006 decision.

Double taxation

In general terms, double taxation occurs when the tax treatment of income does not look at whether other taxes have already been applied on this income. Double taxation exists when the tax system is not fully integrated. This is currently the case as regards the distributions and dividends paid to tax-exempt investors such as holders of pension plans or Registered Retirement Savings Plans (RRSPs). The Bloc Québécois recommends that the Finance Minister seriously consider the following two measures in order to eliminate double taxation.

1. A refundable tax credit for withdrawals from registered accounts based on taxes already paid on trust distributions. Withdrawals from registered plans would be taxed as they are now; however, the refundable credit would avoid double taxation.

2. A tax credit for dividends paid by corporations and held in registered accounts. Withdrawals from registered plans would be taxed as they are now; however, pensioners would be entitled to a dividend tax credit, as is currently the case with fully taxable accounts (no tax deferral).

These two measures are designed to resolve the problem of double taxation. In order to completely eliminate double taxation, the amount of the tax credit should be equal to the corporate tax rate or the tax rate applicable to income trust distributions, and should apply to all tax-exempt investors. In short, these two measures would significantly mitigate, if not eliminate, the problem of double taxation described above.

Conclusion:

The Bloc Québécois acknowledges that the decision to tax income trusts at a rate comparable to other businesses is justified, both in terms of Canada's longterm economic competitiveness and in terms of the pressures that the growing number of corporate conversions to income trusts could have had on the public treasury.

However, the Bloc condemns the fact that the Conservatives did not take into consideration the Bloc's recommendation to extend the four-year transition period to ten years for existing income trusts. The Conservatives' decision led to the severe market correction that impacted the income trust sector. In other words, the Conservatives could have backed down on their irresponsible election promise in a responsible manner, but did not.

HARPER'S FOLLY: BITING THE WESTERN HAND THAT FEEDS YOU!

2007-02-27T21:38:00.000-05:00

INCOME TRUST TRUTH VOLUME 1, ISSUE 12

ENERGY TRUSTS: MORE IMPORTANT THAN REITS

-- So Why Is The Government Destroying Them With Punitive Measures?

Guest Editorial

By Brent Fullard
President and CEO
Canadian Association of Income Trust Investors (CAITI)

Introduction:

The following is a look at the impact of income trusts (royalty trusts) on Canada’s energy sector from the vantage point of the past, the present and the future. The purpose of this review is not to argue that the energy sector receive special exemption per se like REITs, to the exception of business trusts, since our association’s position following the Public Hearings on Income Trusts is, to quote from our press release:

“Therefore as a result of these hearings, our association is calling for a full repudiation of the Tax Fairness Plan in the name of fairness and good governance. As such, all the existing income trusts should be fully grandfathered and be free of growth constraints. Measures should be taken for a transition period to protect these companies from the takeover frenzy that this policy has induced. Future conversions should be the subject of further study and policy evaluation involving stakeholder input through public consultation.”

Tax Leakage:

No discussion about income trusts can begin without first discussing the claim that income trusts result in a loss of tax revenue, or so called tax leakage. The notion that income trusts cause tax leakage has taken on urban-legend status. The inconvenient truth is that income trusts do not cause tax leakage, in fact the reverse is true. The highly guarded and secretive analysis that the Finance Department performed, to arrive at its assertion of tax leakage, fails to acknowledge ANY of the taxes paid by the 38% of income trusts that are held in RRSPs and retirement accounts.

Proper inclusion of these “deferred” retirement taxes in Finance “tax leakage” analyses would result in a conclusion of tax neutrality regarding income trusts (in other words, they are not a drain on the Canadian treasury). Clearly Finance uses the wrong methodology.

A more definitive and unassailable analysis can be had by looking at what happens to income trust taxation in the real world. BMO Capital Markets performed such a real world exercise by looking at all the businesses that converted to income trusts in the period since 2001. There were 126 such businesses as detailed in the attached file. Here are the summary results:

Average Taxes Paid Before Conversion to Income Trust: $3.3 million x 126 = $415.8 million

Average Taxes Paid After Conversion to Income Trust: $6.1 million x 126 = $768.6 million (excluding deferred taxes)

Average Taxes Paid After Conversion to Income Trust: $9.8 million x 126 = $1,234 million (including deferred taxes)

Therefore this comprehensive real world analysis demonstrates the vastly more effective tax generation associated with businesses formed as income trusts versus businesses formed as corporations. The tax raising effectiveness, for the government, is improved by a factor of 3 times for all taxes when a corporation converts to an income trust (and 1.8 times if, like the Finance Department), one totally ignores the present value of deferred retirement taxes.

Cost of Capital Advantage of Income Trusts:

As graphically demonstrated above, income trusts do not cause tax leakage. As well, in today’s protracted low interest rate environment, Canadian retail investors prefer a business that is organized as an income trust relative to the same business structured as a corporation.

There are many reasons for this, the primary one being that these investors are seeking monthly income at returns higher than those generated through investments in GICs, bonds or high yielding sticks. Further, these very investors are more comfortable with the management discipline associated with trust managements having to meet monthly distribution payments to unitholders.

This investor preference manifests itself in higher market valuations for income trusts (certainly before the government’s onerous income trust tax announcement, anyway). This is the market’s decision. As a result of this valuation enhancement, income trusts have a competitive advantage in the form of a lower cost of capital. This is an important strategic advantage that allows income trusts to compete on a global basis, where cost of capital advantages can be a significant cost advantage.

Most important, this cost of capital advantage has been conferred on these companies by the capital marketplace and not through any “tax loophole” as the Finance Minister is so fond of saying, which implies it is being subsidized by Ottawa. Saying so amounts to a patent falsehood, as the absence of tax leakage can hardly support the existence of a tax loophole.

Income Trusts and Canada's Energy Sector: Past:

Before the emergence of the trust sector, many of Canada's intermediate oil and gas companies were being acquired by international corporations, predominantly from the U.S. The expansion of the Canadian energy trust business halted this tide of foreign takeovers and has actually reversed the trend. In the five years ended 2005, trusts purchased over $8.9 billion of oil and gas properties from foreign-owned corporations. Pengrowth's recent acquisition of assets from ConocoPhillips will push this total close to $10 billion. This is made possible by income trusts’ competitive cost of capital and income trusts’ ready access to capital markets (before Mr. Flaherty’s actions).

Income Trusts and Canada's Energy Sector: Present:

At present 20% of Canada’s oil and gas production is produced by Canada’s 31 oil and gas royalty trusts, representing more than 1 million barrels of oil equivalent per day. The combined market capitalization (pre Flaherty ) was almost $100 billion.

In 2005, the oil and gas trust sector generated over 30 percent of the tax revenue collected from publicly traded Canadian entities in the oil and gas sector while representing 16 percent of the revenue. In 2006 the energy trust sector will generate payments of an estimated $5.7 billion to governments in Canada including royalties, property and capital taxes, and the estimated $2.4 billion in personal taxes to be paid on distributions to trust investors.

In 2006, energy trusts reinvested approximately $7 billion of capital into Canada’s Western Sedimentary Basin, and operating and administrative expenditures were expected to total almost $6 billion annually.

Mr. Flaherty’s new income trust tax regime is designed to shut down income trusts. In that regard, it is certain to succeed. In doing so, however, the Finance Minister’s actions have left all 250 income trusts highly vulnerable to hostile takeover.

Most of this takeover activity will be foreign based and largely driven by foreign private equity investors. This takeover frenzy has already begun and will multiply in intensity once the Minister’s TFP proposal is passed into law.

Flaherty’s misguided policy announcement has created what is known in the business as an “event driven” buying opportunity for foreign private equity interests. This is where an event artificially depresses the value of a publicly traded security to a level below its true worth.

Mr. Flaherty has inflicted this possible fate on all 250 income trusts. True value in this context usually means the value that a private equity fund or other investor would be willing to pay for the business. And in the normal course, income trusts traded at their true value until recently.

However, the Finance Minister’s actions have created an artificial discount, one that foreign private equity funds are keen to exploit as they scour the world looking for just such opportunities. Private equity is flush with capital, and ready deployment of capital is their only major constraint. And Mr. Flaherty has handed them a $200 billion capital deployment bonanza. Canada’s incredibly lax takeover rules, and the 8% decline in the Canadian dollar since Halloween, just makes this task even easier and more lucrative for them.

Upon purchasing these vulnerable income trusts, these foreign buyers will return them to corporate form and in doing so achieve two advantages. First as corporations they will now be free of the arbitrary growth restrictions that Mr. Flaherty has imposed on income trusts as the second leg of his trust crackdown. Second, these foreign investors will structure their investments in the form of debt in order to take full advantage of the corporate deductibility of interest. As such, these debt interest payments will be made from pre-tax cash flows and will flow to foreign tax jurisdictions free of any Canadian taxation.

That is, these newly acquired business entities (as corporations) will be structured in such a way, so as to not pay a cent of tax to the Canadian government.

This is a strategy known as “income stripping”. The consequence of this inevitable outcome is that it will create tax leakage for the Canadian government.

This is the ultimate irony of Mr. Flaherty’s policy to combat alleged but non-existent tax leakage from Canada’s income trusts. The very policy that was designed to stem the non-existent tax leakage will itself induce tax leakage -- through a hollowing out of a growing and vibrant sector of the Canadian economy via foreign takeovers.

Income Trusts and Canada's Energy Sector: Future:

As noted above, the emergence of income trusts in Canada resulted in a repatriation in ownership of Canada’s energy sector while at the same time creating a “triple bottom line” result. However, the Finance Minister’s new policy will make Canada’s existing energy trusts vulnerable to foreign takeover and eliminate this triple bottom line result in the process.

Furthermore much of these strategic energy infrastructure assets are likely to fall into US hands. Beyond that, we are leaving other sectors of Canada’s energy sector more vulnerable to foreign takeover as well. For example it was just recently announced that Western Oil Sands is putting itself “in play” and looking to maximize shareholder value.

Western Oil Sands is the 20% owner and operator of the Athabasca oil sands project that produces 155,000 barrels of oil equivalent a day and is currently expanding its scope. Western Oil Sands is a corporation, not a trust and has a market value of $5.5 billion.

Thanks to Jim Flaherty’s destruction of the energy trust market, Western Oil Sands is no longer able to convert itself into a trust as a value maximization/disposition strategy -- even though this conversion alternative would have led to a high level of ongoing Canadian ownership.

Secondly, because of the restrictive growth constraints on existing trusts imposed by Mr. Flaherty, Canadian Oil Sands -- which is an existing energy trust, and which has been an aggressive consolidator of interests in oil sands -- will not be in a position to acquire Western Oil Sands’ 20% Athabasca interest -- even though Canadian Oil Sands is a majority Canadian owned income trust.

As a result, Western Oil Sands is now easy prey for foreign takeover and at prices lower than would otherwise have had to be paid. The plight of Western Oil Sands provides a real time example of how the elimination of income trusts will ultimately cause ongoing dilution to the Canadian ownership and control of Canada’s strategically important tar sands reserves.

As acknowledged in a February Barrons report on Canada’s vast Western energy reserves: “Asset prices in Canada are expected to soften now as the trusts’ access to lower-cost capital dissolves. This means U.S. producers can compete for assets in the region again. Now in play, the trusts are up for grabs by traditional US producers.”

One has to wonder how premeditated such an outcome is in light of the fact that the The Security and Prosperity Partnership of North America agreed to between Stephen Harper, George Bush and Vincente Fox in June 2006 had identified as its top priority the North American Energy Security Initiative. Its mission statement states that “a secure and sustainable energy supply is essential for our economic prosperity in North America”.

Whose prosperity? Whose security? That of the good old U.S.A.?

Other Unintended Consequences:

Whenever major changes are made to government policies without consultation of affected parties, unintended consequences result. In this case, these include:

Massive capital losses to millions of individual investors, on the order of $35 billion, and the associated lost tax revenue;

Reduced or lost income for millions of investors, many of whom depend on this income to live and maintain a decent standard of living in retirement;

Flight of Canadian investment capital to other markets, which offer sought after income-trust-like investment attributes, such as US High Yield Market, US Tax Free Minicipal Bond Market and US MLP market

Loss of confidence in the integrity of the Canadian Capital markets on the part of Canadian and foreign investors, resulting in a dramatically weakened Canadian dollar and a loss of foreign and domestic investment capital

A ripple effect of reduced income for economic spending and lost investment value for millions of Canadians, including charitable organizations;

Exposing Canadian corporations to leveraged buy-out groups seeking to acquire intermediate-sized corporations;

Loss of head office jobs as management control leaves the country;

A shifting of focus from implementing improved, energy-efficient optimization methods on existing developed pools to less energy-efficient, grassroots mega projects. This in turn imposes tremendous strain on infrastructure, available labour and project costs; and

Ultimately reduced production and lower recovery of Canada's oil and gas reserves.

Only in Canada, you say? Tis a pity!

THE JACK & JUDY SHOW -- Courtesy ManuLife & Power Corp.

2007-02-20T17:02:00.000-05:00

INCOME TRUST TRUTH VOLUME 1, ISSUE 11

THE NDP: THE GRAND ILLUSIONISTS

How the righteous have fallen! Once the bedrock of Canadian idealism and social justice, the federal NDP, under the leadership of Jack Layton, have turned themselves into “just another political party” -- pursuing electoral advantage in any way possible. And that includes a quasi coalition with probably the most right-wing government in Canadian history, the Conservative Party of Stephen Harper.

The latest initiative from the Layton/Harper duo is the draconian plan, announced by the Conservative Finance Minister, to kill off income trusts, mainly at the expense of Canada’s seniors and mainly in order to generate even greater profits for giant Canadian financial mutual-fund interests like Manulife and Power Corporation.

Bay Street’s interests must be served, it would seem, by Mr. Harper and Mr. Layton.

For more than a decade, quality income trusts provided a viable high-income investment alternative for retirees seeking the enhanced income stream needed to cope with today’s ever-escalating costs of living (e.g., increasing realty taxes, higher electricity and heating bills, increasing property and car insurance costs, and higher fresh-food prices). And by providing that alternative, income trusts inadvertently drew large sums of investment money away from the mutual fund industry, depriving traditional mutual fund companies of the generous management fees and profit margins which fueled their unseemly annual profit statements.

In other words, income trusts were getting in the way of influential Bay Street interests. And who could best quash the audacious interlopers, and punish the rebellious seniors who had strayed from the money-sucking mutual fund alternatives provided by Bay Street and had turned instead to the generous yields provided by productive income trusts? Why, of course, Stephen Harper and the political party of Bay Street, along with…um, well, what do you know…Jack Layton, and his compliant NDP parliamentary caucus.

For Jack and his complacent fellow NDPers, political survival had obviously trounced idealism and social justice on the issue of income trusts. After all, who cares who gets hurt in order to avoid a damaging election defeat (for the NDP), as long as it’s the most vulnerable segments of the population (cash-strapped seniors) who can’t fight back -- those lacking the massive financial assets and political influence of such socialist stalwarts as Manulife and Power Corporation.

In fact, sometimes it seems that Jack Layton isn’t even leading the NDP anymore. Lately, the loudest and least able voice in the caucus, Judy Wasylycia-Leis, seems to be running the show. And that’s even though everything that the abrasive one knows about income trusts likely wouldn’t even fit on the head of a pin, while everything she doesn’t know about income trusts could easily fill a twenty-volume encyclopedia.

None of which stops Judy Wasylycia-Leis from presenting herself as one of Canada’s foremost experts on income trusts. Yet, anyone minimally versed in the accounting intricacies of income trusts can’t stop from wondering whether she has a clue regarding what she’s talking about.

For example, in October 2006 Ms. Wasylycia-Leis reported and endorsed the results of an "independent" study, "Income Trusts: Heads I Win, Tails You Lose," conducted by financial hobbyist, Diane Uruquart.

Since then, both of the above self-appointed trust experts have pushed the study's conclusion that occasional unanticipated reductions in income trust distributions (usually in the case of badly managed trusts) reflect a structural weakness inherent in trust securities as a class.

According to the dynamic duo, a key concern for trust investors should be that trusts fail to differentiate between the sources of cash used by trusts for distributions (income paid to the investor) in terms of how much of that cash is actually a return of the cash invested by trust holders when originally buying their shares.

The impression given by this study (and by later misrepresentations to the media by Ms. Wasylycia-Leis in particular) is that what is really the exception to the rule among a few struggling income trusts is generic to all income trusts -- which it isn’t.

The few bad trusts chosen for study (usually business trusts) have been selectively culled for their deficiencies, while the researchers (and Ms. Wasylycia-Leis) fail to present the real way most traded flow-through entities (such as income trusts) generate net earnings or growth. The excellent track record of the majority of income trusts is ignored, in order to focus on the few losers whose unfortunate deficiencies are then used to demonize an entire investment class.

As the more responsible researchers at the non-partisan iTrust Institute have noted:

”(a) During 2006, there were more than three times as many distribution increases as decreases by income trusts. There is little difference in statistics when REITs are excluded;

(b) Approximately three quarters of income trusts and flow-through entities have not had a reduction in distribution in the past two years and, furthermore, pay cash returns to investors that are less than operating cash from continuing operations;

(c) The high frequency of cash distributions unique to Canadian income trusts generally increases returns relative to market-related risk for investors. This kind of cash return to investors offers such informative and economic value to investors seeking transparency in managerial practice that there is increasing demand by sophisticated foreign investors to own Canadian flow-through securities. There is demand to own Canadian income trusts despite the economic dampening impact of new taxes on recipients of distributions from income trusts.

Comprehensive factual studies show very different findings with significant implications compared to those presented in the expert independent study that was publicized as if part of the NDP Finance Critic's position on income trusts and the Party's stated reason to support Conservative tax policies.”

In other words, the NDP has misrepresented the very core nature of how income trusts operate, in order to rationalize a decision of political expediency to support a right-wing Conservative government in its efforts to exploit vulnerable retirees and other investors for the sake of increasing the already obscene profits of Bay Street’s largest financial institutions.

Stephen Harper, Manulife, Power Corporation and…Jack Layton? Strange bedfellows indeed!

CAITI TO LAYTON: WAKE UP, JACK!

2007-02-16T02:12:00.000-05:00

CAITI LETTER TO JACK LAYTON, NDP LEADER, FEB 15/07

Conversation: Follow Up Call Requested
Subject: Follow Up Call Requested

Hon. Jack Layton Leader of the NDP Party

Mr. Layton

I have copied this e-mail to Don Francis, a retired scientist with a PhD in Chemistry. Don's family helped found the CCF and have supported the NDP for 67 years. Don and I have met with Judy Wasylycia-Leis and each of us have given expert testimony at the Public Hearings on Income Trusts.

I am also copying the members of your Caucus, as these are matters that should be of great interest to them in the upcoming election that is close at hand.

Thank you for taking the time to speak with me last Friday. I sensed some of the points I raised with you did resonate, in particular the inevitable "hollowing out" effects of the Conservative's income trust taxation on the Canadian economy. This "hollowing out" has already begun. Attached is a file of the announced takeovers that have been occurred as a sole result of this policy. 250,000 Canadians are employed by income trusts. 20% of Canada's oil and gas production is controlled by Income Trusts. Virtually all of Canada's oil and gas infrastructure assets are held in Income Trusts. Income Trusts are the only businesses engaged in the injection of greenhouse gases into mature oil fields to stimulate energy recovery. This is a rare win-win for business and the environment.

I could go on forever about the benefits of trusts, but I won't. I hope you had the opportunity to read the materials I provided to you, in particular the piece entitled; The Inconvenient Truth about Trusts.

One thing is abundantly clear from the hearings is that income trusts do not cause tax leakage. If they did, why are the conservatives hiding their analysis? See attached blacked out documents received under the Access to Information Act. This is a sad day for democracy, transparency and accountability in Canada. By supporting the Conservatives you are explicitly condoning this shameless behaviour and these wreckless outcomes.

When we spoke on Friday, I predicted that an inflection point was close at hand and would occur on Tuesday, when for the first time average Canadians would give testimony at the public hearings. Their testimony was powerful, compelling and well informed. I respectfully submit to you that these average Canadians are better informed on this matter than your party's Finance Critic.

As to my prediction about an inflection point, I could not have been more accurate, as the Liberals came out with their own policy position on Tuesday, which has four stated policy objectives:

-minimizing the loss of savings for Canadians who invested in income trusts;

-preserving the strengths of the income trust sector, notably a high yield instrument for savers and for the energy sector;

-creating tax fairness by eliminating any tax leakage caused by the income trust sector,

and

-creating tax neutrality by eliminating any incentive to convert from a corporation to an income trust purely for tax purposes.

Who could possibly not agree with these policy goals?

Keep in mind, Canadians have lost $35 billion in their hard earned savings with no supporting evidence provided by Flaherty and/or the Department of Finance.

The Liberals will achieve these policy objectives by imposing an immediate 10% tax on income trust distributions that is refundable to Canadians. Therefore the net effect of this is to raise the withholding tax paid on distributions to foreign investors from the current 15% to an effective 23.5% and to leave Canadians whole. This effective increase in the tax foreigners pay is a simple way of doing so without the need for Canada to renegotiate its withholding tax treaty with the US and others.

I would like to arrange a follow up call with you to discuss these and any other issues you may have about the reasons behind why your party thinks supporting the Conservatives on this policy is the correct thing for Canada and Canadians or the reasons why I feel this policy is not the right thing for our country.

Thank you,
Brent Fullard
President and CEO, Canadian Association of Income Trust Investors
www.caiti.info
416 486-2224

THE TWO STOOGES (ROSEN & URUQUART) STRIKE AGAIN!

2007-02-15T11:03:00.000-05:00

FINANCE COMMITTEE HEARINGS [THIRD DAY]

by Harry Levant, Income Trust Research
February 15, 2007

The purpose of the third set of hearings was to primarily hear from individual investors, of which 4 were called and all testified strongly against the proposed tax legislation. Dennis Bruce was the one expert witness for the trust side and he again pointed out the errors in the governments tax leakage calculations. The government has still not provided anything beyond the blacked out numbers to justify their tax leakage claims. One individual witness advised that just two days before appearing he was contacted by one of the expert witnesses who railed on him for an hour about the evils of income trusts. He suggested this amounted to a form of witness tampering.

The trust opponents did not call individual investors but rather relied on expert testimony from Al Rosen and Diane Urquhart. Their testimony focused on capital depletion, comparison of US Master Limited Partnerships to Canadian income trusts and tax leakage through registered plans. Rosen focused on a report dated November 16, 2005 which was authored by he and Uruquhart titled "The Worst is Yet to Come". A copy of this report is located at:

http://www.sipa.ca/library/Documents/ARC-Report-WorstYet-FullReport-20051123.pdf

INCORRECT TESTIMONY (BY ROSEN & URUQUHART)

I reviewed the report at the time and found clerical errors as well as the failure to distinguish between amortization of intangible assets and depreciation of physical assets. The latter issue requires much more disclosure than is provided in the report.

Two issues [for concern] in the report are their clear misunderstanding of the difference between an income trust structure and corporate structure using an Income Deposit Security or stapled unit structure, and their proposal of a 10% tax on income trusts.

Comments on both of these issues are warranted as the former weakens Rosen’s status as an expert witness and the 10% tax proposal is entirely different from their most recent testimony.

In his testimony, Rosen specifically named Medical Facilities Income fund as a trust that was paying distributions far in excess of its capabilities. He made this claim in the November 16, 2005 report, and then again at the finance committee hearings.

Medical Facilities is not organized as an income trust, rather they are organized as a corporation paying distributions comprised of interest and dividends. To arrive at net income, the interest component of the distribution is deducted which requires that it be added back in order to calculate distributable cash. Mr. Rosen has deducted the interest component twice in the calculation of distributable cash and as a result arrives at his incorrect answer.

As an expert witness and a leading forensic accountant, he should have been able to figure out the legal structure of Medical Facilities and the process for correctly calculating distributable cash.

INCONSISTENT TESTIMONY

The second issue with the November 16th report, prepared by them, is the recommendation for a 10% tax on income trusts along with improving of the dividend tax credit for corporations. In their recent testimony, they failed to mention these recommendations and provided testimony bordering on the sensational, suggesting trusts were Ponzi schemes and should be investigated by the legal authorities. The following is a direct quote from their November 16, 2005 report:

"….However the estimated 14% loss caused by full tax parity objectives could be mitigated by taking a blended approach of imposing a 10% federal and provincial combined tax on business trusts and improving the dividend tax credit for public corporations…"

Rosen and Urquhart were present as expert witnesses and the failure to understand legal structures and to disclose key recommendations made in previous reports is cause for concern regarding their testimony.

TORIES PONDER NAME CHANGE: THE PINOCCHIO PARTY

2007-02-14T08:26:00.000-05:00

Welcome to the wacky world of Canada's Conservative Party, the gang that couldn't calculate straight. Read on for a Bloomberg report on the recent Commons testimony by respected HBL economist, Dennis Bruce. Mr. Bruce's testimony, as an independent, non-partisan witness, confirmed that Finance Minister Jim Flaherty either lied outright, or responded in panic to a Bay Street myth, when he declared war on seniors and income trusts on Halloween Eve 2006.

Remember that Bruce's firm was originally hired by the Finance Department a few years ago, to study whether there was any tax leakage from income trusts. And when HLB came up with a different conclusion than Finance bureaucrats wanted -- namely that there was NO appreciable tax leakage created by income trusts -- his report was conveniently lost, never to publicly resurface again.

This week, Mr. Bruce testified before the Commons Finance Committee with a grave threat hanging over his head. Prominent Conservative MPs had already hinted that his firm, HBL Decision Economics, would never get another contract from the federal government if Mr. Bruce were to continue to insist that Finance bureaucrats had fudged their figures on trust 'tax leakage' and that the Finance Minister had either erred or dissembled on Halloween Eve when he referred to a national crisis of massive tax leakage from income trusts.

Despite the threats, Mr. Bruce refused to accede to the Tory party line and insisted that Finance bureaucrats had over-exaggerated the amount of tax leakage from income trusts because of faulty calculations on their part.

Of course, Canada's bungling Finance Minister probably already knew all this from day one, since the Finance Department has had the HBL report hanging around for years. But then again, how could the tiny imperfect Little Napoleon cast himself in the guise of the Saviour of Canada if he were to tell the real truth about trust 'tax leakage'?

How could he please his friends in the mutual fund industry and other Bay Street corporate opponents of income trusts if he were tell the truth about the real reason the Harper government decided to kill income trusts once and for all?

No wonder the Tories are rumoured to be considering renaming themselves the Pinocchio Party -- in honour of all the lies disseminated by their leadership about greenhouse gases and income trusts.

Would you buy a used political promise from these dissemblers?

To find out the story behind the story on the lies and distortions of Canada's tiny, imperfect Little Napoleon, check out the following Bloomberg report on the testimony of economist Dennis Bruce before the Commons Finance Committee.......

CANADA OVERESTIMATED TAX DELAY'S COST, ECONOMIST SAYS
-- Finance Minister Overestimated Trust 'Tax Leakage' By 2.8 Billion Dollars!

By Greg Quinn

Feb. 13, 2007 (Bloomberg) -- Canada would lose C$192 million ($164 million US), far less than the C$3 billion the government estimates, by delaying an income-trust tax for 10 years instead of four, said Dennis Bruce of HLB Decision Economics.

"The HLB calculation differs sharply from that of the Department,'' Bruce, who has studied income-trust taxation for the industry as well as the government, said during testimony in Ottawa today to the House of Commons Finance Committee.

The finance department left out some corporate tax cuts and deferred tax revenue when calculating how much the federal government would lose by extending the delay for another six years beyond 2011, he said.

Opposition lawmakers last week opened hearings into Finance Minister Jim Flaherty's Oct. 31 decision to tax income trusts for the first time, starting in four years. Income-trust executives, investors and some legislators want a longer grace period. They also want some energy industry trusts to be exempted from the tax.

Trusts are often the only source of funding available in Canada for some oil and gas companies, Pengrowth Energy Trust Chief Executive Officer Jim Kinnear told the panel today.

"Energy royalty trusts are highly efficient facilitators of the movement of capital within the oil and gas industry,'' Kinnear said. "There is no tax leakage associated with energy royalty trusts, compared with traditional Canadian oil and gas companies.'' Pengrowth, based in Calgary, is an investor in Canadian oil and natural-gas resources.

Tax Losses

Flaherty, 57, testified Jan. 30, saying he had to act because trusts may be costing C$1 billion a year in tax losses. Extending the four-year delay to a decade would cost the federal treasury C$3 billion, he said [although HLB Decision Economics estimated the total cost to the federal treasury to be only 192 million dollars, 2.8 billion dollars less than the Finance Minister's estimates] ....

Nuff said. The Pinocchio Party it shall be.

HAS CANADA'S LITTLE NAPOLEON MET HIS POLITICAL WATERLOO?

2007-02-14T04:00:00.000-05:00

The Liberal Party has stepped up to the plate and hit a political home run with a centrist proposal to clean up the financial and socio-political mess created by Canada's tiny imperfect Finance Minister, Jimmy 'Little Napoleon' Flaherty -- a mess created when he recklessly declared political war on seniors and income trusts last Halloween Eve.

The ball is in Little Jimmy's court now, and the political fate of the recently-greened Big Brother regime of Commandant Harper now hangs in the dissembling Minister's tiny, chubby, incompetent hands.

What's a blustering politico, in way over his head, to do?

A recent blog entry by MP Garth Tuner says it all:

WHAT ABOUT IT, JIM?

by Garth Turner, MP

Dave Marshall is an income trust investor who stood with me in a Parliament Hill media conference two weeks ago, as I tried to bring to Ottawa some of the faces of people whose lives were chewed up by the minister of finance. He and his wife live in a modest brick bung with an ancient Ford pickup out in front, and have not had a holiday in thirty years.

Today Dave found himself back on the Hill, this time in front of a House of Commons committee where he said, in part, “Mr. Harper and his finance minister took a sledge hammer to our savings and income. Overnight we lost over 20% of our retirement savings and a big chunk of our future income.

During the last election campaign, Mr. Harper said and I quote, ‘A Conservative government will protect seniors and not tax income trusts.’ Because of that very statement, I took him at his word and decided to vote for his party. As it turns out, one of the biggest mistakes of our lives was believing in Stephen Harper.”

In case you’re wondering, it is not easy to go in front of 12 MPs, lots of official-looking officials, spectators and TV cameras, and admit you’re in a pickle because you lost a fifth of your retirement savings. The income trust investors – all 15 of them – who came to Ottawa to join me, showed remarkable courage in simply showing up. After all, the media establishment in this country had already written them off.

There has been virtually no editorial support for these people, mostly because they happen to be seniors, and investors in assets most do not understand. You can get a sense of the prevailing sentiment yourself by reading comments on this blog – where trust investors are called “greedy” and pilloried for putting their savings in things now deemed to be “excessively risky.”

But Dave is neither greedy nor a risk-taker. Like most of the people who bought trust units, he was after a living rate of return, and, moreover, he thought Stephen Harper would protect him. That, he now knows, was a very costly mistake. Collectively, these trust investors – the preponderance being Dave’s age, with no chance ever of making this money back – have lost a stunning $25 billion thanks to the bombshell Oct. 31 announcement by Jim Flaherty that Ottawa would tax income trusts. In fact, the news was so draconian that the entire income trust industry was that night dealt a death blow.

In the House of Commons, Flaherty has refused to agree to my demand to somehow compensate these people. He turned down my suggestion to allow a one-time write-off of these losses from taxable income, and rudely ignored my request to even apologize. Listening to him dismiss me in Parliament, I was keenly aware that a Minister of Finance can brush off one independent MP without even breaking stride.

But the tide may have turned a little on Tuesday.

The Liberals have now issued a policy on income trusts – which could return as much as two-thirds of losses to investors. Stephane Dion and finance critic John McCallum unveiled a plan to drop Flaherty’s 31.5% tax on trusts to just 10%, which would be paid by the trust companies, and refunded to Canadian residents. The plan is sound, because while it redresses a wrong to the little guys like Dave, it does not burn down an entire sector. Income trusts would be maintained and capped at their present number. The more modest tax would offset lost government revenues and put trusts on a level tax playing field with conventional corporations.

It’s a sound and simple plan, and Flaherty will be callous indeed if he dismisses it out of hand. The facts, after all, are clear: (a) Thousands of people bought income trusts last year precisely because Stephen Harper had made an election promise not to mess with them and (b) hundreds of companies converted into trusts for exactly the same reason.

As I said last October, and again standing with Dave and the others two weeks ago, the government has a moral responsibility to help these people, and to repair a $15 billion hole in the investment business. Any claim to be accountable to Canadians, while screwing them out of their life savings at the same time, is a farce.

If Jim Flaherty is the honourable man I believe him to be, he will show so on Wednesday.

MP GARTH TURNER TELLS IT LIKE IT IS!

2007-01-26T10:13:00.001-05:00

Unethical Stand Of The Harper/Flaherty Duo On Income Trusts

Excerpts from MP Garth Turner's online blog:

"Just a few more words on income trusts.

Jim Flaherty is going to have to compromise on this. Stephen Harper will have to do for trust investors what he did for the environment. Take the ethical position.

The compromise is this: Prevent any more trust conversions – which is already done. Now, find a way to level out the playing field on taxing the trust income streams, so all taxpayers are treated equally, and all corporate entities pay a similar amount.

There are a few very creative and smart ideas for achieving this floating around Bay Street right now, and Flaherty should get off his ideological high horse, stop listening to the purists in the Department of Finance, and pay attention. There is nothing – repeat, nothing – inherently wrong with income trusts. They are not the tax evasion machines Ottawa has made them out to be, nor does the income they throw off end up in the pockets of greedy investors.

I used to admire Flaherty. A lot, actually. But that vaporized when I watched him in the House of Commons accuse people who questioned his trust tax as being “friends of big corporations.” If the minister of finance does not know better, he’s miles out of his depth.

The ethical position is this: Income trust investors who lost money because the prime minister lied to them must be compensated. They should be allowed to deduct trust unit capital losses suffered between October 31 and December 31, 2006 from taxable income in that year, with an unlimited carryforward until it is exhausted.

The coming hearings in Ottawa into the trust affair, although a mere six hours long, will surely uncover the untruths perpetrated by the Finance Department, and broadcast by the minister. For example, it is untrue that Canada is the only place in the civilized world with income trusts. A vast regime exists in the US.

It is untrue that trust money flowing into retirement accounts and RRSP is untaxed, costing Ottawa billions. As every retiree knows, money taken from an RRIF or an RRSP is fully taxable at that moment, regardless of where it originated.

Finally, it will remain forever untrue, or at least unbelieved, that income trusts hurt the economy, wound national competitiveness and rob the treasury of revenues, so long as Ottawa fails to give us the facts. The release this week to a financial analyst of 13 pages of documents under the Freedom of Information Act, which were blacked out and unreadable, only fuels our suspicion. The trust tax was imposed without reasons overwhelming enough to erase tens of billions of dollars in Canadians’ savings.

I think we’d understand the need to do something big to save the country. We’d go along even if a lie was involved. Even if the prime minister said it.

But in the absence of credible information, what are we to think? Especially when we see arrogance, where compromise, and ethics should be." -- Garth Turner, MP

Tax Leakage, Mr. Flaherty? There Is NO Tax Leakage!

“The notion of tax leakage has achieved the status of an urban legend in the press and public. The absence of any transparency by the Department of Finance (DoF) on this issue contributes to the myth of tax leakage. Exacerbating this absence of transparency is the equally glaring absence of competent methodology and analysis by the DoF. Their deeply flawed methodology means the government¹s assertion of tax leakage is indeed a myth: a dangerous and very costly myth that ill serves the public and degrades the government.

HLB Decision Economics prepared an authoritative analysis of alleged income trust tax leakage in the fall of 2005. HLB is economic consulting group based in Ottawa that does work for many departments of the federal government. HLB and DoF worked closely together. The government never released the analysis conducted by HLB. The final analysis of HLB and DoF diverged on the critical issue of revenue from Retirement accounts. HLB correctly considers these accounts as tax-deferred. DoF erroneously considers these accounts to be tax exempt. In fact retirement income is the second largest source of taxable income for the federal government. In 2004 Canadians paid $9 billion in retirement taxes on $52 billion in retirement income.

Erroneously characterizing retirement accounts as tax exempt instead of tax-deferred is a major cause underlying the myth of tax leakage. The Plan and all of its accompanying objectives are based on a foundation of sand. The mirage of tax leakage stems from the deeply flawed analysis and methodology of the DoF. Absent tax leakage there is no unfairness; absent unfairness the Plan is pointless.

In actuality the Plan is far worse than pointless: it is catastrophic. Announcement of the Plan instantly destroyed $30-35 billion in capital. A disproportionate number of investors harmed by this mammoth loss of capital are senior citizens and retirees. The Plan will also destroy a vibrant section of Canada¹s free market economy.

Virtually every study and report published after the Plan¹s announcement criticizes the Plan. Respected financial analysts and economists such as Gordon Tait and Yves Fortin are among those who have strongly criticized the Plan in their published reports.

Income trusts deserve to be preserved. These securities are an important investment choice for Canadians, many of whom are either saving for retirement or are retired." -- Garth Turner, MP

THE FOOL IN EXPERT'S CLOTHING

2007-01-25T18:59:00.000-05:00

The Truth About Diane Urquart, Self-Annointed Income Trust Expert

From today's press release from the bipartisan I-Trust Institute:

MISINFORMATION FROM EXPERTS DUE TO LIMITED DATA

A respected financial expert, Diane Urquhart, took the press podium in October 2006 beside the NDP finance critic, Judy Wasylycia-Leis, to present an "independent" study, "Income Trusts: Heads I Win, Tails You Lose".

In lead-up to public hearings, that expert is now reinforcing the study conclusion that suggests that reductions in income trust distributions reflect a problematic structure inherent in trust securities.

Ms. Urquhart is quoted (Toronto Star, January 23, 2007) as saying that a key concern for investors is that trusts fail to report the difference in source of cash for distribution in terms of return of capital or net operating gains.

The study and follow-up public commentary gives the public, including Finance Committee members and politicians, the misimpression that such distribution and structure problems are significant and generic among trusts.

Such expert opinion fails, however, to measure the extent to which the relatively few securities cited for study reflect the way flow-through entities [such as income trusts] generate net earnings or growth. Neither pre-hearing media commentary nor expert original study observes a full data set for the income trust market.

As a result, the expert comments are irresponsible and misleading when presented as fact, particularly when published without comparative measure and out of context. The distribution-oriented propositions are as offensive to good Canadian managers as the statements are inappropriately generic.

Through use of comprehensive market-tracking data, the iTrust Institute can show that:

(a) During 2006, there were more than three times as many distribution increases as decreases by income trusts. There is little difference in statistics when REITs are excluded;

(b) Approximately three quarters of income trusts and flow-through entities have not had a reduction in distribution in the past two years and, furthermore, pay cash returns to investors that are less than operating cash from continuing operations;

(c) The high frequency of cash distributions unique to Canadian income trusts generally increases returns relative to market-related risk for investors. This kind of cash return to investors offers such informative and economic value to investors seeking transparency in managerial practice that there is increasing demand by sophisticated foreign investors to own Canadian flow-through securities. There is demand to own Canadian income trusts despite the economic dampening impact of new taxes on recipients of distributions from income trusts.

Comprehensive factual studies show very different findings with significant implications compared to those presented in the expert independent study that was publicized as if part of the NDP Finance Critic's position on income trusts and the Party's stated reason to support
Conservative tax policies.

Institute findings can support some of the conclusions of that same study by Ms. Urquhart in so far as there is common recognition of the need to protect Canadians from false claims and incomplete attention to risk during promotional efforts by financial product and broker sales personnel.

There is clear evidence of need to improve the accuracy of information provided to investors by sellers when they advise or promote purchase of units or shares, particularly for initial public offerings. This perspective is not new or isolated to income trusts, however, and has been featured as a conclusion of reports commissioned by authorities like the Bank of Canada.

GORDON TAIT (BMO) -- TAX LEAKAGE? WHAT TAX LEAKAGE?

2007-01-25T18:03:00.000-05:00

Hey Mr. Flaherty & Friends, Where's The Beef?

For an insight into the sheer arrogance and incompetence of Jim Flaherty and his Finance Department bureaucrats, nothing beats the recent ROB-TV interview of BMO analyst, Gordon Tait.

If you're able to view video files on your computer, then please click on this link to the Tait interview on ROB-TV.

Isn't the Freedom of Information act, as interpreted by the Great Helmsman Stephen Harper and his acolytes, grand?

ENERGY TRUSTS -- KEY TO WESTERN PROSPERITY

2007-01-25T14:34:00.000-05:00

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

Excerpted from CCET Report

Executive Summary

This report summarizes the perspective of the Coalition of Canadian Energy
Trusts (“CCET”) regarding the Government of Canada’s announcement of
October 31, 2006 with respect to energy trusts. The CCET also fully supports
the initiatives of the Canadian Association of Income Funds (“CAIF”) in regard
to reconsideration of the tax proposals made by the Minister of Finance.
Do Energy Trusts Cause Federal Tax Leakage?

No. Federal and provincial government revenues are actually enhanced by the
energy trust structure. During the past five years, CCET member trusts have
generated greater taxes both provincially and federally than would have
occurred had they been structured as corporations.

In 2005, the oil and gas trust sector generated over 30 percent of the tax
revenue collected from publicly-traded Canadian entities in the oil and gas
sector while representing only 16 percent of the revenue. Oil and gas royalty
trusts have also generated over 40 percent more taxes than Canadian publiclytraded
senior independent producers on a unit-of-production basis.

The capital intensity of oil and gas exploration and production generates
significant tax pools. As a result, oil and gas exploration and production
corporations have historically paid minimal corporate taxes. In contrast,
distributions from energy trusts generate:
• current personal income taxes from Canadians;
• additional tax from compounding investment in tax-deferred accounts; and
• a 15 to 25 percent withholding tax from foreign investors.

Because most CCET unitholders live outside Alberta, where all energy trusts
are based, Canadians throughout the country share in the distributions paid and
their provinces of residence benefit through hundreds of millions of dollars of
increased tax revenues. Alberta, in turn, receives the benefit of additional
royalties on mature oil and gas producing assets, spending on goods and
services in the province, employment and associated taxes, and all of the
ancillary economic spin-offs associated with increased activity.

Other Tax Considerations

• As long as there is no reduction in total tax paid, sources should be
irrelevant to the government, especially given that the government is
currently experiencing surpluses from its tax revenue collections.

• The federal government surplus is supported by taxes being collected
directly on distributions and from taxes being paid on retirement plan
withdrawals.

• Canadians’ retirement plans are “tax-deferred”, not “tax exempt”.

• Trust distributions in tax-deferred accounts act as huge savings accounts for
the government and serve to increase government tax revenues because:
- there is a gain to government revenues when trusts or other securities
are held inside tax-deferred accounts; and
- the tax cost of the contributions in any given year is offset by taxes
collected on the withdrawals in any given year.

• The existing 15 to 25 percent withholding tax on distributions to foreign
investors generates substantial revenues to the government, without any
corresponding use of services or infrastructure.

• Should a significant portion of the trust’s assets revert to foreign ownership,
tax value will most likely leave the country in the form of deductible interest
in Canada which will be subject to only 0 to 10 percent withholding tax and
from taxation of capital gains in foreign jurisdictions and not taxed in
Canada.

Do Energy Trusts Threaten Canada’s Long-term Economic Growth?

On the contrary, energy trusts are the ideal model for Canada’s mature
hydrocarbon basins. Since their introduction in 1986, they have played a unique
role in maximizing oil and gas production and reserve recovery and providing
essential capital to Canada’s energy industry.

The Western Canada Sedimentary Basin (“WCSB”) has matured rapidly in the
past twenty years. Despite record levels of drilling activity and capital spending:

• Canadian conventional light oil production has entered a decline phase with
production dropping at 3.4 percent per year since 1997; and

• Canadian natural gas production has only remained flat since 2000.

Other evidence of the maturation of Canada’s most prolific hydrocarbon basin is
as follows:

• capital spending in conventional assets, excluding oil sands, has doubled
since 2002;

• annual drilling activity has increased 500 percent since 1992;

• the cumulative number of wells drilled in the WCSB has more than doubled
in the last 13 years, but with ever-diminishing returns as production per well
continues to fall;

• limited incremental conventional oil opportunities exist as annual oil drilling
activities have remained flat since 2002 despite significant increases in
commodity prices and capital spending in the WCSB;

• with the producing well count increasing, the average per well oil productivity
has declined at 4.6 percent per year since 1994;

• the basin’s conventional prospects are now predominately natural gas pools,
with over 70 percent of conventional wells drilled in the WCSB targeting gas
in 2005; and

• natural gas production has reached a plateau as average natural gas per
well productivity has declined 9.2 percent per year since 1996.

Investors expect oil and gas producers organized as corporations to grow
production. Growth is increasingly difficult in the WCSB, where new gas well
production can decline as much as 30 percent in the first year. This is the socalled
“treadmill” effect as oil and gas producers have to reinvest much of their
cash flow just to keep production flat.

Oil and gas royalty trusts have a sustainability mandate. With a successful
history of optimizing assets and increasing productivity, this model has
demonstrated improved capital efficiencies over exploration and production
corporations with conventional WCSB operations.

For oil and gas trusts, there is an urgent requirement to reinvest cash flow to
maintain production. This is one of the major differentiators of royalty trusts from
business trusts.

Energy trusts have an important symbiotic relationship within the energy
industry. The oil and gas royalty trusts:

• buy and enhance mature assets from senior producers;

• are the logical buyers of juniors’ assets once they have proven up new
reserves and seek to monetize value, often providing a catalyst for
successful junior management teams to re-capitalize new companies,
creating more economic activity;

• have injected over $17 billion of new capital into the energy sector in the last
five years, much of which has been redistributed to the other producer subgroups
in the sector;

• have themselves invested over $15 billion in the last five years into lower
risk / lower return projects aligned with the objectives of the trust’s incomeoriented
investor base to optimize mature fields, enhancing the ultimate
recovery of Canada’s oil and gas resources; and

• have repatriated approximately $10 billion of assets from foreign control
during the past ten years. Many of these assets are being aggressively
optimized by the energy trusts, providing additional production and reserves
with minimal impact to the environment.

The government’s proposed tax changes would force trusts back into a
corporate structure that is less efficient for mature oil and gas assets, reducing
tax revenue for both provincial and federal governments.

Evolution of Canada’s Energy Industry

Conventional finding and development costs are up substantially in the last five
years, while unit operating costs have more than doubled. The combination of
higher costs and lower production and reserve expectations has made it more
difficult for energy producers to invest profitably in the WCSB. Those factors
have driven senior producers to seek their growth opportunities outside
Canada, to reduce their production growth expectations in the WCSB and to
pursue development of Alberta’s oil sands.

Senior producers and their peers have been selling their mature WCSB
properties to energy trusts, which have become expert at maximizing the
resource recovery out of these mature reservoirs. With the lower cost structure
and lower cost of capital that results from the alignment of unitholder objectives
to the asset base and the business plan, energy trusts are able to exploit and
extend mature property opportunities that would be uneconomic to other
producers.

This provides more oil and natural gas from existing pools without
intensive capital and infrastructure development of the type required for oil
sands development. From an environmental point of view, a considerable
number of these mature properties conserve waste gases, utilize efficient power
sources and have significant potential for greenhouse gas sequestration.

Although newer Canadian conventional hydrocarbon basins outside the WCSB
are promising, they remain underexploited due to a number of factors. These
include remoteness from markets, lack of infrastructure or unsettled land
claims, such as is the case with the Mackenzie Valley and Delta; a lack of new
discoveries, such as in offshore Newfoundland; and moratoriums on exploration
such as offshore BC. Optimal recovery from the WCSB remains critical to
Canada’s conventional oil and gas industry.

Environmental Considerations

Perhaps the most significant unintended consequence of the government’s
proposed tax changes relates to the environment, which is important to all
Canadians. Canada’s greenhouse gas (“GHG”) challenges are well
documented. As the WCSB has matured, ownership and control of the vast
majority of Canada’s legacy conventional oil reservoirs has transferred to the oil
and gas trust sector. The large corporations chose not to retain control of these
properties and pursue enhanced oil recovery (“EOR”) activities through CO2
injection, instead selling the majority of these large ‘in-place’ oil reserve assets
to the trusts.

The oil and gas trust sector’s low cost of capital and business model has
allowed these projects to become more attractive economically such that trusts
are now at the forefront of CO2 sequestration initiatives. In two large fields
alone, Pembina and Redwater, CO2 EOR projects could reduce emissions of
GHG to the atmosphere by 30,000 tonnes per day, or 11 million tonnes
annually. These projects represent the only truly meaningful opportunities to
dramatically reduce Canada’s GHG emissions in the near term.

Unfortunately these projects would be targeted to come on stream around
2011, just as the government’s revised tax treatment for trusts would come into
effect. The proposed changes will drive energy trusts back into a corporate
model.

As history has shown, this business model and a growth-oriented investor base
is not aligned with the pursuit of CO2 EOR projects in Alberta. At the very least
these projects will be delayed but more likely many may not proceed at all.

Social Considerations

Canadian energy trusts focus on optimizing existing conventional oil and gas
pools. This focus on optimization extends the effective working life of mature oil
and gas fields, providing continued direct and indirect economic benefits,
including future employment opportunities and municipal and county taxes, to
the many Western Canadian communities where trusts operate as well as to
the provincial treasuries. Additionally it creates new productivity in areas with
infrastructure, gas conservation and future potential for greenhouse gas
sequestration.

Other Unintended Consequences

Whenever major changes are made to government policies without consultation
of affected parties, unintended consequences result. In this case, these include:

• massive capital losses to millions of individual investors, on the order of $14
billion, and the associated lost tax revenue;

• reduced or lost income for millions of investors, many of whom depend on
this income to live;

• a ripple effect of reduced income for economic spending and lost investment
value for millions of Canadians, including charitable organizations;

• exposing Canadian corporations to leveraged buy-out groups seeking to
acquire intermediate-sized corporations;

• loss of head office jobs as management control leaves the country;

• a shifting of focus from implementing improved, energy-efficient optimization
methods on existing developed pools to less energy-efficient, grassroots
mega projects. This in turn imposes tremendous strain on infrastructure,
available labour and project costs; and

• ultimately reduced production and lower recovery of Canada’s oil and gas
reserves.

Without the trust structure companies will be forced to choose higher return
grassroots mega projects over lower return optimization of mature fields. With
the trust structure both types of projects can exist in harmony, ultimately
maximizing the recovery of Canada’s hydrocarbon resources.

Did Canada Stand Alone in its Treatment of Trusts Before These
Changes?

No. The U.S. did eliminate flow-through entities (“FTEs”) in 1987 but provided a
ten-year transition period, plus life thereafter upon electing to pay a 3.5 gross
income tax. This to be compared with the four years proposed in the “Tax
Fairness Plan”.

Further, the U.S. excluded Real Estate Investment Trusts (“REITs”) and explicitly exempted resource industries from the measures.

Ironically, the government’s proposed new tax will effectively eliminate the trust
structure in Canada’s resource sector just as that structure expands in the U.S.
Acting consistently with the U.S. would mean exempting the resource sector
and providing other trusts with a ten year transition period.

Conclusions

Energy trusts are different from other trusts by virtue of their very high
reinvestment requirements and their role in maintaining Canadian oil and
gas production. The proposed changes will have many unintended
effects, including the diminution of Canada’s energy supply.
Exempting energy trusts from the proposed tax changes is the only
sensible course of action for this government. Failure to do so will be
counter-productive to the government’s own stated reasons for acting.

Excerpted from: A Report By The Canadian Coalition Of Energy Trusts

TERRANCE CORCHORAN: TIME FOR COMPROMISE ON TRUSTS

2007-01-25T08:35:00.000-05:00

END TRUST WARS

BY Terence Corcoran,
Financial Post
Published: Thursday, January 25, 2007

Eventually we may get to a rational point in the income trust debate, some higher plain where we can no longer hear the juvenile caterwauling that currently drowns out sensible discussion. We got a glimpse of what that point might look like in Jack Mintz's commentary on this page yesterday reiterating his proposal to end the double taxation of corporate dividends.

Prof. Mintz's ideas and views on trusts, published in detail in the Canadian Tax Journal last year, are a good start, but maybe there's more to be done. An RBC Capital Markets analyst has done just that, taking up the Mintz plan and merging it with another to create a tax regime for both corporations and income trusts that would resolve the current cause of the clash between the systems.

The Mintz plan aims to end the core corporate tax problem that still exists in the Canadian system. Corporations are taxed on their income, but dividends paid to investors in RRSPs and pension plans are subject to tax again when the dividends are distributed as retirement income. To end that double taxation, Prof. Mintz proposes that Finance Minister Jim Flaherty introduce a refundable dividend tax credit for all Canadians.
An example: If a corporation earns $100 in profit, it pays $32 in tax at the corporate level. If it pays a dividend of $68 with the remaining cash, the $68 will eventually become taxable again in the hands of a retired person. If we assume a top tax rate of 43%, that leaves only $38 in the hands of pensioners. That's not fair.

To fix that double taxation problem, Prof. Mintz proposes a dividend tax credit that would refund the original $32 paid by the corporation to the pension fund or RRSP holder. The pensioner would then effectively receive $100 and pay tax only after the money is distributed as retirement income some time in the future. All investors would be in the same after-tax position.

The Mintz plan, thus oversimplified, ends there. The expectation is that the plan, which effectively standardizes the corporate tax rate across all Canadian taxpayers, would end the demand for income trusts since there would be no tax advantages to the trust structure.

Dirk Lever, at RBC Capital Markets, takes the Mintz plan further by incorporating another idea, first suggested in December by PricewaterhouseCoopers. The PWC proposal was aimed at neutralizing the double taxation effect of Mr. Flaherty's new tax on income trusts. It follows the same track as the Mintz plan. The tax paid by an income trust under the Flaherty plan would be reimbursed to pension funds and RRSPs on distribution. The income therefore enters a pension fund tax free and would then only be taxable when it is paid to the final recipient of retirement income.

The PWC proposal, therefore, only aims to fix the double taxation of income trust distributions, while the Mintz proposal aims to fix the same problem on corporate dividend payouts. The RBC Capital Market plan joins the two proposals, creating many benefits for the whole Canadian corporate tax system.

First, the RBC plan puts income trusts and corporations on the same tax footing. Second, it means that existing income trusts may not have to go through costly conversions from the income trust structure back to corporate structure. Best of all, the plan ends what has long been a source of distortion in the Canadian corporate tax system, the double taxation of corporate profits that are distributed to Canadian investors.
As Mr. Lever puts it, a merger of the Mintz and PWC plans "will eloquently solve both issues." All Canadians can come out of the trust policy fiasco as winners.

Trusts and corporations could then exist side by side as far as the tax rates are concerned, all other things being equal. There may, of course, be other reasons for investors and corporate managers to favour one structure over another, but at least the investment and structural decisions will not be dictated by distortions in the tax system.

To download the RBC Capital Market research papers on corporate taxation, check the online "extras" at www.nationalpost.com . As the government and the Commons finance committee review the income trust issue, they should know that they have a solution at hand that transcends the political grandstanding and hysteria-mongering that now dominate the debate.

© National Post 2007

DIANE FRANCIS TELLS IT LIKE IT IS!

2007-01-25T08:27:00.000-05:00

PROVE THE CASE OR DROP THE TAX
-- Finance Minister Flaherty Hasn't Done His Research On Income Trusts

BY Diane Francis
Financial Post
Wednesday, January 24, 2007

The only fair resolution to the Tory income-trust mess is to compensate every investor who held onto, or bought, income trusts after Stephen Harper uncategorically promised they would remain untouched eight months ago.

That, or they must abandon their proposed tax on existing trusts.

The stupidity of this trust tax is why the issue hasn't and won't go away. It's why Opposition parties have correctly forced a hearing for next month at the finance committee in the House of Commons.
Personally, I am offended by the actions and attitude of rookie Finance Minister Jim Flaherty.

He was twice a rookie for: (a) not crafting an income-trust reform that would respect his Prime Minister's promise to leave existing income trusts alone; and (b) for not doing his homework in an area that he obviously doesn't understand - - thus the fact that he has parroted a number of obvious inaccuracies.

On the first gaffe, Mr. Flaherty should have known there were dozens of alternatives that would have stopped the proliferation of income trusts and, at the same time, surgically reformed existing ones without damaging investors. This is what the Americans and Australians did when they embarked on reforms.

But Mr. Flaherty did not do his research. He could not have because he said publicly that the Americans and Australians had shut down all their trusts except for real-estate ones. That's totally wrong.

The U.S. energy/infrastructure trust sector is now equivalent in size to 20% of the entire Toronto Stock Exchange, or more than US$480-billion. Whoops.

Then there's the tax leakage myth.

Department of Finance officials convinced, and gave Mr. Flaherty, the false information that registered retirement savings plans (RRSPs) and pension payments were tax-exempt. Too bad they aren't.

So the question that begs an answer is, why didn't this Finance Minister know this was untrue? Is it because he is not an investor and won't rely on his RRSP like 70% of Canadians must? Instead, he and his spouse are professional politicians with defined-benefit pension plans.

Another piece of "work" cited by government officials that tax leakage was an issue was done by Toronto academic Jack Mintz, who has been going around ever since distancing himself to paying customers on Bay Street from this research.

So there you have it: an academic allegedly unwilling to publicly come out defending or recanting, as well as civil servants and a minister who apparently don't even understand how RRSPs or the tax system operates.
It's little wonder we have this mess -- which comes to my last, and possibly most important, point for the House of Commons committee members to consider and pursue.

About the only excuse I can think of to account for this $30- billion mistake is that securities laws prevented Flaherty from talking with knowledgeable industry sources ahead of time. There were leaks when the Liberals looked at income trusts and the Tories made an unholy fuss about that.

But that doesn't matter. Mr. Flaherty had plenty of experts to consult outside the Department of Finance, which has been gunning for this tax for ages.

If he wanted to understand the nature of RRSP and pension tax treatments, he could have called former finance minister Michael Wilson, who invented RRSPs in the 1980s.

He is now on the government payroll as U.S. Ambassador and, therefore, securities law safe.

More important, Flaherty could have, and should have, picked up the phone and called the most knowledgeable man in the country -- Bank of Canada governor David Dodge.

If he did not do that, it's recklessness. If he did, and didn't listen, he was irresponsible. If he listened and rejected, then he had better tell the committee why the man who really runs the economy was wrong last summer when he defended income trusts after a bank study.

Here is what Dodge said in 2006:

"The work we have done in terms of capital markets, per se, is that probably, on balance, income trusts make capital markets somewhat more complete and somewhat more efficient," Dodge told a news conference held as part of the bank's quarterly economic outlook. The bank studied trusts.

"Limited evidence suggests that income trusts may enhance market completeness by providing diversification benefits to investors and a source of financing to firms that might not otherwise have had access to markets," the bank's study said.

That's why it is no wonder people who understand capital markets are furious.

Now, firms like PriceWaterhouseCoopers and various prestigious money-management firms are joined in the Canadian Association of Income Trust Investors.

And their bottom line is the same as mine. This Finance Minister must prove his case or drop the tax.

"If the government's actions cannot be fully substantiated by independent experts with proven expertise in the workings of the Canadian capital markets, then our Association will be calling for the repudiation of the Tax Fairness Plan in the name of fairness and good governance."

It all proves that being Finance Minister of Canada requires a lot more sophistication and a lot more experience than just paying bills, cutting costs and tinkering with local taxes as a provincial treasurer.

UNHOLY NDP/TORY ALLIANCE -- PROMOTING INEQUALITY

2007-01-24T09:35:00.000-05:00

The NDP/TORY Plan:
Propping Up The Privileged On The Backs Of Average Retirees

Who'd a thunk? The NDP in bed with the most right-wing political party in Canada's history -- allied in a stubborn legislative effort to bring more perks and privileges to the affluent while kicking a vulnerable segment of Canada's seniors while they're down.

Congratulations, Jack Layton. You (and your abrasive NDP finance critic) have enhanced the election prospects for the Liberal and Green Parties for years to come.

So what's the story behind the story of the NDP sell-out to establishment interests? Well, obviously Mr. Layton so strongly fears another election that he foolishly has put the full weight of the NDP behind Stephen Harper's heartless plan to enrich his wealthy allies on the backs of ordinary Canadian retirees, via a non-stop war on income trusts. Not to mention that Mr. Harper's proposed Machiavellian legislation appears designed to impoverish already-vulnerable seniors in order to enrich the most privileged groups of seniors (the uber wealthy in Rosedale and other gilded ghettos of privilege, and retired government employees and politicians receiving their over-generous guaranteed indexed pensions).

Whether by destroying publicly-traded investment trusts as a source of retirement income for ordinary seniors, or by enshrining the "sacred' role of private family trusts for the wealthy, the planned Layton/Harper legislation can only create and perpetuate new social and class divisions among Canada's seniors.

The new order of the day, for the NDP and their Conservative friends, appears to be glaring social and economic inequality among Canada's retired seniors, and perpetuation of the economic dominance of Canada's affluent ruling classes.

Quite a day's work for a political party like the NDP, which still talks the socialist/democratic talk, but now walks the elitist Rosedale/Rockcliffe walk -- thanks to the party's alliance with Jack Layton's newest best friend, Stephen Harper.

Imagine what the dynamic duo have planned for Canada's environment once they're done with income trusts. Perhaps Mr. Layton would consider appointing Rhona Ambrose as his deputy leader for this next big push.

In the meantime, please read on for more unpleasant truths about the social inequality being promoted by Canada's most deceitful politicians, in the name of "fairness":

***********
NDP'S BLIND ADHERENCE TO CONSERVATIVE'S INCOME TRUST AGENDA PROMOTES FURTHER INEQUITY IN CANADA'S TWO TIERED PENSION SYSTEM, SO SAYS CAITI

TORONTO, Jan. 23 /CNW/ - The Income Trust issue is one that profoundly affects the ability of senior Canadians to provide for retirement income. It materially affects Canadian's standard of living during their retirement years.

The Conservative's Income Trust agenda is being advanced for the benefit of narrow corporate interests. It is being falsely advanced on unproven assertions of tax leakage and other unproven, yet quantifiable, assertions contained in the Notice of and Means Motion to Amend the Income Tax Act. These measures will eliminate this popular retirement investment choice for the average Canadian.

This policy eliminates important retirement investment choices for Canadians, both now and in the future. To make this very same point, Stephen Harper himself quoted CARP (Canadian Association of Retired Persons) in his opinion editorial which appeared in the National Post on October 25, 2005: "Seniors are actually enraged frightened and panicked about potentially losing retirement savings that they count on for the essentials of daily living."

Of course, during the autumn of 2005, Mr. Harper was promising to "protect seniors" and to "NOT tax income trusts." Would you buy a used car from this politician?

Well, perhaps NDP leader Jack Layton would. After all, by blindly adhering to the Conservative's newly-minted policy to eliminate income trusts as a means to provide retirement income, the NDP is helping foster financial uncertainty and unnecessary hardship on those of retirement age and the most vulnerable members of Canadian society -- namely seniors.

Many long standing NDP supporters are bewildered by this unholy alliance between the NDP and the Conservatives on this issue: "We are shocked that the NDP has supported the Harper government on its attempts to steal our retirement monies. My parents and relatives helped found the CCF and the NDP. I am sure they are turning over in their graves at what seems to be an illogical political move by the NDP. "

Canada has a two-tiered retirement system, which is evolving into an unanticipated underpinning of new social and class divisions in the senior years (in other words, new social and economic inequities).

30% of Canadians are members of defined benefit pension plans [generous guaranteed pensions], whereas 70% are not. Those who are in the first privileged category include our elected representatives in Ottawa and the 280,000 members of the public civil service in Ottawa whose pension assets are managed by the Public Sector Pension Investment Board. These generous pension arrangements are accorded to all Members of Parliament, regardless of their political party affiliation.

The other 70% must provide for their retirement through payouts from RSP-style savings plans (what they receive will depend upon how much they were able to save).

At present, Canadians are generally acceptant of this seeming disparity in the manner in which certain Canadians' financial security is assured, while other's financial security is based on virtual self reliance. Others consider it an inequity.

The Conservatives' Income Trust policy, and the NDP's adherence to it, dramatically exacerbates this inequity in the minds of the many Canadians who are members of the 70% majority who do not have a guaranteed pension. That is because, on the Income Trust issue, the majority is now being treated like a minority.

Under the proposed Tory/NDP trust tax legislation, important choices will be taken from the majority and be preserved and enhanced for the privileged minority.

Unlike the changes contemplated a year ago by the Liberals, the Conservatives have implemented a subtle yet profound change to their proposed trust tax policy. Mr. Flaherty's brand of so-called tax fairness "carves out" the ability of Canada's largest pension funds to replicate the current tax-free benefits of income trusts (for the trusts themselves, not their investors who pay tax) by holding private trusts in their private equity portfolios.

So the 70% majority (the rest of us) will no longer be able to invest in the original beneficial "flow-through" trust tax structure. But privileged politicians and bureaucrats still will be able to enjoy the benefits this "flow-through" structure via the private trusts that their pension plans create and invest in.

Our question to the Stephen Harper and Jack Layton: "How can something that is being denied the average Canadian, on the basis of its presumed negative effect on Ottawa's tax base, be allowed to persist for the benefit of those in our public civil service and others so advantaged?"

Not being slow to take advantage of this "carve out", the Public Sector Pension Investment Board (PSP) is already making good use of this exception through the recently announced purchase of Telesat Canada from BCE Inc for $3.4 billion. Telesat will be the financial equivalent of an income trust and will be held in the public-sector pension plan's growing private equity portfolio.

Talk about tax leakage, tax unfairness and political inequities. PSP's investment in Telesat will not be taxed in the manner that Flaherty would tax such an investment in an individual Canadian's RRSP.

This is a gross inequity that only serves to exacerbate the two tired pension system in Canada, making things harder for the marginalized 70% and better for the privileged 30%.

Consequently, The Canadian Association of Income Trusts Investors (CAITI) calls upon the NDP to fundamentally rethink its irrational adherence to Finance Minister Flaherty's inherently unfair and unjustified legislative proposal to erode ordinary Canadians' ability to fund their retirements, while enhancing the options available to Canada's most privileged seniors.

Not to mention the Conservative government's decision to continue to permit private tax-advantaged family trusts for the wealthy, while denying similar benefits to those who most desperately need such tax relief in their senior years. -- Excerpted from a press release from CAITI

*********

FEDERAL TRUST TAX PROPOSALS: TAX UNFAIRNESS

Dirk Lever, et al

RBC Dominion Securities

January 23, 2007

We believe the Federal Government’s trust tax proposals do not meet its own goal: tax fairness. The proposals only address 1 of 4 tax fairness tests. There is a better way!

A Summary Of This Report

Double Taxing Pension Benefits – Canadian corporate dividends received by Canadian pensioners through a pension plan or fund are taxed twice; once at the corporate level and again in the pensioners’ hands. Yet interest from a Canadian corporation or government is only taxed once. We believe it is not fair to tax Canadian corporate dividends a second time. The trust tax proposals tax Canadian corporate dividends twice. [More tax unfairness]

U.S. Investors in Canadian Trusts Benefiting -- Currently, U.S. investors in Canadian trusts obtain preferential tax treatment when compared to Canadian investors in equivalent U.S. investments (U.S. investors pay approximately half of what Canadians pay the U.S.)
The trust tax proposals will lower the benefits derived by U.S. investors and put them on similar footing to Canadians investing in U.S.trust-like investments. [The one example of fairness in the new trust tax legislation]

Some Canadian Pension Funds More Equal Than Others – We believe Canadian pension funds should be able to invest in the pre-tax cash flows (interest income is such an investment) of a business, regardless of the size of the pension fund. The tax trust proposals would eliminate the ability of small pension plans (including RRSPs) to invest in business pre-tax cash flows, yet large pension funds would be allowed to continue in certain industries. Tax fairness should mean equality for all, regardless of size. [More Tax Unfairness]

Canadians Stripped of Private Equity Financing Techniques – With the Federal Government’s trust tax proposals, small Canadian taxpayers (who have paid their fair share of taxes) would be stripped of their ability to structure a Canadian business in a manner that Foreign Private Equity investors will likely utilize to fund the take-over of Canadian trust businesses. How can a proposal that puts Canadian taxpayers at a disadvantage to Foreign Private Equity investors be considered “fair”? [Even more tax unfairness]

Confusing Expedience with Fair – We believe that merely adding the words “fair” to the Federal trust tax proposals does not make them “fair”. It is a form of false advertising that is being foisted on the Canadian public for the sake of expedience. There are better alternatives.

LEST WE FORGET #3

2007-01-23T07:45:00.000-05:00

The Evil Wrought By Machievellian Politicos

As a Canadian, I have never felt so abandoned by my government. My MP only sings the Harper spin story and the press seems to have given up. How can a government in Canada betray the people and turn a deaf ear to the hardship it has created? Harper and Flaherty stand firm in their fight against the allegedly evil trust companies and they don't care about the individuals they have hurt. They refuse to listen to facts from experts and they refuse to produce any facts of their own. They are the most ruthless uncaring poliicians Canada has every seen in power. If this is the future for Canadians then we better watch out. If Harper achieves his goal of a majority government there will be no stopping his hidden agenda. What will he betray Canadians on next? Those who support him better watch out because no one is safe with this guy...Canadians can't trust him...he has shown that. -- Abandoned By Our Government, January 05, 2007

Liars are in power and they have stolen money from my grandchildren, my daughter, my family and friends. I just don't care about MY money. I suffer when others lose money only because thay have followed me and believed in a clear promise made by longnose Harper. In this country, we hate liars. In this country, citizens with no honour and heart, don't deserve appreciation. How come we have elected a Prime Minister of that kind? Please God, HELP US! -- Jean-Marie Lapointe, November 26, 2006

The Sad Truth Behind Their Lame Lies

“The story of the staggering loss of corporate tax revenues that circulated before Flaherty's announcement now appears to have been flat wrong. The truth, it seems, is that whatever leakage of corporate tax dollars the trusts caused was more than offset by the increased tax collected from individuals who were recipients of trust distributions” -- Brian Flemming, Halifax Daily News

"You may be right about tax leakage. It may be small to non existent." -- Eric Reguly, Globe & Mail, 9th January online chat

“It wasn’t just that the Composite Index dropped almost 300 points, shedding $26 billion in capitalization in one day (and $36.3 billion in the trust sector in two days!). The real story was the people who took the biggest hit. They weren’t cigar-smoking Wall Street moguls, they were ordinary folks. Many retirees and 50+ baby boomers saw a big chunk of their life savings melt away before their eyes” -- Gordon Pape, GlobeInvestor

"The majority of Canadians believe the federal government is unjustified in slapping a levy on income trusts. About 55 per cent of those surveyed in the national poll, conducted for CanWest News Service over the last week, said the reasons given by the Conservatives for changing the way income trusts will be taxed do not justify breaking their campaign promise on the issue." -- Jack Aubry, CanWest News Service, November 08, 2006

"Last night in Ottawa, the 'Dishonorable' Minister of Finance Jim Flaherty announced his proposal for a Tax Fairness Plan for Canadians. The plan allegedly seeks to restore balance and fairness to the federal tax system by creating a level playing field between income trusts and corporations. I call him "the dishonorable" because I stood in a room with him nine months ago when he told a group of us that 'You can rest assured that the Tories will NOT go after the energy trust business like our predecessors.' But now we have what may be the single-stupidest economic policy move I've ever witnessed."-- Jim Tobin, Fox News Conributor, November 2006

"We looked at 126 businesses that converted from equities to trusts between 2001 and 2005 to prove that Ottawa reaped more, not less, tax revenue after firms converted to income trusts...We found that on average the government stood to collect 2.2 times more in taxes by taxing the distributions of the trust than had been paid by the corporations prior to their conversion." -- GORDON TAIT -- Research Analyst, BMO Nesbitt Burns

"A new report by a major accounting firm disputes the conventional view of income trusts as mature, plodding cash cows. According to a study released Thursday by PricewaterhouseCoopers Canada, trusts have been expanding their businesses and reinvesting their capital at 'impressive' rates, boosting economic growth even as they were making payments to investors.
Income trusts are valued for their ability to churn out regular payouts, but critics say they tend to place growth on the backburner.
Federal Finance Minister Jim Flaherty, who stunned investors with a Halloween announcement that trust distributions will be taxed in 2011, raised concerns that further trust conversions would hurt productivity by holding back investment in productivity-enhancing tools.
Ross Sinclair, national leader of the PricewaterhouseCoopers income trust practice, said stereotypes about trusts have formed amid an absence of facts.
'The surprise is the amount of spending in capital they [trusts] are in fact doing,' he said in an interview.
The study of more than 250 income trusts concluded that last year $26.5 billion went towards capital spending -- 230 per cent of profit. In 2004, capital spending was $21.8 billion -- 376 per cent of profit.
In addition, Canada's income trusts reported a 62 per cent increase in profit and a 54 per cent rise in sales in 2005, the report said.
Sinclair said the findings confirm that companies that converted to trusts continued to invest in productivity-enhancing projects and technologies, and to raise cash for capital spending and acquisitions. -- Canadian Press, December 2006

"Among other CCET findings:
-- Energy trusts do not cause federal tax leakage.
The report claims that energy trusts in fact pay more tax revenues than conventional oil and gas companies. Many of those conventional companies wind up paying little corporate tax, if any, the report said.
The report said energy trusts acquired more than $35 billion worth of mature oil and gas assets in the past five years and spent another $15 billion to develop them. In addition, they repatriated $10 billion worth of assets from foreign control over the past decade.
-- Canadians' retirement plans are "tax-deferred" not "tax-exempt" creating a huge savings account for the government that will eventually lead to higher tax revenue as those funds are withdrawn.
-- Dielwart fears the tax changes will lead to lower reinvestment in aging energy assets and ultimately, lower oil and gas production. The changes could also result in lower retirement income for investors, higher energy prices for consumers, and reduced efforts to capture and store greenhouse gas emissions in old oilfields, he added.
-- This is not just about taxes. It's about the environment, personal investments and Canada as an energy leader." -- © The Calgary Herald 2006

TWENTY QUESTIONS -- FOR CANADA'S ALLEGED CHAMPIONS OF SOCIAL JUSTICE

2007-01-22T07:45:00.000-05:00

Here's a number of salient questions about social and economic justice in Canada, worth pondering by Jack Layton and his NDP caucus:

What's happened lately to Canada's alleged political champions of social justice -- the left-wing NDP? Why do they continue to support Canada's most far right conservative political party in the Conservative's war on dispossessed seniors and struggling income-trust investors?

Why are these allegedly left-wing politicians still stubbornly supporting a Conservative legislative initiative that is designed to squelch the only viable competition left to Bay Street's banking and mutual-fund interests, and thus pour even more obscene profits into the financial establishment's corrupt coffers?

What about all the ordinary Canadians whose lives have already been destroyed by this clumsy Conservative initiative? Don't they count as much, to the NDP, as increased profits for Canada's greedy financial institutions?

Why has the social conscience of the Left conveniently fled the scene of the crime? And why has Canada's self-described ultimate Machiavelli (with his cold heart of industrial steel), Stephen Harper, become the NDP's best political friend?

Doesn't Jack Layton, the NDP Leader, realize that you are judged by the company you keep, as well as the misdeeds you sanction, as much as by empty political rhetoric about saving the world?

Isn't time for the Hon. Jack Layton to finally signal that he no longer will play the repugnant role the obedient lackey of Stephen Harper and his minions, enabling so much destructive mischief in Parliament?

And by the way, who's running the NDP, these days? Mr. Layton, or his finance critic?

Isn't it time for the NDP to demand, from the Conservatives, a moderate, reasonable compromise/solution to the current Tory income-trust screwup -- e.g., full-pledged consultations and/or a permanent or ten year tax moratorium for existing trusts (particularly energy trusts)?

And if the Conservatives won't consider a moderate solution to the mess they have created, then shouldn't the NDP let Mr. Harper know that they will join with the Liberals (and possibly the Bloc) and vote against Mr. Harper rigid foolishness in the House of Commons?

Reminders To Jack Layton & His Fumbling Finance Critic

(1) Any compromise trust solution (as advocated by the Bloc and Liberal opposition) -- such as a ten-year or permanent moratorium on existing trusts -- will more benefit individual investors than it will benefit Bay Street itself.

In past, the way that Bay Street's rapacious financial institutions and corporate lawyers made their biggest profits from income trusts was in stage-managing corporate conversions into trusts. But as long as the final "adjusted" trust legislation puts a stop to the further conversion of publicly-traded corporations into income trusts, then this Bay Street cash cow will be ended.

(2) Under this same compromise trust legislation, proposed by the Bloc and Liberal parties and opposed by the Harper/Layton alliance, the kind of cataclysmic tax leakage prophesied by the current Finance Minister -- allegedly the result of too many corporate conversions into trusts -- will not happen. Federal tax revenues will be safe.

However, if existing trusts -- especially energy trusts -- are spared from destruction by adjustments to the original legislation, then some equilibrium can be re-introduced into the income trust market -- meaning ordinary investors will see some of their lost equity restored.

Not only that, but retired seniors will again have the opportunity to invest in the alternative source of extra income provided by income trusts, beyond the usual low-interest savings vehicles offered by the financial establishment (with huge profit margins and management fees built into these limited saving vehicles offered by greedy financial institutions).

Not only that, but the economic threat now hanging over rural Western towns and small cities -- where most of Canada's energy trusts are exploring and drilling -- will be lifted by a compromise initiative that recognizes their pivotal role of these trusts in the economy of Western Canada.

For example, restoring the viability of Canada's energy trusts will avoid the potential loss of local jobs, investment, infrastructure spending, and tax revenues that the current rigid Conservative/NDP trust tax legislation threatens to unleash on rural areas of Alberta and Saskatchewan.

(3) If the NDP or any other political party is worried about misleading or inaccurate financial reporting by income trusts -- a problem that is much more serious in regard to small-cap common stocks on the Canadian Venture exchange -- then they can push for more rigorous accounting standards for both income trusts and common stocks.

(4) Based on his political beliefs and past political record, why would Stephen Harper be so anxious to destroy the income-trust market unless there was a hidden benefit to the Bay Street financial special interests that have long supported the Conservative Party. Even though a popular financial investment option (trusts) will go the way of the dinosaur (if Mr. Harper and Mr. Layton currently have their ways), surely there must be a big financial payoff for the monopolistic Bay Street financial interests who secretly have been cheerleading the Harper administration's extreme war on income trusts. Read on.

(5) To enable the Tory trust legislation to pass is to reward the many big-business interests who secretly pushed Stephen Harper and Jim Flaherty to take such extreme action in the first place -- such as (1) the Power Corporation mutual fund empire which lost significant business to competition from income trusts, and (2) the many CEOs of common stocks who feared losing their huge salaries, bonuses, stock options and other luxury perks if their companies were forced to turn into income trusts.

In other words, rather than being an initiative to save the nation's finances, is this just another Conservative measure to further boost the already obscene profits of Canada's monopolistic financial establishment -- and eliminate any competition to the traditional financial instruments offered by Canada's banks and mutual funds?

Is the war on income trusts really about "tax leakage" from Canada's treasury, or protection of the excessive profit margins and management fees so loved by Bay Street's financial institutions?

Is this Tory initiative really about saving Canada's seniors from themselves, or about saving the over-generous salaries, bonuses, stock options and severance settlements of Bay Street CEOs?

(6) This is a legislative proposal created in haste, without prior consultation with the parties affected. As a result, it will have many unanticipated consequences -- such as ravaging the Western oil patch and leaving many energy trusts open to takeovers by foreign private-equity firms (vulture capitalists) who intend to never pay a cent in taxes to the Canadian government.

In addition, the formal announcement of this legislation has already lopped billions of dollars off the retirement savings of millions of Canadians. And it threatens to deprive retirees of an important high-income savings instrument required in today's high-cost-of-living economic environment.

What other disastrous unintended economic consequences of this trust legislation will negatively affect Canadians, because an impulsive and badly-brief Finance Minister refused to carry out the due diligence required before initiating legislation of this magnitude?

(7) With its potential negative impact on Western-based energy trusts, and its hidden rewards for Toronto's financial establishment, this legislation recklessly threatens to pit Western Canadian interests against those of the Central Canadian establishment (as in the case of the NEP)-- and again with Central Canada designed to be the winner.

In sum, where is the alleged political conscience of Canada hiding? Come out, come out, true NDPers, wherever you are!

HARPER GOVT ON THE DEFENSIVE

2007-01-21T14:47:00.000-05:00

How the haughty have fallen.

Just last autumn, Canada's minority Conservative government felt it could do no wrong. Polls showed the Harper government held a healthy lead over a leaderless and demoralized Liberal Party. Canadians appeared to be viewing leader Stephen Harper as a credible, trusted leader for the first time. And a majority government appeared to be in the haughty Harperites' grasp.

And it was in such a heady political environment that the Harper Conservatives decided to roll the political dice and break a popular electoral promise to Canada's seniors' not to tax income trusts.

Influenced by the strident calls of Canada's Establishment newspaper of record, the Globe & Mail -- and various self-interested special-interest groups -- Finance Minister hastily unveiled a destructive new income-trust tax policy that was clearly not ready for prime time.

Nevertheless, despite an avalanche of credible evidence that the blundering Finance Minister had been misled by misinformation supplied by his bureaucrats and Bay Street banking buddies, the Harperites decided to forge ahead -- confident that the Conservative's heady poll numbers and popularity would nullify any loss of votes, political donations and election volunteers from the seniors and other investors hurt by this impetuous new trust tax proposal.

My, how things change. Canada's miscalculating Machievellians now find their backs to the electoral wall. And unless they can show a bit of humility and flexibility, on the issue of income trusts, electoral defeat looks like a near certainty for the Conservatives this spring.

How bad have things gotten politically for the gang that couldn't shoot straight, enviromentally and otherwise? Please read the following Toronto Star analysis below, and then ponder the question of whether their electoral prospects will be even worse once seniors and other disillusioned income-trust investors jump onboard the 'Anybody But Harper' express and take their electoral revenge (not to mention the drop-off in individual political donations to the Conservative Party because of Little Jimmy's mishandling of the income-trust issue).

Most important, why wouldn't Mr. Harper consider a bit of flexibility and compassion on this issue, to at least give him a fighting chance in the next election?

Check out the Toronto Star analysis of the Conservatives' potential electoral woes below, and ponder the question of whether Jim Flaherty and Stephen Harper really are Canada's latest incarnation of Dumb and Dumber?

OH, HOW THINGS CHANGE

Les Whittington and Allan Woods
Ottawa Bureau
Toronto Star
January 20, 2007

OTTAWA – Stephen Harper, who flew to Victoria this week to personally take part in the Conservatives' bid to play the "green" card they discarded months ago, is struggling to find a way to appeal to the mainstream as his reckoning with voters draws ever nearer.

A year ago, in the aftermath of an election that ended 13 years of Liberal power, it seemed the newly chosen prime minister and his band of Conservative MPs had nowhere to go but up.

"Tonight, friends, our great country has voted for change," a beaming Harper told supporters in Calgary on Jan 23. "We will honour your trust and we will deliver on our commitments."

It was a heady time for the Conservatives. Paul Martin, his government mortally wounded by Liberal scandals, was out after fizzling in the prime minister's job. And as the Tories got down to work, Canadians seemed impressed with Harper's activist agenda and the targeted tax cuts in Finance Minister Jim Flaherty's sure-footed first budget. By May, many Liberals were talking dispiritedly about five or six years in the political wilderness.

But Harper's upward trajectory was short-lived. And now the government faces a shifting political landscape that is forcing it to redefine its priorities and adjust to pockets of adverse regional reaction that threaten to undercut its game plan for re-election.

As Canadians' concerns have evolved, Harper finds himself fighting to keep the public onside in a bloody conflict in Afghanistan and overcome a glaring failure to anticipate the emergence of the environment as an overriding national issue. As well, the government has been weighed down by controversies over Middle East policy, accusations of a Mike Harris-like tendency to slash social programs and investor anger from the stunning reversal of the Conservative promise not to tamper with income trusts.

Also, the political picture has been greatly altered by a decline in public disgust over the sponsorship scandal, particularly in Quebec, says pollster Frank Graves.

"It's striking how rapidly that's receded and how quickly the issues have shifted to things that are not particularly favouring the Conservatives" such as Afghanistan and the environment, says Graves, president of EKOS Research.

Although the timing of the minority government's defeat in Parliament – and the next election – remain up in the air, the opposition parties are circling for the kill at the most opportune moment to capitalize on the Conservatives' inability to consolidate their strategic advantage.
Invigorated by a scalding-hot leadership contest and newly united under Stéphane Dion, the Liberals are readying for a wide-open election in which they appear likely – according to recent polls – to leave the starting gate at least neck-and-neck with the federal Tories.

Now in full election campaign mode, Harper is trying to airbrush his party's right-wing image and position the Conservatives closer to the centre of the ideological spectrum.

He shuffled Vic Toews, his law-and-order justice minister, out of that high-profile ministry and into the quiet pastures of Treasury Board. Harper also replaced Environment Minister Rona Ambrose, who shouldered the blame for the Conservatives' disastrous handling of the climate change file, with hard-charging John Baird.

As he took on his new post, Baird denied that the Conservatives had totally miscalculated on the environment.

"I think Canadians had a very different set of priorities a year ago," he said this week. "They wanted Canada's new government to come to Ottawa and clean up the ethical mess that the Liberal party left us ... People wanted tax cuts, people wanted child-care programs that are universal for every child in the country.

"Now they've got those and it's natural that they're going to look at new priorities."

But Daniel Bernier, Ambrose's chief of staff in the environment portfolio, says the Tories were not prepared for the explosion of environmental concerns.

"The file evolved rapidly, very rapidly," Bernier says. "When the Tories were elected – look at the priorities – it wasn't there at all. We had discussions about whether we should try to make it a sixth priority..."
Ultimately, the environment did not make Harper's top five issues for action last January, and the government's Clean Air Act was condemned both at home and abroad at a time when Canada, as head of the United Nations Framework Convention on Climate Change, was supposed to be a leader.

Harper has acknowledged it will be a challenge for the Tories to bounce back from their failure to draw up a credible environmental policy. "We don't think that just a communications change will change anything," he has said.

The Prime Minister is putting his own prestige on the line in this recovery effort, personally announcing a $1.5-billion commitment to long-term development of wind power and other renewable energy sources in Victoria yesterday.

It is one of a number of Liberal approaches to climate change – also including clean energy research and conservation incentives for homes – that the Conservatives had killed but are now reviving in an effort to throw a "green" cloak over their government.

"Now, they reiterate (these programs) and pretend it's fresh and new," Dion says.

Retreading Liberal initiatives appears increasingly common as the Harper government courts mainstream voters.

Battered by charges they were neglecting vital relations with economic superpower China, Flaherty and Trade Minister David Emerson, a former member of the Martin cabinet, mounted the kind of trip to Beijing to promote business and commerce that the Liberals once championed.

And the Tories' child-care policy may end up with more resemblance to the Liberal program they rejected as the government tries to cope with businesses' total lack of interest in Harper's offer of a $10,000 tax credit for each daycare space created by the private sector.

Over the past year, both the staying power of the Tories' policies and their political acumen has been put to the test.

Last January, the election of a prime minister from a western riding was seen as a breakthrough for the Conservatives. "The West is now in," Harper famously declared after the votes were counted.

But his government's quest for additional support, particularly in eastern Canada, is starting to expose vulnerabilities on the party's western flank.
It is not a major threat at the moment, but the creation of the Party of Alberta in November – a sort of Bloc Québécois for the oil-rich province – speaks to a frustration that some Tory MPs, and the odd cabinet minister, only whisper about.

It is the slow progress and outright reversals on things like Senate reform, the effect of the income trust tax decision on the development of certain oil sands firms, and the decision to recognize the Québécois as a "nation" that have shaken people's faith in the Tories, says Rhys Courtman, the 26-year-old founder of the fledgling Party of Alberta.
Long-time conservative supporters have discovered that the firm vows made by Harper and by the Conservatives' predecessor parties are no fait accompli now that the party is in power.

"The process which led to the founding of the Conservative party ... along the way something was lost that was important to Albertans," Courtman says.

And Harper's major federal-provincial gambit, his attempt to overhaul the national system of revenue-sharing to address provincial complaints, is in danger of inflaming western resentment if it's seen as mainly a sop to Quebec. The Saskatchewan government is already up in arms over Ottawa's handling of this file.

The changes that have come about in the last year have also registered abroad, which is where the Tory shift is most pronounced.

At times, Harper's performance seemed like the bumbling of an uncoordinated child trying to hog the ball through a schoolyard game. In contrast to Jean Chrétien golfing with Bill Clinton and Martin dancing with Bono, Harper had barely seen the world outside of the U.S. and a Mexican resort town.

He wore a fishing vest on his first outing with his U.S. and Mexican counterparts and sipped root beer in Kandahar.

But more troubling for some is the government's puffed-up policies on human rights in China and Harper's hawkish forays into Middle East diplomacy.

Harper made Canada the first country in the world to freeze funding to the Palestinians after the election victory by Hamas, which Canada had years previously designated as a terrorist group.

He also raised eyebrows by praising Israel's "measured" response to the kidnapping of an Israeli soldier by Hezbollah in Lebanon last summer, which was the spark for a month-long war.

The Liberals criticized the Prime Minister's judgment, but Canada's Jewish community opened their arms to him. Then Harper attacked what he said were anti-Israel positions taken by "virtually all" of the Liberal leadership candidates. The Liberals roundly denounced him.
Paul Heinbecker, a former Canadian ambassador to the United Nations, says the Tories have demonstrated both too little experience and too much certitude on the world stage.

"I would have thought that the job of a Canadian prime minister was to be pro-Canadian," he says.

"It doesn't make sense to pick sides because, from time to time, both sides have been offside with international law."

Canada's foreign policy shift has not gone unnoticed, either. The European Union has criticized the government for abandoning the Kyoto environment treaty, and in October Amre Moussa, secretary general of the Arab League and a former Egyptian foreign minister, lashed out at "a policy based on total and full bias to one party" – Israel. He warned that such an approach by Canada would do "nothing but damage that country's diplomacy."

But Heinbecker says the government's "balance sheet" on foreign affairs is not entirely negative.

Despite major missteps touting the military commitment to Afghanistan, including rushing into a two-year extension of the mission, Canada has earned the respect of its neighbours and allies by taking a stand against the Taliban.

Looking back, it's clear that Canada's political agenda has changed considerably since the night Harper was chosen by the voters nearly a year ago.

The next few months will reveal whether the Prime Minister – and his rivals in the Liberal, New Democrat, Green and BQ parties – will sink or swim in these unpredictable cross-currents.

LEST WE FORGET #2

2007-01-20T13:37:00.000-05:00

Shameful Moments In Canadian History:
Stephen Harper Sells Out (Yet Again)!

The smoking gun(s):

http://www.youtube.com/watch?v=U9mibZYpVPY

The dirty deed and its aftermath:

TAXING TRUSTS WILL NOT LEAD TO TAX FAIRNESS

by Diane Francis
National Post
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 which 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. The root of the problem is that the decision was based on analysis by federal officials who regard RRSPs and pensions as tax "exempts" even though they are merely deferral mechanisms.

So the numbers were improperly counted when it comes to taxes paid by Canadian income trust unitholders. And the officials apparently missed the real source of leakage -- U.S. income trust owners, who pay only a 15% withholding tax. Not only was this ignored, but Mr. Flaherty even mused aloud that the 15% withholding tax should be even lower than it already is.

It gets worse. New proposed taxes on income trusts will force them to restructure back into traditional corporations. This will increase the tax leakage. A Post reader analyzed taxes paid by a corporation, Manulife Financial, and an income trust, CI Financial Trust. Manulife is a $40- billion market capitalization giant and CI Trust, $7.7-billion.

In 2005, Manulife's pre-tax earnings were $4.3-billion and the cash taxes paid were about 7% of earnings. It paid dividends of $926-million to shareholders, who were taxed at 18% rates. So the combined corporations' and investors' tax rates were equivalent to 25%. By contrast, the CI Financial Income Trust forecasted a 2006 distribution of $570-million and its unitholders would have tax rates of 35%.

Why wouldn't the Department of Finance, the Minister and Prime Minister understand this? Because Ottawa's analysis [regarding alleged 'tax leakage'] dealt with posted tax rates, not with the actual tax rates paid after all the accounting tricks are used.

Corporations duck taxes while income trusts are tax-generating machines because they are constitutionally set up to distribute a majority of their money to unitholders who pay full taxes, except for foreigners. (If Ottawa finally realizes that leakage is about the foreigners, then it should grandfather existing trusts and require future ones to have foreign ownership restrictions.)

On the issue of productivity, Mr. Flaherty and his Finance Department "pencils" get failing grades again. The theory of corporate taxation is that by imposing taxes on corporations, they will be encouraged to avoid them by keeping their cash flow then productively redeploying it. But here's how the real world works: Corporate managements usually deploy their cash surpluses to overpay themselves. Then they often get involved in unproductive, but tax-efficient, endeavours such as buying back stock, which, not coincidentally, also enhances the value of their own wallets. In addition, corporations use surplus cash to make sometimes foolish diversifications, acquisitions or sub-optimal investments in their own businesses. The examples are plentiful of such misadventures by cash-rich managements.

Finally, there's the governance issue. Many of us invested in the trust sector because we were sick and tired of lousy managements getting their sticky fingers on owners' funds. Besides, income trusts have more managerial discipline because they must make regular payments, which imposes on their managements a rigour that is otherwise non-existent.

As one reader summarized: "It is a simple truth that nothing Enron was doing, in terms of reporting as current earnings future questionable returns and concealing liabilities with dubious off-balance sheet debt parking, could have taken place if it was an income or royalty trust and forced to let investors know each and every month how much cash they were going to be getting."

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 these 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, thus putting more pressure on taxes from ordinary Canadian families.

THE TRUTH AOUT INCOME TRUSTS #7

2007-01-20T12:18:00.000-05:00

Healing The Wounds:
Recognizing & Restoring The Good In Income Trusts

Canada’s Prime Minister, Stephen Harper, calls his new income-trust proposals "tax fairness". But these measures are actually unfair and regressive, because they unnecessarily take away, from retirees and self-employed workers, an enhanced income source for coping with today's oft-ignored rising costs of living -- for example, escalating costs for fresh food, heating, electricity, education, realty taxes, insurance, and auto fuel.

For retirees, in particular, coping with today's escalating costs of living is particularly difficult in the new financial environment of low interest rates paid by GICs, bonds and other traditional savings vehicles.

As well, the onerous taxation regimen proposed by the Harper government, for energy trusts (originally called royalty trusts), threatens to suppress a key engine of wealth, prosperity and jobs in the Western oil patch -- particularly in local Western rural communities that depend upon energy-trust companies for jobs, spending on equipment, and local tax revenues.

All of these negative consequences contrast strongly with the increased business profits that ultimately will be directed to financial institutions in Central Canada by the Conservative’s hastily-conceived trust legislation.

New Equitable Legislative Adjustments Required

Consequently, new equitable "adjustments" need to be made to the Harper government's current income-trusts tax proposal, whether by the current government or by a brand new Liberal or coalition government.

First of all, it's easy to see why Mr. Harper and his Finance Minister felt it was necessary to end "conversions' of large Canadian corporations into income trusts whenever such conversions are intended strictly for tax-avoidance purposes -- especially in regard to publicly-traded corporations unsuited to the traditional income-trust financial structure.

It's disappointing that the Prime Minister didn't recognize such an eventuality when he originally promised not to tax trusts in any way. But it's not difficult to recognize his present desire to respond to emerging economic realities and take some kind of concerted action.

However, there was, and is, a less destabilizing route which Mr.Harper's government (or a new Liberal or coalition government) could take to achieve the primary goal of preventing further trust conversions by unsuitable corporations seeking only to avoid corporate taxes.

To avoid the financial suffering that has been arbitrarily and retroactively imposed on millions of Canadian investors in existing income trusts (4 million Canadians according to an autumn Ipsos-Reid poll), the government could crack down on future trust conversions for tax-avoidance purposes, but permanently exempt existing trusts from its new tax provisions (often referred to as "grandfathering" existing trusts from the new tax).

Or this government (or a future Liberal or coalition government) could minimally make adjustments to the proposed trust legislation and follow the same path taken by the American Congress when a similar perceived tax-avoidance phenomenon began to occur in the United States in the late 1980's. In the U.S., trust-like entities (public traded partnerships), with a few exceptions, were given a ten-year exemption before they were taxed at conventional corporate tax rates.

And even more preferable treatment was accorded to trust-like, resource-based MLPs in the U.S. (for example, energy MLPs). After industry-wide consultations, legislated criteria were created to exempt, from conventional corporate taxes, “mature” resource MLPs which could benefit from the advantages of the tax-exempt “flow-through” structure.

Australia, in most cases, followed the same path of exempting resource companies (e.g., energy producers) when attempting to end unnecessary corporate conversions into trust-like entities in that country.

End Bay St. Excesses, But Restore Trust Market Stability

Either of the above tax exemption solutions would still allow the government to crack down on conversions of corporations into trusts strictly for tax-avoidance purposes. But each type of tax "moratorium" would also permit the survival of today's existing income trusts and ensure a more equitable outcome for the millions of innocent Canadians who believed Mr. Harper's original promise to protect their savings and not tax income trusts.

In that regard, it's important to remember that most victims of Mr. Harper's present "all or nothing" attack on income trusts are not rich "fat cats". Rather, they usually are ordinary Canadians, from all age groups and walks of life, trying to cope financially with today's very high cost of living -- including cash-starved seniors just trying to scrape by, and desperate young parents saving up for their children's education or for their own retirement.

Both retirees, and the self-employed working class, have found the challenge of generating ample savings income for retirement or education goals difficult to accomplish in today's low interest-rate savings environment.

A truly fair government trust tax policy should enhance the financial well-being of such Canadians -- not penalize or bankrupt them.

A Positive & Fair Solution

In that regard, politicians in Ottawa should permanently extend the exemption of existing income trusts from corporate taxes, or minimally extend the current tax exemption until the year 2017 -- as well as completely exempting traditional energy trusts from corporate taxes (just as the current government has proposed exempting most real-estate investment trusts).

THE TRUTH ABOUT INCOME TRUSTS #6

2007-01-20T12:12:00.000-05:00

The Sorrow & The Lack Of Pity:
The Damage Done By Conscience Challenged Politicians

“It wasn’t just that the Composite Index dropped almost 300 points, shedding $26 billion in capitalization in one day (and $36.3 billion in the trust sector in two days!). The real story was the people who took the biggest hit. They weren’t cigar-smoking Wall Street moguls, they were ordinary folks. Many retirees and 50+ baby boomers saw a big chunk of their life savings melt away before their eyes” -- Gordon Pape, GlobeInvestor, Autumn 2006

"I am dismayed at the turn of events. I personally will survive, but tears come to my eyes when I think of all the retired people (both in the US and Canada) who had 50% or more of their "nest eggs" invested in these trusts and had a late night announcement on October 31st destroy their future. They have no capacity to earn income to replace what they have lost. They are helpless, frightened and bewildered. This is not what one would expect from a mature, civilized, democratic, and principled country such as I always considered Canada to be." -- M. K., USA, December 2006

"I do not want to go into the nitty gritty but I was looking forward to doing some traveling before I reach the pearly gates (hopefully). This [the Finance Minister’s new income-trust tax proposal] has now put a big strain on my financial situation and I am afraid that my dream will have to be put on hold. I am however afraid my dream will not be reached due to health problems. If I knew months ago that the government was going to do this, I may have been able to soften the blow. In all my years as a law abiding, tax providing and dedicated hard working Canadian, I have not seen such downright dirty trickery. Is there any hope this may change???? I will pray tonight that I will wake up from this nightmare."-- Anonymous, TRUSTS online forum, November 2006

"With the governments ill-considered action my account has gone down by $55,000 and most likely will not recover given the brutal shock to the royalty trust sector that occurred. I am back to worrying continuously about money, my future, and that of my wife. I do not expect this will be good for my health since I am a cancer survivor, the low grade lymphoma is still with me and might lead to more demands on the government purse, an interesting footnote on the government's concern for alleged tax leakage." -- A. Hurd, Victoria, November 2006

"Mr. Harper, you LIED to us and I take this very personally! I'm not just disappointed that you went back on your word, I'm so angry I can't wait for the next election to get rid of your Conservative government. I don't know who you guys are 'catering to', but it certainly isn't the average lower middle class retired Canadian like myself. I'm NOT rich and because of you I'm going to get a lot poorer now. All I need is income of about $34,000, but it looks like that goal will go up in smoke! I do not know how I will cover my modest cost of living as I face retirement in 2 months, but I guess you think this is OK as billions in [tax] surpluses keep rolling into your coffers." -- MLR, November 2006.

"You have to go some distance to upstage former Prime Minister Pierre Trudeau's heinous NEP, an ill-conceived government initiative that devastated the oilpatch in the early 1980s, in the minds of Calgarians. But Stephen Harper's Tories weren't far off the mark when they decided to renege on an election promise not to tamper with income trusts -- without bothering to warn either the industry or investors that changes were in the air. As a result, The Halloween Day Massacre as it has come to be known, is already inscribed in the annals of political infamy. In the meantime, investors are struggling to recoup the billions of dollars lost following the announcement." -- Columnist Charles Frank, Year-end Review, Calgary Herald, December 31, 2006

"Broken promises have consequences. Just ask any kid in grade school. But when a Prime Minister and Minister of Finance of a modern, Western, democratic society lie to and deceive their people the consequences are far reaching and…sometimes tragic.

"Yesterday, when I read a post on a popular financial forum, it took the concept of “betrayal of trust” to a whole new and tragic level. The poster said that an “old man” who had worked all his life, did the best he could to provide for his family and wife of many years, lost a huge whack of his savings in income trusts, and took his own life in mid-November of 2006.

"We don’t know the 'old man’s' name. We don’t have a picture of him. We don’t know how many grandchildren he had. We don’t know how many years he worked and saved. We don’t know his life’s story. We don’t know if he was like your grandfather or mine. From the post, what we do know is….he was depressed, he lost a large portion of his life savings after Oct. 31, 2006 , and he had most of that savings in income trusts.

"I think it is safe to say the 'old man', like most good, honest seniors….took [Prime Minister] Harper at his word. I know that many politicians, bureaucrats, and media types -- trying to comfort their own guilty (and not so guilty) souls -- will dismiss this financial loss nine ways from Sunday. I can hear it now: 'He should have been diversified.' 'He should have known the Income Trusts couldn’t last.' 'Besides, this action [by the Harper government] was for the greater good of our society'."

"And, this ladies and gentlemen, is where we are with today’s political and bureaucratic mentality….dismiss, deny, obfuscate, blame the victim. They will do anything but confront the real issue….the broken political promise and betrayal of trust.

"On November 1, 2006 , Harper & Flaherty’s premeditated BETRAYAL OF TRUST not only set up this grandfather and every senior/retiree for a financial catastrophe, but also destroyed any remaining faith we ever had in government, politicians, and bureaucrats -- R. Cox, Ph.D., January 2007

LEST WE FORGET

2007-01-20T12:00:00.000-05:00

(1) For your viewing displeasure:

http://www.youtube.com/watch?v=U9mibZYpVPY

(2) And for a quick reminder of the damage done by a broken political promise:

TRUST FIASCO FALLOUT:READERS STILL ENRAGED OVER TORY BLUNDER

by Diane Francis,
Financial Post
Wednesday, December 06, 2006

This is a small sample of the hundreds of remarks and insights from readers following my columns criticizing the Tories' income-trust-policy blunder.

A Westerner points out the damage to the oilpatch:

"Under this back-of-a-napkin policy, thousands of 'stripper' [low production] wells will be abandoned. Every barrel lost is another never to be recovered -- no more employment, taxes, royalties, export income, etc. As I watched the Liberals choose their champion to go against [Prime Minister Stephen] Harper, I had to keep reminding myself that I don't give a damn. I won't vote Green, Liberal, NDP or Harper."

Ron Kuhn puts this another way from a poor-resource-stewardship angle:

"The only other aspect I would add to your trust comments is the impact higher financial costs and the climate of uncertainty will have on reducing the amount of oil/gas that energy companies will eventually extract.

"Normally the production of a field will be based on a combination of production rates and technological processes that maximize the net present valuation. The likelihood is that the ultimate recoverable resources from our dwindling resources will be further reduced. And, generally, it will be impractical to go back to fields that have been over-produced and easily access any remaining oil or gas.

"I would have expected that Harper would have appreciated the emerging need for some mechanisms to encourage maximization of field recovery. Rather we are now on the road to do just the opposite -- pump out as much as you can in the next four years."

Louis Mix points out the government proposal appears to impose a punitive double taxation on RRSP recipients:

"For the well-heeled, savvy investor holding IT [income trust] units in a non-registered account, the after-tax difference will be relatively small, largely because of the dividend tax credit. But after 2010, the investor who continues to hold the units in an RRSP account will be subjected to double taxation of (a) 31% on income earned by the RRSP and (b) another 17% to 32% when IT income is withdrawn from the RRSP.
"For the taxpayer in the lowest bracket, the tax on IT income earned and withdrawn will be 48%."

From Laszlo Kozalk:

"What is especially distasteful to me is that Stephen ran his campaign on honesty and integrity. That was the image he wanted to portray to the Canadian people.

"It was interesting to hear that [Finance Minister Jim] Flaherty is now going after off-shore trusts. Apparently there is $88-billion outside the country. Thanks for warning them that you are training your sights on their assets. I am sure they have their accountants working feverishly for ways to hide this money from you again.

"As an investor who manages his own finances, I understand the risks involved in what I do. I never anticipated the government and especially my government would do something so blatantly harmful to the equity market. He vapourized $30-billion of peoples' assets. I can't believe we have no laws in this country to protect Canadians and their assets and provide some sort of recourse."

I have also received hundreds of e-mails from U.S. investors who pay only a 15% withholding tax on their repatriated income trust distributions. Here's one from Wil Huett of Colorado:

"Congratulations on an excellent piece on the royalty trust situation. You have hit the nail on the head on almost all points. I do quibble with your assertion that the real tax loss is to U.S. investors. To assume that the 15% tax I pay is a loss to Canada presupposes enough capital within Canada to fully fund the needs of the trusts.

"My capital has helped the trusts succeed and thus contibute to the Canadian economy. The 15% tax I pay appears to me to be 'free money' to the Canadian government. I receive no services, nor use any Canadian infrastructure. Indeed, I have never been in your country. It might be interesting to see if any of your academic institutions have done a cost/benefit analysis of the effects of foreign investment."

A Calgary investor called and said that the Finance Minister cost him plenty after his announcement cost the market $30-billion in value, thus creating tax losses for some and forfeiting capital gains taxes of at least $5-billion.

dfrancis@nationalpost.com

© National Post 2006

THE TRUTH ABOUT INCOME TRUSTS #5

2007-01-18T10:23:00.000-05:00

RETIREMENT 'HAVES' & 'HAVE NOTS":
THE NEW SOCIAL INEQUALITY

With their irrational attack on the income-trust industry, the current Conservative government (along with their new political friends, the NDP) have signalled their alliance with two key segments of Canada's most privileged elite -- (1) retired executives with hefty defined-benefit pensions and (2) affluent public-service retirees (including Ottawa politicians and bureaucrats) with gold-plated indexed pensions.

Unfortunately, the gilded, guaranteed retirement paradise of these privileged Canadians is no longer available to most other Canadians ("TROUs" -- The Rest Of Us). Instead, in retirement, the rest of us must try and cope with ever-escalating everyday costs of living -- such as heating, electricity, insurance costs, property taxes and automobile costs -- with the returns from accumulated RSP savings.

And retirement life is no longer a picnic when you have to finance it with the very limited income provided by the "safe" investments promoted by Canada's establishment financial institutions -- GICs, bonds, treasury bills, and bond & morgtgage mutual funds.

Although the Ottawa elite still refuses to come to terms with this new socio-economic phenomenon, Canadians are now living in a high-cost/ low-interest-rate economic environment which is likely to continue for decades. And retired TROUs are most negatively affected by this new economic reality.

For example, in the last two years or so, a retiree was lucky if he or she was able to get a 3 1/2% annual return on a five year GIC from a local bank (yes, those Bay Street banking moguls are just too generous to us, all the while they vote themselves ever-grander multi-million-dollar salaries and bonuses).

Factor in the official inflation rate (which is in fact much lower than rising real-life costs), and there's not much left to spend on food, rent, transportation, taxes and perhaps cable TV. Anyone for cat food for dinner tonight -- the diet obviously recommended for financially-starved seniors by today's Conservative Party leadership?

What About The Rest Of Us?

So what was (or is) the average, non-privileged retiree to do, in order to just scrape by and keep his or her head above the inflationary waters? In the past, the answer was quality income trusts, with their high yields and their priority on utilizing profits to generate a generous income stream for investors -- rather than following the corporate stock model encouraged by Jim Flaherty, which is to plow corporate profits into heftier executive salaries, bonuses, stock options, company mergers, and share buyback schemes.

If the current new Flaherty trust tax legislation is passed in Canada's Parliament, then this one steady source of enhanced income for retirees (and other Canadians) will disappear. And (as apparently intended) Canada's financial establishment will once more reign supreme, as the only game in town for investors looking for income -- even though this "game" is totally rigged in favour of Bay Street's banks, mutual funds, and other financial institutions.

That in turn will ensure big profits for a big government-fostered business monopoly. Just the way Jim Flaherty and his Bay Street friends appear to like it.

Which leads us to the point of today's "sermon”: The emergence of a new government-sanctioned inequality among Canada's seniors. A new world of senior "haves" and senior "have nots."

Maintaining The Privileged Status Quo

"Let them eat cat food!" Jim Flaherty and his bureaucratic minions symbolically appear to be exclaiming about TROUs (most of whom need income-trust income to forge a liveable life in today's changing economic environment). Meanwhile, Mr. Flaherty and his privileged public-service and big-business allies can happily celebrate their impending retirements -- and the prospect of living the good life on gold-plated pension plans.

Can you say privilege and social inequality in today's senior years, boys and girls? Well that's the divisive new socio-economic trend emerging in Canada today. And no-one seems to want to do anything about it.

But where are the journalistic social progressives of the Globe and Mail and the Toronto Star on this issue? Where are the protest voices of the socially-progressive NDP politicians on this issue? And where are all the other champions of social justice dedicated to protecting the "little people" from the forces of privilege, affluence and the social status quo?

Imagine that. They're all supporting the conservative government of Stephen Harper. And unintentionally they are also supporting the vested interests of Mr. Harper's puppet masters within the Bay Street financial establishment.

Of course, Canada's 'reformer chic' class talks a good game; but when their comfortable journalistic, bureaucratic or political careers are at stake, they readily become the enablers of privilege and the status quo if necessary.

Isn't it sad how power and privilege always seem to win out in this country, one way or the other?

We will be back in February to bring you more revealing truths about the war on Canada's income trusts and on income-trust investors.

In the meantime, we include a homework reading assignment below. To get a better idea of one aspect of the social inequality that's emerging in retirement life these days, please read the Financial Post article below:

*********************************
PRIVATE SECTOR LOSING GROUND AS PENSION GAP GROWS

Jacqueline Thorpe
Financial Post
January 18, 2007

Canada is on its way to a two-tier retirement system, where public sector workers will be assured of gold-plated, fully-indexed pension plans and many private-sector workers will be lucky to have a pension at all, a report from the Canadian Federation of Independent Business said yesterday.

The CFIB says huge underfunded liabilities among public sector pension plans could lead to future tax increases, dragging down the economy, productivity and prosperity while the growing gap with less generous private sector plans could lead to greater income and social inequity.
"In researching this issue, it became obvious that those of us who work in the private sector will not have the same means to retire as our counterparts in the public sector, and to add insult to injury, we are subsidizing their retirement lifestyles," Catherine Swift, CFIB president, said in a statement released with the report. "It's very inequitable."
CFIB said the public sector has driven the early retirement trend that started in the 1980s. In 2005, roughly 56% of public sector retirees had retired early, compared with 33% in the private- sector and only 20% of self employed individuals.

Furthermore, the average age of retirement in the public sector has decreased dramatically to 59 from 64 in the mid-1970s, compared with 62 from 65 for the private sector, while remaining stable at 66 for the self-employed.

CFIB says in 2003, only 27% of people in the private sector belonged to an employer-sponsored pension plan or registered pension plan (RPP) as they are known, down from 35% in 1977. Meanwhile, 87% in the public sector were covered by an RPP.

Many small business owners often have no pension, relying for their retirement income on the $500,000 lifetime capital gains plan, personal savings and assets, RRSPs and proceeds from the sales of their businesses.

What's more, the private sector has been rapidly moving to defined-contribution plans where the contribution may be guaranteed but not the payout, while public-sector pensions remain almost entirely defined benefit plans. Here the payout is fixed, and usually linked to inflation and the employer (i.e. the taxpayer) is entirely responsible for ensuring it is fully funded.

And taxpayers may be paying more because many public-sector plans are under water, although the data are sketchy and it is hard to tell by how much.

A 2004 report from the Certified General Accountants Association of Canada estimated that more than half of DB plans in Canada had a funding deficit, amounting to $160-billion in total at the end of 2003, although that number may have shrunk somewhat as financial markets have rallied in recent years.

The Ontario Teachers' Pension Plan had an estimated $6.1-billion shortfall at the end of 2006, down from $32-billion in 2005, thanks to revised estimates that only added to the confusion in trying to understand shortfalls, CFIB said.

Ms. Swift said Canadian taxpayers are paying for these shortfalls. She was shocked to learn that all the $2-billion transferred to Newfoundland and Labrador from the federal government in the Atlantic Accord went entirely to reducing the unfunded liabilities of the province's teachers' pension plan.

"I think Canadians were maybe okay with that amount of money going to help [Newfoundland] with their standard of living but it's totally going to people who are already making a very good standard of living and already have a very rich pension plan and that's by no means the only example," she said. The Ontario government recently increased contributions rates to the Ontario Teachers' Pension Plan. "We're already paying and we'll just pay more if we don't get a better grip on this issue."

First, governments must take a critical look at the issue to figure out exactly where the liabilities lie.

"Government are going to have to be dragged kicking and screaming to do anything about it because, let's face it, their senior decision-makers are the beneficiaries, so why would they go near it with a 10-foot pole?" she said.

Secondly, when plans go into surplus the knee-jerk reaction should not be to increase benefits and payouts, as happened during the stock-market boom of the late-1990s, only to see their funds disappear in the crash.

CFIB is pushing for capital gains rollers but higher RRSP contributions would likely help only a few. Lower taxes might help.

"Our members have always been supportive of higher RRSP limits but let's face it most people never get to their limits year to year," she said. "Maybe if they weren't forking over so much money in taxes to pay for somebody else's pension they could afford a little bit for themselves.

The overall objective of any pension-policy reform should be to level the playing field between the public and private sector."

THE TRUTH ABOUT INCOME TRUSTS #4

2007-01-17T17:20:00.000-05:00

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.

INCOME TRUST TRUTHS #3

2007-01-16T13:29:00.000-05:00

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 the nation's 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 let's not go there, 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

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 does he have any idea of the further damage his proposed initiative will have on Canada’s home-grown energy industry, or 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, 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 20 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 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 even 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? As far as we know, 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 the Telus trust.

Not only that, but since the posted pre-Halloween corporate taxation rate was well under 33%, 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.

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.

After all, you might argue, where would the federal Arts Council otherwise get the money to fund that enlightening public art exhibit by Montreal artist Cesar Saez, in which a giant-sized yellow banana-shaped dirigible circles around the skies of Texas to make a symbolic statement about…er, uh, um…well, about something very important to Ottawa’s ruling elites…damned if we know what?

But actually, there’s something that the bureaucrats forget to tell our tiny perfect Finance Minister and his dour boss about corporations like BCE and Telus. 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 at the point these stocks converted into income trusts), would have poured hundreds of millions of dollars of new tax revenue into government coffers.

And here’s another discomforting factoid that makes one wonder what Jim Flaherty and friends were smoking on Halloween eve. Now that the government has clamped down on income trust conversions, and prevented BCE from turning itself into a trust, we now learn that BCE still expects to be come up with enough tax dodges, as a common stock again, to pay minimum federal corporate tax until 2010.

How do we know? Well, BCE’s CEO Michael Sabia -- evidently now a close pal of Canada’s Finance Minister -- has proudly told us so: BCE, as a common stock, will face "no significant federal cash taxes through 2010."

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 statuatory (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 unsuitable 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 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."

We'll be back in coming issues to provide you with more truth about income trusts and the Ottawa gangs that couldn't calculate straight.

MYTH BUSTING: BUSTING THE MYTHS ABOUT INCOME TRUSTS

2007-01-15T17:51:00.000-05:00

In a previous post, we attempted our own amateur attempt at debunking the top ten myths about income trusts.

Now the the professionals at CAITI have given us their more expert and knowledgable take on the same issue.

Check out their superb trust "mythbusting" effort at:

http://www.caiti.info/resources_it_mythbusters.html

Don't forget to e-mail, fax or "snail mail" their comprehensive debunking exercise to your favourite politician or business writer.

DEBUNKING MORE FLAHERTY MYTHS: NEW BMO REPORT

2007-01-15T10:11:00.000-05:00

What really happened in the United States and Australia, when more reasonable and informed politicians (than Canada's Keystone Cops duo of 'Little Napoleon' Jim Flaherty and 'Hit Man' Harper) attempted to restrict the trust-like "flow-through" investment market to companies appropriately suited to the original intent of such investment structures?

A new detailed BMO research report tells all, and reveals the distortions and fabrications underlying the current Flaherty/Finance justification for the Halloween Eve 2006 trust massacre.

When you have some time please read this report and ponder the multitude of reasonable and moderate alternatives that were open to Canada's Little Finance Napoleon before he overreacted and revealed his totally irrational and unjustified plan to destroy Canada's income trust industry completely. To access the new BMO report, please click on the following link:

http://www.canadianenergytrusts.ca/documents/DiggingDeeper.pdf

And for more details on the sell-out of Canada's seniors and self-employed by Canada's political Keystone Cops, please reread the following:

http://incometrusttruth.blogspot.com/2007/01/truth-about-canadian-income-trusts-1.html

Also watch for future installments of our continuing series on the Truth About Income Trusts.

NEW TRUST ADVOCACY GROUP FOR SENIORS

2007-01-14T17:30:00.000-05:00

No More Carping About CARP

A new association has been formed to represent seniors who are income trust investors: Canadian Association of Income Trust Investors (CAITI)

The founding members are Sentry Select Capital, CI Investments, Coalition of Canadian Energy Trusts, Dynamic Funds, Acuity Funds Ltd, Citadel Group of Funds, Brompton Funds, Gluskin Sheff + Associates, Borden Ladner Gervais, LLP, PricewaterhouseCoopers and Lawrence Asset Management Inc.

For those of you looking to fill the advocacy void created by the ineffective folks at CARP, the newly formed Canadian Association of Income Trust Investors should receive your serious consideration. Their website will be accessible tomorrow (Monday morning) at:

http://www.caiti.info/

Join CAITI tomorrow and continue the fight for investor justice.

CCET -- TALKING SENSE

2007-01-14T16:18:00.000-05:00

Instead of passively accepting the nonsense about income trusts now spewing from Ottawa, please check out the wise words emanating from the Coalition of Canadian Energy Trusts (CCET).

The CCET tells it like it is, regarding the blantant mishandling of the income-trust question by Canada's tiny perfect Finance Napoleon, Jim Flaherty. And they demonstrate the many negative (and usually unintended) consequences of Mr. Flaherty's misguided war on royalty (energy) trusts in particular.

Here's a transcript of the Coalition spokespersons' opening remarks at their first press concerence in December 2006:

"Good morning. Thank you for joining us today, we sincerely appreciate your interest.

Yesterday a reporter wrote: “someone should encase income trust lobbyists in concrete and fling them off a bridge into deep water.” My first reaction was --- just how much concrete would it take for [my colleague] John?!

With more sober thought, I was disappointed to think that we would be vilified for asking to be heard in respect to a Government policy change that has such significant impact on our country and our investors. Given our knowledge and familiarity with the facts of energy income trusts, our voice must be heard. Canadians, such as the members of our coaltion, deserve to be heard by Government in a meaningful way.

Well Ladies and Gentlemen, to date we have not been heard in a meaningful way.

Despite Minister Flaherty’s comments made on Monday, and echoed by the Prime Minister, that “it’s over, the case is closed,” --- we are here to assure you it is not over.

Today we present the findings of a report we have compiled based upon the input of data and information received from members of the energy trust sector and other third parties.

We are challenging the government’s assertions in respect of their new tax proposals as they relate to Canada’s energy sector.

Since our November 6th news conference when we issued a call for meaningful consultation with the government, we have been extremely busy on two fronts.

(1) First, we undertook the gathering of information and completed the document presented today. This report speaks to:

* productivity enhancement in Canada

* payment of taxes for the benefit of hard working Canadians

* support for Canadians in their retirement years, and

* Initiatives by energy trusts to significantly reduce green house gas emissions

All of these contributions are threatened by the proposed tax changes.

(2) Secondly, we have spent a considerable amount of time meeting with members of parliament of all party affiliations. Additionally, we have met with the media, investors, the Finance Department including the Minister of Finance as well as Senator Grafstein, Chair, Senate Banking, Trade and Commerce Committee. Our purpose was to elevate our call for meaningful consultation as well as to secure facts supporting the recommendations of the Finance Department to Government.

It is our view that the Finance Department did not do its homework. Here is what we have determined:

* Through a request under the Freedom of Information Act for analysis that supported the government’s proposals, we were told that no documents could be found supporting the Governments action.

* Conversations with numerous Conservative MPs failed to point us towards supporting documents. The typical response received was the [Flaherty] “party line”. We know many of these MPs have unanswered questions of their own.

* Despite our request for clarity, the Finance Department could not show any meaningful information that supported a 180 degree turnaround by Government on a key election plank [promising to "protect seniors" and "not tax income trusts"]..

Ironically much of the data in our accompanying report required collection through a variety of sources – something we believe was not conducted by the Finance Department.

Our obvious conclusion – Government did not do its home work and as a result is making a major decision that will harm millions of Canadians based on insufficient information. If we’ve missed the updated analysis that has resulted in a complete reversal or policy, then we call upon the Government to make it readily available to all Canadians now.

Sue will highlight our findings contained in the report:

Ignorance Is Conservative Bliss

Let me start by re-iterating that it is our belief the Government is making decisions with inadequate information relative to the energy sector and not in the best interest of Canadians and our economy.

Government is concerned that trusts cause federal tax leakage. This is not the case with Energy Trusts. Our members have generated greater taxes both provincially and federally than would have occurred had they been structured as corporations. Our report shows that oil and gas producing trusts represent 16% of revenue but generate 30% of tax revenue collected from publicly-traded oil and gas entities.

Unlike exploration and production companies, energy trusts do not generate tax pools resulting in minimal corporate taxes being paid [as do tradiitonal corporate common equities]. Rather, our distributions generate tax from personal income taxes from taxable Canadians, future (deferred) tax from tax-deferred accounts (RSPs), and a 15 to 25 % tax from foreign investors.

Unitholders across Canada are receiving millions of dollars of distributions from energy trusts. In fact, the majority of our Canadian unitholders reside in eastern Canada. And, in petroleum producing areas, energy trusts are generating provincial royalities and contributing to the local economy through the purchase of goods and services.

Government is concerned that trusts threaten Canada’s long-term economic growth. This is simply not the case for energy trusts. In fact the opposite applies – we are important contributors to the Canadian economy.

Energy trusts typically focus at maximizing production from oil and gas pools that many energy players have ignored in a quest for more lucrative opportunities. That effort requires capital, because oil and gas producers have to reinvest to keep production flat, let alone grow it. This need for capital reinvestment distinguishes energy trusts from many business trusts, which have much lower reinvestment needs. Energy trusts have methodically acquired, optimized and in many cases have grown production from mature oil and gas properties. The result – our members produce about 20% of Canada’s petroeleum energy.

The energy trust model enhances the Canadian energy industry through our symbiotic relationship with the other players. From senior producers we buy and enhance mature assets. Junior oil and gas companies agressively grow small oil and gas assets and as they mature, sell the assets to trusts. In Turn, the recapitalized junior proceeds to its next exploration opportunity.

Capital investment over the past 5 years by energy trusts has exceed more than $35 billion through acquisitions. In addition, $15 billion have been invested to optimize production.

We do not believe the Government has factored into their decision our unique role in Canada’s energy industry and has overlooked the value we provide Canadians.

Bill will outline the potential impacts to the social fabric of western Canada [of the Harper Government's new trust tax proposal]:

Trusts Enance Prosperity In Small Western Oilpatch Towns

Through the tax proposal the Federal Government has created winners and losers. The proposal favours the minority of Canadians with defined benefit pension plans at the expense of the majority of Canadians who depend on contributions to self directed registered retirement savings plans for their golden years.

On October 31, 2006 the Conservative Government delivered a major blow to the investment portfolios of small retail investors in order to appease the interests of large corporations, high net worth investors and private equity interests. In an effort to help average Canadians, the government has punished them.

Independent Canadians, who chose to invest in a vehicle that Prime minister Harper pledged to protect, have been cast aside and the Government has decided to court the privileged minority with defined benefit pensions and to curry favour with large corporations and private equity interests. Quite a trade and quite a change from a party that was founded on grassroots support from small town and rural independent Canadians. We have a saying in the west that you “Dance with the one you brung”. Looks like the Government found more interesting partners at this dance and left behind the ones who got them there.

Energy Trusts operate for the most part in rural communities throughout western Canada. By optimizing production from mature oil and gas pools we extend the economic life of not only the pools but also of the communities that provide labour, goods and materials. Our employees work in hundreds of communities throughout western Canada. Collectively the trusts and our employees pay school taxes, local taxes and provincial taxes and tariffs that are necessary to provide Canadians, and especially rural Canadians, with the quality of life associated with small communities.

The Prime Minister recently commented on the potential for removing tax incentives available for mega projects such as the oil sands by saying that western Canadians had already been hit by the proposal to eliminate energy trusts. Does this imply that he has abandoned the notion of balance between conventional oil and gas optimization and oil sands development based on Finance Department notions that don’t hold water? Or did he base it on the fear of future large business trust conversions? Why are we as an industry forced to choose between optimization and agressive development, between utilizing existing infrastructure and building new infrastructure and between home town and boom town?

The model was working. There was room for both. In a rush to make policy and prevent future tax leakage has the Government compromised Canadians? In the weeks since the announcement, I have taken calls from Canadians from coast to coast who have had life savings eroded, who have had to alter their retirement plans and who feel sold out and betrayed by the actions of the Government.

It is no consolation for them to have some Bay Street slick tell them that they should have diversified or better yet, have their fate decided by someone who believes that individuals who depend on assets in their registered retirement savings plans for future income are somehow labelled tax evaders.

The Finance Department in Ottawa remains hunched over their spreadsheet (assuming they have one) inisiting that there is tax leakage and that there is no room in Canada for a Made in Canada solution that revitalizes mature oil and gas fields, keeps rural communities vibrant and provides a meaningful source of income for independent investors.

Now John will outline other critical Canadian issues being ignored by the Minister’s actions and outline our conclusions and go forward plan:

Energy Trusts: Improving The Environment

For those of you who have discussed the Government’s approach to trust with me know that I’m slightly annoyed …well maybe that’s a euphenism. We should never have been placed into such an untenable situation.

This Government does not understand energy trusts and our report shows this in spades. And, not even acknowledged in decision making by the government is the critical role we play for CO2 reduction and as a contributor to Canada’s world energy leadership.

Members of our Coalition are leaders for CO2 sequestration and the precious environmental capital being invested will simply not be available under proposed tax changes. Canada’s work towards the reduction of Green House Gas emissions will be materially impaired.

The Prime Minister has said he wants to make Canada an energy superpower. Damaging the energy trusts will reduce Canadian energy production and ultimately cause consumers to pay more for their energy. None of those outcomes are conducive to the energy superpower role Mr. Harper envisions for Canada.

Government has said, and departmental officials have leaked, that there is no precedent for treating energy flow-throughs as distinct and exempted from other resource industries. This is simply not accurate. The United States not only provided a 10-year transition period and a conversion option but explicitly exempted resource industries from tax measures. We need to be able to compete in a North American energy market.

Our conclusion is that energy trusts are different from other trusts. Exempting energy trusts from the proposed tax changes is the only sensible course of action for our members, Unitholders and Canadians.

We will continue to press for meaningful consultation, and we emphasize meaningful.

We will vigorously continue our quest to preserve the energy trusts’ position in Canada’s vital energy industry. As our colleagues at the Canadian Association of Income Funds have done, we will pursue an aggressive public campaign to engage Canadians in this important issue and will announce our communication strategy in the coming weeks.

The case is not closed. this is an important issue to our nation. When Canadians begin to hear in plain language what their Government is proposing, we believe they will stand by our side.

Thank you.

Countdown; TOP TEN INCOME-TRUST MYTHS

2007-01-14T11:34:00.000-05:00

Have You Stopped Beating Your Wife, er, Taxman?

or

Debunking The Top Ten Myths Regarding Income Trusts

1. Income Trusts cause substantial tax loss for Canadian governments.

The Truth: This myth is about as credible as former Conservative Environment Minister Rona Ambrose. In fact, distribution payments made by income trusts are treated as taxable income in the hands of the investor who receives them, and contribute significantly to the tax rolls of federal and provincial governments -- and personal trust taxes are usually paid at a higher tax rate than paid by most Canadian publicly-traded corporations (and many of these corporations pay NO tax).

RBC Financial Group has estimated that governments collect more than $5 billion in personal taxes each year on the cash distributions made by income trusts to their investors. This figure does not include the additional money governments collect from capital gains taxes imposed when corporations convert into income trusts.

Note that RBC analysts have concluded that government tax loss is a “non-issue” when it comes to income trusts.

Of course, the personal and financial suffering of seniors and other investors, because of Stephen Harper's broken election promise to not tax trusts, is considered a non-issue by Prime Minister Harper and his little buddy, Jimmy.

2. Until Halloween Eve 2006, market demand for income trusts was being driven by publicly-traded corporations looking to save money on their tax bills.

The Truth: Demand for income trusts was being driven largely by financially hard-pressed Canadians who relied on the regular cash payouts of trusts to keep up with the ever-rising costs of living. In 2005, income trusts allocated $16 billion in distribution payments. The majority of these payments – 75 per cent – were made to "retail" investors (individual Canadian investors).

In particular, income trusts are attractive to retirees because retirees can use the regular monthly cash pay-outs of trusts to supplement their pension plans and old age security benefits.

Remember that by 2025, seven million Canadians - almost one-quarter of the population – will be over the age of 65.

Wonder how many of them will be voting Conservative?

3. Income trusts do not contribute to the Canadian economy.

The Truth: The more than 250 companies structured as trusts in Canada, on Halloween Eve 2006, operated across many sectors of the economy – food and beverage, telecommunications, oil and gas and manufacturing. These companies generated significant economic growth, productivity, reinvestment and jobs across Canada.

Canada’s income trusts employed more than 250,000 Canadians nationwide –- representing almost two per cent of the private sector workforce of 13.3 million people, according to Acuity Investment Management.

The income trust structure also attracted foreign businesses to Canada at a time of increasing globalization. Thanks to the income-trust financial structure, more than 15 foreign companies have established head offices in Canada and listed as trusts on the Toronto Stock Exchange. Foreign businesses structured as trusts generate productivity gains for Canada, indirectly contribute to the tax system (by paying distributions to Canadians which are in turn taxed by government), create new jobs in Canada, and reverse the outflow of Canadian dollars usually flowing from Canadian corporate subsidiaries to their foreign home offices.

This is just another important truth about income trusts that Canada's Finance Minister was never told about by his Finance bureaucrats. Talk about "information leakage" in Ottawa!

4. The income trust structure prevents reinvestment in the growth of any company that is structured as an income trust.

The Truth: Companies structured as income trusts distribute most (not all) of their cash directly to unit holders in the form of monthly or quarterly payments. However, a considerable portion of the cash earnings generated by income trusts is reinvested to support the future growth of the company.

Income trusts are required to make informed and responsible reinvestments in order to grow the company and secure the distribution payments that are made to unit holders on a regular basis.

Under the more traditional common-equity corporate structure, publicly-traded corporations retain most of their earnings and make reinvestment decisions based on their ability to reduce their corporate taxes.

As well, because of their structure, income trusts are often required to return to the capital markets to fund large expenditures, such as an energy trust acquiring more energy reserves to spur oil production. And this provides an opportunity for the capital markets (lenders or new shareholders) to endorse or reject many trust expenditure decisions.

This check has been favoured by Canada’s large pension funds, which regard this as an added layer of fiscal accountability.

5. The income trust structure favours large corporate-like entities.

The Truth: The majority of income trusts – nearly three-quarters – are small to medium-sized businesses with market capitalizations of under $1 billion.

More than half of income trusts have market capitalizations under $250 million.

In its recent review of income trusts, the Bank of Canada concluded that “Most business trusts would be classified as mid-cap or small-cap (companies).” Canada's central bank also noted that “An examination of initial public offerings of income trusts between 2001 and 2005 shows a steady decrease in median IPO size from $155 million in 2001 to $75 million in 2005.”

Access to capital for many of these small and medium-sized businesses would be prohibitively expensive if not for the trust structure. The income trust structure has allowed many small- and medium-sized businesses to thrive and grow in Canada, rather than become subsidiaries of U.S. corporations.

This is especially the case in Canada's Western oil patch, where a number of small energy producers and drillers have thrived as income trusts, created jobs, and pumped money into their communities through infrastructure spending, sales taxes and energy royalties.

6. The investment community has placed high valuations on income trusts because their distribution payouts to investors are high.

The Truth: To date, no market analysts have concluded that Canada’s income-trust valuations were directly linked to distribution payments. Capital markets have traditionally valued income trusts based on their cash revenue, debt levels, reinvestment strategies, management, and market demand for units in the company.

7. Income trusts are unregulated relative to companies set up under the common equity structure.

The Truth: Income trusts are subject to stringent corporate governance rules -- many of them originally legislated by Ottawa -- and are just as accountable to their unit holders as common-equity corporations are to shareholders.

The income trust structure, by design, imposes a stringent investment and reporting discipline on management. For example, the trust structure places an additional financial discipline on capital investment decisions. Trusts must ensure their financial decisions are accretive so as not to disrupt the monthly and quarterly distribution payments made to unit holders.

Any negative impact, by poor investment of capital, on the cash flow and cash distributions of income trusts would quickly become apparent to unit holders and market regulators.

On the other hand, because they are obliged to pay out so little of their cash flow to shareholders as dividends, publicly-traded corporations do not face similar scrutiny. Hence their CEOs can waste company cash on grandiose salaries, stock options, and money-losing buyouts of other companies. Witness the ignominy of Canada's most prestigious telephone company, BCE, in recent years.

8. Trusts are bad for Canada because they pay money to unit holders instead of investing it in the company.

The Truth: Comparing business spending on acquiring or upgrading physical assets such as buildings and machinery among companies before and after their conversion to the income trust structure shows that such spending is HIGHER after a trust conversion than before a conversion. Also, business spending as a percentage of revenue is higher for income trusts listed on the Toronto Stock Exchange (TSX) than for common corporate equities listed on the TSX.

Such infrastructure spending by income trusts, especially in the oil and gas industry, has mammoth positive spin-off effects on local Canadian communities, increasing employment and business activity, as well as local sales-tax revenues.

9. Income trusts are hard to understand and don’t communicate honestly about their financial performance.

The Truth: As public companies, income trusts are subject to stringent corporate governance rules similar to those imposed on common stocks, and they are required to communicate honestly and openly about their financial performance and investment decisions.

There have been more "bad apples" and fraudulent reporting among North American common stocks than among income trusts. For example, can you say, Enron, Hollinger or Bre-X, boys and girls?

It's just that business journalists have chosen to focus on a few bad apples in the income trust world, while choosing to ignore the terrible financial suffering, among shareholders, created by so many common-stock frauds.

Only the incautious meddling of government in the income-trust world has managed to create financial losses and suffering on the scale caused by so many common-stock frauds and swindles of the past two decades. Yet, in Canada, very few common-stock scandals have been investigated or successfully prosecuted by federal or provincial authorities.

Only income trusts, for example, have come under the financial microscope of Canada's Finance Department. The fraudulent comings and goings in Bre-X, Hollinger and the past Drabinsky Cineplex empire, for example, have been of no interest.

10. Market regulators and analysts do not like the income trusts structure and think it has a negative impact on Canada’s capital markets.

The Truth: In a June 2006 report, the Bank of Canada concluded that income trusts contribute positively to the country’s capital markets. Specifically, Canada's central bankers noted: “The continued growth and maturation of income trusts as an asset class has resulted in a market that is increasingly diverse in terms of sector, size and risk characterization...Available evidence suggests that income trusts may enhance financial market completeness.”

During an October 2006 press conference, Bank of Canada Governor David Dodge said that income trusts make capital markets “more complete” and “more efficient."

But then again what does David Dodge or the Bank of Canada know, as compared to such economic geniuses as Stephen Harper, Jim Flaherty and Canada's Finance Department bureaucrats?