Monday, December 31, 2007

If Don Martin's wishful reportage is to be believed

I was intrigued to learn today, that according to Don Martin of the National Post that Jim Flaherty is deserving of honorable mention for Best Cabinet Minister of the year, solely on the basis that Flaherty “seems to have finally put the income trust flip-flop behind him.”

The word “seems” suggests that Don Martin basis his proclamation on some evidence. If that’s the case, I am curious to know at what point in time this “behind him” event occurred, and what exactly was the watershed event that marked the point where the issue was put to rest. For example was the income trust issue resolved to everyone’s satisfaction at the point in time where Jim Flaherty bravely proclaimed that all the foreign takeovers induced by this policy was “not my fault”. Or did absolution occur when the Privacy Commissioner in the Department of Finance demanded that the 18 pages of blacked out evidence of tax leakage be returned? Perhaps the whole matter was put behind Flaherty when he promoted Mark Carney to become Governor of the Bank of Canada, against the wishes of the BoC Board, in order to provide Mark Carney with a form of immunity, since as Bank of Canada Governor we are told that Mark Carney can no longer comment on government legislation? If that’s the case, someone should have told his predecessor, who allowed himself and his office to be politicized on this matter at Flaherty’s behest.

Mr. Martin. I am curious to know at exactly what point and what precise event caused this issue to be “finally behind” and Flahery absolved and exonerated, since:

  • It most certainly isn’t “behind” the 2.5 million income trusts investors, who continue to have sustained a $35 billion loss in their hard earned retirement savings.
  • It most certainly isn’t “behind” the 300 US income trust investors, who have joined inn the Gottlieb lawsuit against the Canadian Government under the “detrimental reliance” provisions of NAFTA
  • It most certainly isn’t “behind” the Green Party of Canada, who have called for a public inquiry into alleged tax leakage.
  • It most certainly isn’t “behind” the Liberal Party of Canada, who put the following motion before the Finance Committee that reconvenes on January 28, 2008:
"That this committee as soon as possible launch an inquiry into the unproven allegation by the Finance Minister that income trusts result in a loss of tax revenue to Ottawa, in light of reports that 70% of all recent trust purchasers are tax-exempt, while individual Canadian investors lost tens of billions of dollars, and therefore pay less tax, as a result of the government trust decision."
None of this sounds very “behind” to my simple way of thinking. Please advise me of the basis for your thesis that this issue is now “behind” the Stephen Harper government as they will likely face the electorate in the coming year at which point they will face the wrath of betrayed Canadians. Or is it simply a matter of wishful reportage on your part, and you are the one who is behind the “behind”?

I would submit this issue is as alive as it has ever been, since the unintended negative consequences that many had been predicting since the very outset have now come home to roost in all their combinatorial glory, as evidenced by over $65 billion in trust tax related takeovers and the LOSS of taxes fro a policy whose very intent was the obverse outcome. In case Don Martin didn’t realize it, the largest takeout of them all, namely BCE is expected to be closing sometime early in the new year, at which point it will become abundantly obvious to all those whose heads aren’t firmly implanted in the sands of denial, that this takeover alone will cost Ottawa $793 million in forgone taxes ANNUALLY relative to had BCE been allowed to convert into a value maximizing, tax collection maximizing income trust to the betterment of all, save and except the management of BCE, who have learned are still establishing tax policy for Canada, while simultaneously maximizing their personal wealth. If Don martin is to be believed, all this is now officially behind us. After all, he said so. And in a manner totally consistent with the trust tax itself, namely, the complete absence of proof and with an abundance of evidence to the contrary

Wednesday, December 26, 2007

Toronto Star Editorial Board implicitly supports public inquiry into tax leakage.

This principled line of reasoning by the Toronto Star into the need for the Public Inquiry of Schreiber/Mulroney applies as equally to the need for a Public Inquiry into tax leakage as called for by the Green Party and the Liberal Party........only the stakes are higher.....Canada is bleeding $1.4 billion in ANNUAL lost taxes to date from a policy that been around for a year, soon to grow to $7.5 billion a year. And to the extent anyone even cares, Canadians saving for retirement have lost a mere $35 billion.....with a B.....as in Brian. The only difference is these Canadians were more than happy to pay their taxes to the government on their retirement income.....only to have the government ignore its existence when it came time for policy formulation.

“There are compelling reasons for such a probe, including the importance and value of the truth and integrity to our democratic institutions. Effective democracy demands that the public interest must always take precedence over the private or personal interests of those who enjoy the power and privilege of governing.

Canadians accept all kinds of costly safeguards to ensure the system works as effectively as it can. The auditor general, for example, provides an effective check on how our tax dollars are spent. The ethics commissioner is the first line of defence against abuse of the public trust. And public inquiries are needed at times to consider whether or not politicians and bureaucrats have abused their power.” Toronto Star Dec 22, 2007


Good of the Toronto Star to mention the Auditor General, since it is the Auditor General whose mantra is “Parliamentarians need objective fact based information on how well the government raises its funds (taxes)”

How objective and fact based do you suppose 18 pages of blacked out documents are? In the absence of facts to support its veracity, where is the accountability for the income trust tax? The transparency? The Toronto Star Editorial? The MSM?

Mulroney inquiry is worth the price - The Toronto Star

Harper Valdez...Strengthening Canada's Social Security for Pensioners and Seniors?



CLICK FOR FULL SIZE IMAGE

Related:
On the good ship Harper Valdez
Treating the symptoms. Two Jims in a Jam!
Conservatives signal foreign takeovers OK until next year

Saturday, December 22, 2007

Royal Bank foresaw what Deloitte has confirmed........creating tax leakage where there otherwise wasn't tax leakage

Who's fairy tale do you want to believe? Jim Flaherty’s or those wild and crazy people at Royal Bank and Deloitte?

Earlier this month Deloitte issued a study entitled “Income trust buyouts: Lots of activity, little tax revenue

Among other things Deloitte's study confirmed Income Trust buyers are largely tax-exempt:

Buyers in the 40 announced deals were equally split between strategic and private equity, as well as between domestic and foreign. But in terms of tax revenue for the Canadian government, the news was not so balanced: 70% of the purchasers are tax exempt pension/private equity funds or foreign buyers who pay little if any tax in this country.

What structures were buyers using to acquire trusts? In 22 of the 40 transactions, trust units were acquired; in the other 18, the purchaser acquired shares of subsidiary corporations, trusts or partnerships. The method of acquisition has significant implications for the buyer, trustees and unitholders. The entity left “holding the bag” has to bear the cost and risk associated with the wind-up of the engineered trust. A caveat for future purchasers: all parties should consider the implications of a proposed structure when assessing the value and risk of an offer for a trust.

Based on our involvement with over 20 income trust buyout transactions in the past year we believe that the buyout momentum will continue. The current M&A slowdown is primarily driven by “mega” transactions exceeding $1 billion in size. The income trust market, particularly the business trust segment, is comprised of medium-sized companies that are ideal for financial and strategic buyers. Clearly, volatility in the income trust sector is far from over.
This sounds familiar. In April 2007 RBC Capital Markets issued “Aesop’s Warning Ignored: Much wants more yet oft loses all” forecasting the following:
Proposed Trust Tax Akin to Killing the Golden Goose - Believing they are not collecting sufficient taxes fast enough, the proposed trust tax is a living example of Aesop's Fable, "The Golden Goose." By effectively killing the Trusts, less taxes will be collected, not more.

A Glimpse Into the Future
- Look at the announced trust acquisitions; it is clear that less taxes will be collected, not more. The acquisitors are not your friendly neighborhood taxpayer, they are sharp investors looking to maximize cash flows from their investments. And who can blame them, it is their right to plan ahead in order to minimize their income tax burden.

Flawed Analysis
- Forget prying the secret analysis free for public scrutiny; its underlying logic is likely flawed. Why? You can draw generalities from analyzing many specifics, but you cannot draw specifics from analyzing many generalities. Anecdotal (specific) evidence is already available on the announced trust takeovers. Taxes collected from the acquired trusts will decline, this is now coming into focus for all to see. How could the trusts have been a source of tax leakage if we collect less tax from them when reverted back to corporate form?

Greed, One of the Seven Deadly Sins
- It was greed that killed the Golden Goose in Aesop's famous fable. Trusts, which lay golden eggs (cash distributions) for so many taxpaying Canadians, appear to be heading for similar fate for a similar reason.

It is time for a reality check.

Tuesday, December 18, 2007

CBC? Income Trusts? Scandal? Lobbyists?

Don Newman¹s motto is "the spin stops here", and for good reason.

Facts are facts. Where are Flaherty¹s "facts"? Who were those unregistered
lobbyists? Gwyn Morgan? Paul Desmarais Jr? Time for a public inquiry.


Related:
Conservative spin check: What is Gwyn Morgan talking about?
In Gwyn we trust? A fairy tale from a Conservative apologist.
Stephen Harper leveled the playing field......in Paul Desmarais Jr's/Power Financial's favour

Flaherty's Mini Budget: What became of leveling the playing field?



John McCallum asks a question of the Harper government

Q-1492 — November 29, 2007 — Mr. McCallum (Markham—Unionville) — With regard to the tax on income trusts announced on 31 October 2006, using the same model that was used to calculate the government’s estimates of tax leakage described by the Minister of Finance during his appearance at the Standing Committee on Finance on January 30, 2007, what would the government’s estimates of tax leakage have been if the corporate tax rate had been 15% rather than 21% as they were in 2007?



Trusts Redux: Tax Policy Suitable for Halloween

As an economist I welcome Minister Flaherty’s October 30 announced intention to boost Canadian productivity and prosperity by reducing the general federal corporate income tax rate to 15 per cent by 2012. The measure should be embraced by all: It will position Canada favorably in the global economy for decades to come. But while I laud the strategic direction on corporate taxes, I continue to question the government’s consistency on tax policy in general.

A year ago today the Minister announced in his Tax Fairness Plan his intention to “restore balance and fairness to the federal tax system by creating a level playing field between income trusts and corporations,” to eliminate tax leakage and to remove distortions in investment decisions. To paraphrase the Department of Finance’s analysis, the avoidance of corporate taxes from entities after conversion to an income trust is not totally offset by the taxes paid on income trust distributions from individual unit-holders; therefore tax leakage. The Minister estimated that annual tax leakage was in the order of $500 million and stated that something had to be done “to restore balance and fairness in the tax system”. The Minister’s solution to create “tax fairness” and eliminate tax leakage was to implement a 31.5% Distribution Tax on trusts in 2011 and to not allow any new conversions to the income trust form. The market response to the “Tax Fairness Plan” announcement was very negative.

Having worked for the income trust industry and with the Department of Finance on determining the appropriate methodologies for tax leakage, I presented evidence on the tax leakage issue to the Parliamentary Standing Committee studying the issue. To be precise, I raised several concerns with the Department of Finance approach – all of which went to a “sharp over-statement” of tax leakage. The major flaw in the Department of Finance analysis was that it did not take a lifecycle view of the tax leakage issue but rather focused on a 2006 “test year”. By failing to account for the reality that corporate tax rates were legislated to be reduced to 19 percent by 2011, the Department took a short-sighted and punitive approach to the issue. Despite the debate and a dissenting Committee Report “Taxing Income Trusts: Reconcilable or Irreconcilable Differences”, the income trust provisions of the Tax Fairness Plan remain in place.

It is regrettable that the October 30 announcement did not occur a year ago. It would have all but eliminated the perceived tax leakage issue without the punitive distribution tax on income trusts. In fact, the Department of Finance’s own Tax Leakage Model would have given an estimate of merely $80 million in tax leakage when accounting for yesterday’s corporate tax cuts instead of the $500 million stated by the Minister at the time. The Department’s own analysis would not have supported a tax on income trust distributions. If the October 30 announcement had been made last Halloween, the billions lost by investors would not have occurred and the playing field would have been leveled by 2011 – all this according to Department of Finance methods of analysis. These losses cannot be recovered and one has to question the path that led us to this point and Finance’s tax policy strategy.

I believe that even the $80 million estimate sharply overstates the leakage. This aside, yesterday’s corporate tax cuts would now allow the abolishment of the income trust distribution tax all together without incurring federal tax leakage – this, again, according to the Department of Finance’s own model.

Dennis Bruce is Vice President with HDR Decision Economics and has studied the income trust tax leakage issue since 2003. He twice testified before the House of Commons Finance Committee on the question Income Trust tax leakage.

Dennis Bruce
Vice President
HDR | HLB Decision Economics Inc.
1525 Carling Avenue, Suite 500
Ottawa, Ontario
Tel: 613-234-0080
Cell: 709-632-1708

HDR - ONE COMPANY | Many Solutions ™


Thursday, December 13, 2007

John McCallum challenges Flaherty with Deloitte report and Government Cover-up

Auditor General: “Parliamentarians need objective fact based information on how well the government raises its funds (taxes)”

Stephen Harper and Jim Flaherty may not believe that, but John McCallum and the Liberal Party clearly do, as witnessed by this question in Parliament on December, 13, 2007:



Deloitte's report reveals the following failures of the Conservative policy on Income Trusts:

Takeover Buyers are largely tax-exempt

Buyers in the 40 announced deals were equally split between strategic and private equity, as well as between domestic and foreign. But in terms of tax revenue for the Canadian government, the news was not so balanced: 70% of the purchasers are tax exempt pension/private equity funds or foreign buyers who pay little if any tax in this country.

What structures were buyers using to acquire trusts? In 22 of the 40 transactions, trust units were acquired; in the other 18, the purchaser acquired shares of subsidiary corporations, trusts or partnerships. The method of acquisition has significant implications for the buyer, trustees and unitholders. The entity left “holding the bag” has to bear the cost and risk associated with the wind-up of the engineered trust. A caveat for future purchasers: all parties should consider the implications of a proposed structure when assessing the value and risk of an offer for a trust.

Based on our involvement with over 20 income trust buyout transactions in the past year we believe that the buyout momentum will continue. The current M&A slowdown is primarily driven by “mega” transactions exceeding $1 billion in size. The income trust market, particularly the business trust segment, is comprised of medium-sized companies that are ideal for financial and strategic buyers. Clearly, volatility in the income trust sector is far from over.


Read the complete report here. Income trust buyouts: Lots of activity, little tax revenue

And contrary to the fantasy and misdirection of Jim Flaherty, the Liberals have been consistent in their position for some time as recently explained by John McCallum on October 31st, 2006:



See also: The Liberal Plan - Feb 16, 2007

Meanwhile the Green Party has called for a public inquiry into the government’s unproven allegation of income trusts. Likewise the Liberals:

Green Party calls for inquiry into the alleged tax leakage of income trusts

Dr. Carney and Mr. Hide

Harper promises 'new era of accountability'
February 1, 2006
CBC News

Incoming prime minister Stephen Harper says his government's first act upon assuming power will be to table a federal accountability bill. No immediate changes to civil service, Harper says

However, Harper said his government would not move immediately to make major changes to the public service that were recommended in Gomery's second report.

Harper said they had "merit" but said his government would have enough to do elsewhere in the first few months of its transition into power.



Mark Carney is an example of a completely unaccountable top ranking bureaucrat from the Department of Finance who thinks that a solemn election promise that was reversed at the cost of $35 billion in Canadian’s hard earned life savings can be simply justified on the strength of 18 pages of blacked out documents, and nothing else.

As Diane Francis, Editor at Large of the Financial Post has written; “prove the case or drop the tax”

You be the judge of whether Bank of Governor elect Mark Carney, meets your test of Stephen Harper’s promise of new Accountable and Transparent government.




Related:
Pump it up
The NDP are needlessly setting themselves up
There's a sucker born every minute
Harper, Carney, Flaherty income trust mistake: Deloitte - Diane Francis
Federal Conservatives' So-Called "Federal Accountability Act" and Related Decisions Earn a "D" Grade - Democracy Watch

Wednesday, December 12, 2007

The true compensatory loss sustained by trust investors

By Brent Fullard

There was a somewhat misleading article that appeared in today’s National Post entitled “Trusts still in black“ about the losses sustained by income trust investors as a result of the Harper Government actions of Halloween 2006. This article looked at the matter from the standpoint of a portfolio manager’s annual performance and not from the standpoint of compensatory losses in a court of law, which is the relevant test to be applied.

The question of what losses were sustained by income trust investors requires the application of Decision Theory, as taught in science courses, and as would be applied in a court of law in terms of seeking compensation necessary to make the plaintive “whole”.

  • The value of trusts has fallen from 164.86 to 141.11 at the close yesterday for a loss of 14.4%
  • Meanwhile, the value of the TSX has gone from 12,344 to 13,940 at the close yesterday for a gain of 12.9%
  • Therefore, the actual loss in the value of trusts is $28.8 billion
  • Whereas the relative loss in the value of trusts is $54.7 billion


Including the distributions paid on income trusts is irrelevant to this calculation, since Decision Theory 101 instructs that any exercise which seeks to evaluate the impact of particular event (in this case the Harper government’s reversal of its election promise to never raid senior’s nest eggs) has to identify and isolate those outcomes and only those outcomes that differ between the “Raid Senior’s Nest Egg Scenario” and the “Do Nothing Scenario” during the past 13 months. This is how a court of law would look at it. For example if an accident caused my house to burn down, the accused couldn’t deduct from my losses the fact that my car in the garage was spared from damage. Think of distributions as the car in the garage.

Under both scenarios of Raid Seniors Nest Eggs versus Do Nothing to Harm Seniors Nest Eggs, the distributions would have been paid and therefore this aspect of the analysis is not to be considered. The distributions will only differ as between the two scenarios come 2011, when they are taxed at 31.5% under the Raid Scenario and not taxed under the Do Not Raid scenario, however we are only seeking to evaluate the losses over the past 13 months

Therefore, What did differ, as between these two scenarios is the value of Seniors Nest Eggs in accordance with the numbers cited above. Income trusts investors whose nest eggs were raided lost $28.8 billion if there plan was to have liquidated their investments for cash, and $54.7 billion if their intention was to remain invested in the market. This is the damage sustained by invetsors that would be sought in a court of law under these circumstances: $54.7 billion.

Keep in mind, apart from the promise “not to tax income trusts” there was also the Harper election promise/lie contained on page 43 of their campaign platform that read: “timely compensation will be paid to all persons who are deprived of personal or private property as a result of any federal government initiative, policy, process, regulation, or legislation.”

Wednesday, December 5, 2007

The NDP are basing their income trust tax policy on someone described by the courts as "frivolous and vexatious"

By Brent Fullard

The NDP are clearly lacking in research capabilities of their own, That was proved abundantly obvious when Judy Wasylycia-Leis made a claim in Parliament on May 10, 2007 that CAITI had had donated $282,000 since 1993 to the Liberal party and $53,700 to Liberal leadership contenders in 2006. Not only does CAITI have a strict policy against making any political donations, direct or directly, at the time of this claim, CAITI had only existed for less than 4 months. That didn’t stop former used car salesman and Conservative MP Dean Del Mastro from parroting the same claims five minutes later.

Now we know how false claims like tax leakage get started and how others are quick to blindly jump on the band wagon. Emphasis on the word “blind”. Much like the press in Canada.

Another example of the NDP’s ineptitude at research occurred at the NDP gathering I attended on the subject of the SPP (Security and Prosperity Partnership) on November 24. The NDP’s depth of knowledge on this subject by their “in house expert on the SPP, Peter Julian, could easily be superseded by spending 2 hours of googling SPP and listening to Lou Dobbs on CNN . Peter Julian admitted that the NDP are still in the process of putting the SPP puzzle together and would welcome receiving information from people in the audience.

This form of trolling for information obviously makes the NDP susceptible to people like Diane Urquhart, the self professed “independent analyst”, as they are happy to “out source” their research on virtually any fact based topic. Not sure what “independent analyst” means, as Diane states she has no clients. If that’s the case, then she is only representing herself as an individual investor.

I do know, however that the NDP have bought Diane’s arguments about income trusts, hook, line and sinker. Diane also seems to get a lot of press lineage for someone who has a questionable credentials. The NDP are so fond of Diane Urquhart, that they saw to it that she testified no less than three times before the Finance Committee on the matter of income trusts. I am only aware of one other person who testified more than once, and that was Dennis Bruce who testified twice. He however, as Vice President with HLB Decision Economics, was the only person who worked with the Department of Finance to create with them the tax leakage model and published the definitive study that lays to shame the false allegations of tax leakage entitled Tax Revenue Implications of Income Trusts.

Meanwhile the NDP are in bed with the “frivolous and vexatious Diane Urquhart”. At least according to the courts. So too it seems are the Conservatives

Here was the glowing introduction afforded Diane Urquhart by Mr. Dean Del Mastro (Peterborough, CPC):

"Mrs. Urquhart, I'm just reviewing your resumé a little bit. You've got quite of bit of experience in relation to investment and you are certainly a professional witness before this committee. I appreciate your being here.”
It is clear from Diane’s resume that she has engaged in resume inflation and resume puffery. Despite what her resume says, at no point was Diane Urquhart the Managing Director of Equities Research and Institutional Equities at Burns Fry Limited, since during Diane’s time at Burns Fry, which ended in 2004, the title of Managing Director did not exist at the firm. No one had such a title. Nor did Diane “Co-lead the daily operations of 175 research, sales and trading personnel” at Burns Fry. Such a construct did not exist, as Diane had no responsibility for the institutional Sales and Trading personnel at Burns Fry. I can assure you, since I also worked at Burns Fry from 1991 to 2002, that if she did, they all would have quit. The individual responsible for that function was Barry Cooper. Diane reported to him as the manager of the Research Department. I have confirmed this with other people at Burns Fry who were there at the time and who were very aware of what Diane did and did not do. Diane obviously harbored desires to be the Head of Research, Sales and Trading and launched at the time what can only be best described as a “coup” against Barry Cooper that failed miserably. She left shortly thereafter.

Diane also describes on her resume that after leaving Scotia Capital Markets in 1998 that she was for the period from 1999 to 2001 a Venture capital investor in iTCANADA.com, an internet services consolidator that was sold to Technovision Systems Inc. in December 2000.

Diane however fails to describe how she went on to lose about all of her $1.19 million investment in Technovision that she received in exchange for her 25% ownership of ITCANADA.com and sought to recover her failed investment in actions she brought in the BC and Ontario courts and involving the securities commissions in BC and Ontario. The details are available at the Ontario Securities Commission

The details of these legal proceedings are not very flattering of Diane Urquhart as an investor or of her business acumen. Why the NDP are relying on her views on income trust only goes to discredit the NDP’s own credibility.

The Ontario Court ruled:
  • “We find that this section 104 application on behalf of the Applicants is out of time and frivolous and vexatious, and in the words of the Honourable Justice Pitt, "this is precisely the kind of proceeding that motions judges are obliged to stay or dismiss on grounds of res judicata, issue estoppel, abuse of process and on the ground that they are frivolous and vexatious."
  • This is a private dispute and should be resolved in the civil courts. Failure to succeed in the civil court should not be the basis for an application to the Commission to change a private dispute into a matter of public interest.
  • The application of Urquhart is therefore dismissed.”
Related:
The NDP are needlessly setting themselves up
Tax Revenue Implications of Income Trusts

Tuesday, December 4, 2007

An autopsy of the Telus - BCE deal. How the Harper government favoured Private Equity and turned it's back on Canadian investors.

"I would argue we [Telus] would have generated more taxes for the government as a Trust than what we would do as a public entity" Darren Entwistle November 20, 2007

Entwistle describes the advantages for Canadian taxpayers and investors of converting to an Income Trust. This option was no longer available after the Conservative's surprise October 31, 2006 decision to dramatically increase taxes on Canadian Business Trusts.

Also, Entwistle looks at the circumstances which lead to the unsuccessful attempt by Telus to buy BCE and the obstacles put in place by the Harper Conservative government.



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