Scrap the tax

Published: January 23, 2009 4:00 PM
Updated: January 23, 2009 5:44 PM

With increasing job and stock market losses and decreasing home values, Canada needs positive and sustainable economic changes. I’ll gladly accept the interest rate cut you’re going to hand out next week but can’t help but think of other measures that could be taken that would provide Canadians with economic benefits that are more sustainable.

It seems almost all ideas about how to best stimulate our economy have been focused around the creation of new monies.

We all know that it was artificially low interest rates, and therefore excess new money creation (read: inflation), were one of the main reasons we are in the economic mess in the first place.

Creating even more new money to solve the problem of excess money creation will only be a band aid fix at best. The cocaine addict feels better moving to heroin but still has to pay the ultimate price sometime, ie: it’s not a sustainable fix.

I feel very strongly that eliminating the proposed new tax on income trusts would go a long way towards sustainable and positive economic growth.

Aside from putting more money in the pockets of Canada’s largest demographic, allowing income trusts to operate as they did would allow the small to mid-sized companies that make up the majority of the income trust space to grow and create new jobs.

It is very tempting at this point to go over all the sketchy details surrounding the proposed income trust tax that don't make sense.

I won’t go into detail here but, these are just a few of the concerns:

BMO Capital Markets study showing income trusts create more than twice the tax revenues compared to corporations

Lost capital gains, increased capital losses and lost distributed income taxes not reported

Most of the 18 pages of the government document showing apparent tax leakage being blacked out even though the document was requested under the Freedom of Information Act

The misrepresentation that Stephen Harper gave in his campaign to not tax income trusts

Regardless of those facts and many others, the question becomes: what can we do here and now to stimulate our economy, while preferably not creating even more inflation?

Providing Canadian retirees and pre-retirees with a sustainable source of monthly income that is generated from Canadian companies, that in turn would create more jobs and therefore an economic circle that would allow Canadians to take care of Canadians makes nothing but sense.

On behalf of all our clients and all investors across Canada I implore you to eliminate the proposed ‘Tax Fairness Plan’.

Canada is still one of the best countries in the world but I’m sure many around the world have joined Canadians recently in scratching their heads over decisions made over the last few years with our income trust debacle, Alberta royalty taxes and proposed coalition government etc.

Dramatic changes can only happen under dramatic circumstances.

These are dramatic times and I therefore propose a challenge to all Canadians: Write your local MLA’s, write your party leaders as well as the Finance Minister and Prime Minister.

Income trusts should never have been taxed in the first place but, unless we the people do something about it by taking action, nothing will change.

Trevor J. Perepolkin

A cozy agreement

As I suspected from the outset, Canada in cahoots with US over trust tax.

The fraudulent notion of tax leakage would never “go down” in the US, since they still have a vigilant press and endless legislative checks and balances that prevent such conspiracy theories from ever being enacted into legislation, see Writing and Enacting Tax Legislation

Meanwhile we learn of this cozy agreement:

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NAFTA Safety Valve Comes to the Rescue
Embassy, June 25th, 2008

By Luke Eric Peterson

Lately, the North American Free Trade Agreement has seemed like the electrified third rail of North American politics.

We've seen sparks flying over proposals for a so-called NAFTA Super-Highway as well as a media firestorm over a leaked diplomatic memo that cast doubt on Barack Obama's true feelings about the NAFTA.

Yet the U.S. and Canadian governments have managed to reach across the border and come to an agreement on one thorny NAFTA dilemma: In a little-noticed exchange of diplomatic letters this past April, the two governments have agreed that Americans investing in Canadian income trusts are not entitled to sue Canada for "expropriating" those investments.

This diplomatic accord comes in the aftermath of the 2006 decision by the Harper government to slap a tax on many types of income trusts. You'll recall that that move drew howls of outrage from Bay Street, as well as from foreigners who had long sunk money into these lightly-taxed investment vehicles.

One pair of Chicago-based investors went so far as to announce last year that they would sue Canada under NAFTA for the "massive destruction" inflicted on their personal stock portfolios. The couple, Marvin and Elaine Gottlieb, have set up a website to encourage other similarly-affected U.S. investors to join them in a class-action type lawsuit against the Government of Canada.

However, that lawsuit suffered a set-back in late April when the governments of Canada and the United States quietly agreed—in a formal exchange of letters—that the taxation of income trusts does not amount to an "expropriation" for which U.S. investors need be compensated under NAFTA. In reaching such an agreement, the two sides effectively vetoed any bid by U.S. investors to sue Canada for expropriating their income trust holdings.

What exactly constitutes an "expropriation" under NAFTA has long been a contentious question. Although the NAFTA provides strong legal protections to businesspersons and companies investing in another North American country, the extent of such protections remains unclear.

If a NAFTA government were to nationalize an industry—say the oil or steel sector—the trade-pact obliges the government to compensate affected foreign-owners. But what happens when a government introduces new regulations or tax measures which impose a heavy new financial burden on foreign-owned businesses, without going so far as to confiscate or nationalize those businesses?

The question may seem academic until you consider that the answer will determine when the public could be on the hook for writing hefty compensation cheques to affected foreigners.

In the income trust spat, the Gottliebs alone are threatening to sue for $6.5 million in losses; thousands of other claimants could join the Chicago couple in suing Canada for hundreds of millions.

Ultimately, it falls to panels of arbitrators to determine whether a given government law or policy is so destructive that it amounts to an expropriation. But with the NAFTA itself offering little guidance as to how to resolve such expropriation cases, arbitrators can find themselves in the same position as U.S. Supreme Court Justice Potter Stewart, who famously wrote that he might not know how to define "obscenity", but he knew it when he saw it.

For anxious governments not eager to leave things up to the discretion of arbitrators, the NAFTA does contain a little-noticed safety valve. If a foreign investor has a beef with tax policy—as opposed to other types of government policies—NAFTA governments can confer amongst themselves and determine whether the tax in question crosses the line. Arbitrators are then obliged to respect any such joint-determinations.

And that's exactly what happened recently when U.S. and Canadian officials got together to agree that the new tax on income trusts—while certainly having a financial impact on trust owners—cannot be likened to an "expropriation".

While the decision by Canada and the U.S. strikes a fatal blow to any NAFTA expropriation claim mounted against the income trust tax, U.S. investors remain free to argue that the tax violated other NAFTA protections.

In fact, in documents filed last year, the Gottliebs also accused Canada of unfairly discriminating against U.S. investors—who held unusually large stakes in the energy income trust sector. It remains open for them, and other U.S. citizens, to continue with their lawsuit against Canada and seek compensation for suffering discrimination and unfair treatment.

For the moment, however, the Gottliebs have not signalled whether they plan to press forward with their claim—and if other U.S. citizens will join them in any such fight. If they do, they will join a lengthening queue of U.S. investors suing Canada under NAFTA for various forms of alleged wrongdoing.

While economists continue to debate how effective the North American trade pact has been in generating trade and employment, the NAFTA is clearly creating a lot of work for lawyers.

Luke Eric Peterson is a columnist for Embassy. He is also the editor of the electronic news service, Investment Arbitration Reporter,

editor@embassymag.ca

Related:
Marvin and Elaine Gottlieb explain why they are launching a NAFTA action against the Harper government

Americans Take on Canadian Prime Minister over Income Trust Injustice - Diane Francis

Liberal Finance Committtee members calls on the Auditor General to investigate the tax leakage claims

“I think that this government’s stonewalling has gone on long enough and it’s time that Canadians got to see that the Government simply made up its story that income trusts cause federal tax leakage,” Liberal Finance Critic John McCallum February 29, 2008

The Harper government have offered no credible explanation to Canadians on questions surrounding Income Trusts and alleged tax leakage.

• Canadians are given 18 heavily censured pages instead of the transparency and accountability the Conservatives promised.

• Finance Committee members are given no information by which to verify the Conservative claims.

That is why it is important the Auditor General investigates the questions on alleged tax leakage the Conservatives refuse to answer.

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Full text of Liberal's letter to Auditor General

Sheila Fraser, FCA
Auditor General of Canada
240 Sparks Street
Ottawa, Ontario
K1A 0G6

February 29, 2008

Dear Ms. Fraser,

We are writing to you today to urge you to investigate the government’s allegation that the income trust sector was the cause of an annual tax revenue loss of $500 million to the federal treasury. As identified in the Auditor General Act, you are the “auditor of the accounts of Canada, including those relating to the Consolidated Revenue Fund,” and we feel that this matter is of great concern to the balance of that consolidated revenue fund.

As you indicate in one of your 2005 reports, “One of Parliament's most important roles is to hold the federal government to account for its use of taxpayer dollars. To fulfill its role as watchdog over the public purse, Parliament needs objective, accurate information on how well the government is managing public funds. The Office of the Auditor General is an independent, reliable source of such information.”

In terms of the government’s claim that income trusts cause tax leakage, both Parliament and Canadians need your help to provide them with objective, accurate information on how well the government is managing public funds.

We look forward to your response.

With best regards,

John McCallum
MP for Markham-Unionville

Garth Turner
MP for Halton

John McKay
MP for Scarborough-Guildwood

Massimo Pacetti
MP for Saint-Léonard—Saint-Michel

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Another Conservative non-answer









Related:
Liberal Finance Committee Members call on Auditor General to Examine Government’s Claims of Income Trust Tax Leakage

Harper Valdez, as seen in the Hill Times just in time for the opening of Parliament

CLICK FOR FULL SIZE IMAGE

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

Should Jack Mintz testify at Ethics Committee hearings?

Who knows how much of a crook Brian Mulroney will turn out to actually be. I am vastly more interested in the blatantly fraudulent ways of our current Prime Minister in doing the bidding of Corporate Canada’s Controlling Elite (CCCE) on the matter of income trusts.

It’s time for an Ethics Committee Hearing on Alleged Tax Leakage.

Here would be a good starting point. Namely Jack Mintz comments on validity of Stephen Harper’s methodology for alleged tax leakage;

“I do want to point out that there is a serious flaw in some analyses especially on the taxation of pension and RRSP accounts. Finance was not right to treat the impact as zero”

All of which begs the question, what is the correct tax leakage? Here is an Op Ed written by Dennis Bruce that neither the Globe and Mail nor the National Post saw fit to publish. What are they afraid of apart from the truth? The very fact that the press are suppressing the truth behind this policy, is what profoundly requires a Hearing by the Standing Committee on Access to Information, Privacy and Ethics. The CBC already has their hands full uncovering these scandals the press ate happy to ignore.

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Trusts Redux: Tax Policy Suitable for Halloween
October 31, 2007

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 ™

One year after Stephen Harper's Income Trust Betrayal: The Top Ten questions still unanswered.

OTTAWA, Oct. 31 /CNW/ - Stephen Harper broke his election promise to never raid seniors' nest eggs through taxing income trusts, by doing that very thing on Halloween 2006. 365 days later, the following questions for Stephen Harper remain unanswered:

(1) Where is your government's proof of alleged tax leakage? 18 pages of blacked-out documents are all that you have provided to back up this claim.

(2) Why were the taxes paid by 38% of all outstanding income trusts held in RRSPs and pension accounts not included when evaluating possible tax losses to the government?

(3) Where is the promised transparency and accountability? Such a sweeping change in tax law should at the very least have involved public consultation.

(4) Why did the Department of Finance demand the return of the 18 pages of blacked out documents issued under the Access to Information Act?

(5) How could the proposed conversions of BCE and Telus into income trusts have had any effect on tax revenue when neither were paying taxes as corporations and were not expected to for several years?

(6) What policy advantage is there, now that BCE has been taken private through a highly debt levered buyout, and which has caused a loss of the $793 million more PER YEAR that BCE would have paid as an income trust?

(7) How is the stated objective of tax fairness and leveling the playing field achieved when government sponsored pension plans are allowed to own trusts, free of tax in their private equity portfolios, while 70% of individual Canadians are not? Why are government sponsored pension funds exempted both from the punitive 31.5% tax and growth restrictions of this policy? Furthermore, why does income splitting for seniors only benefit the 30% of Canadians with pensions, and not the 70% without? Why is this government deliberately creating a two-tiered pension system in Canada? Is this the government's response to the retirement time bomb of an aging population?

(8) Why was the 15% withholding tax paid by foreigners on interest on leveraged buyout loans reduced to zero as part of this same tax policy, at a cost to Canadians of $300 million a year? This special foreign tax loophole makes Canadian public companies more susceptible to leveraged buyout foreign takeovers, at the same time as the trust tax causes them to become grossly undervalued, because of the discriminatory nature of the tax, which only applies to Canadians and not pension funds or foreigners. As such the government has, in effect, introduced tax subsidies to encourage foreign takeovers. Why?

(9) What effect will the loss of $2 billion in annual tax revenues arising from the $65 trust takeovers to date (including BCE) have on the average Canadian taxpayer or Canada's social program spending? Will individual taxpayers be the ones to make up the shortfall? Once the entire sector is taken over by foreign private equity and government sponsored pension plans, the loss in annual tax revenues will rise to $7.5 billion, the equivalent of a 1.5% GST increase. What plans are in place to address this inevitable shortfall in light of all the other tax reductions contained in yesterday's fiscal update amounting to $60 billion. At what point will the cupboard be bare?

(10) Stephen Harper wrote the following in the National Post on October 26, 2005. "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." If so, then why did he so abruptly and without notice or public consultation reverse his promise, leaving investors and seniors with losses of $35 Billion and their incomes reduced by 31.5% and in some cases 50%? How is this socially just or fair?

(11) Meanwhile, why is Jack Layton and the NDP supporting this policy when they profess to be against wholesale foreign takeovers of Canadian businesses and supposedly in favour of protecting seniors' dignity and seniors' retirement savings? Where is Jack Layton's and the NDP's proof of tax leakage? Is the NDP in possession of confidential insider information that would underlie the basis for the following claims contained in correspondence from NDP MPs to their many concerned constituents:

"I have spoken with the NDP party's Finance Critic, Judy Wasylycia-Leis, and she assures me that the government's estimates of future tax revenue losses, are solid."
Jack Layton

What is the basis for these assurances from Judy Wasylycia-Leis? Canadians are demanding of answers from both the Leader of the NDP and the Prime Minister of Canada on this cornerstone assumption.

Conclusion:

Taken as a whole, this is a travesty of democracy, starting with the breaking of a promise, the false premise for breaking the promise, the complete absence of consultation and the litany of adverse policy repercussions as the aftermath of a policy borne out of zero accountability and a complete lack of government transparency. All Canadians are adversely affected. Narrow special interests have successfully manipulated Canada's New Government for their selfish ends.

Alleged tax leakage is the cornerstone assumption behind this tax policy. It constitutes two of the five provisions of the Ways and Means Motion. The other three provisions of the Ways and Means Motion are verifiable constructs as well. Meanwhile transparency and accountability are the cornerstones of a democracy. The real danger to Canadians is that the Conservative Government is flagrantly undermining our democratic institution known as Parliament, if major tax laws are being enacted and passed on the basis of their foundations being assumed to be true, when in fact no proof whatsoever has been provided by the Government.

Dangerous Precedent:

This is an extremely dangerous precedent to have established, since it gives extraordinary powers to the Government to pass important legislation by invoking fact based arguments, that are devoid of fact based evidence. If this is allowed to occur under circumstances like these, then the risk for future abuse of our Parliamentary democracy under matters that are not verifiable in nature, is limitless.

Public Inquiry:

Stephen Harper together with Jack Layton, and the members of their respective parties are acting in concert to abrogate Canadians' democratic institution known as Parliament. As such, we are calling for a Public Inquiry, to fully examine the matter of alleged tax leakage, particularly in light of the Government's announced reduction in corporate tax rates by a staggering 32% from 22% to 15% in 2012. If the original policy intent on income trusts was to "level the playing field" with corporations, then this changed tax regime for corporations announced by the government yesterday, demands a re-examination of the extent to which these most recent measures will have tilted the playing field in favour of corporations and to the detriment of income trusts.

Furthermore, all Canadians need to establish whether Professor Jack Mintz was correct when he stated:

"I do want to point out that there is a serious flaw in some analyses especially on the taxation of pension and RRSP accounts. Finance was not right to treat the impact as zero".
Jack Mintz

This level of uncertainty over the central premise of tax leakage is significant and fails to meet the standards of the Auditor General, who states:

"Parliamentarians need objective fact based information on how well the government raises its funds (taxes)".

Until this standard is met, Canadians will never know whether the following policy measure of this new tax is fact or merely political deceit:

"strengthening Canada's social security system for pensioners and seniors" (Ways and Means Motion)"

Brent Fullard
President & CEO
Canadian Association of Income Trust Investors
www.caiti.info

For further information please contact the:
Canadian Association of Income Trust Investors
media@caiti.info or by calling (647) 505-2224

Source: CNW

Months after destroying Income Trust sector, Flaherty admits his 'tax leakage' analysis is flawed.

Canadian tax-exempt investors, such as Canadian pensions and RRSPs, are subject to tax neither on Flow-Through Entity income nor on dividend income. Jim Flaherty, October 31 2006

"The purpose of the pension funds, ultimately, is to ensure they can honour their pension obligations. And there is taxation, of course, when pensions are paid out," Jim Flaherty, July 4 2007

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No wonder the Conservatives think there is tax leakage - they left out almost half of the taxes!

The term tax leakage is used to describe a situation in which it is believed that the Government of Canada collects fewer taxes from one form of business ownership structure relative to another form of business ownership structure. Many who oppose the income trust form of business ownership would like Canadians to believe that Income Trusts cause tax leakage when compared to corporations.

Tax leakage has to be determined by looking at the taxes paid not just by the business itself but also the taxes paid by its owners on the distributions/dividends paid from the business to its owners (shareholders/unitholders).

On this basis income trusts do not cause tax leakage, rather it is the Department of Finance's analysis (which to date our Minister of Finance refuses to release to his fellow MP's or Canadians) that causes tax leakage, since this analysis completely ignores 31% of the good when it performs its good/bad analysis of Income Trusts relative to Corporations.

The Department of Finance does not include the taxes (retirement taxes) that it receives on the 31% of Income Trusts that are held in retirement accounts (RRSPs and the like) in the false treatment of retirement accounts as being "tax exempt" Charities and not-for-profits are "tax exempt" , retirement accounts and RRSPs clearly are not "tax exempt".

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All withdrawals from retirement accounts are taxed at the highest marginal rate of personal taxation, just like income from employment. In fact retirement income is the second largest source of personal income taxed by the Government, second only to income from employment. During 2004, the most recent year for which data is available, Canadians paid $9 billion in retirement taxes on $52 billion of retirement income. Retirement taxes are not tax exempt, but rather they are tax deferred. When comparing income trusts to corporations in its analysis, the Department of Finance is not even "internally consistent" in its treatment of deferred taxes. The deferred taxes paid by income trusts held in retirement accounts are totally ignored, whereas the deferred taxes paid by corporations are included.

This profound analytical bias by the Minister of Finance and the Department of Finance causes tax leakage. Income trusts do not cause tax leakage.

Finance Minister Flaherty needs to justify his actions. Tax leakage is a discernable fact. Canadians need facts not fiction. MPs need facts not fiction, before voting Flaherty's so called "Tax Fairness Plan" into law. If there is no tax leakage why are we doing this?

Canadians will lose an important investment choice for both today and the future. Canadians have sustained a loss in their hard earned savings of $35 billion as a sole consequence of Mr. Flaherty's actions. This is profoundly wrong. This can not be justified. Source: caiti.info

Related:
Simple to the extreme
To: Finance Minister Flaherty, Your Tax Leakage Analysis is Fraudulent
CAITI Mythbusters

Conservatives signal foreign takeovers OK until next year

"The idea is to have something in the new year on the national security issue. Not this year," says Finance Minister Flaherty.
Source: Reuters

As if Canadian small investors in Royalty Trusts haven't been beaten down enough, the Conservatives signal foreign-owned entities that their money is still good in Canada, and Royalty Trusts can still be had at deep discounts if they move quickly.

The following chart study looks at two time periods of equal length.

The first period looks at 235 trading days prior to the October 31st, 2006 announcement. The second time period examines the period from October 31st, 2006 to October 15, 2007, also 235 trading days.

The difference in the 'before' and 'after' charts illustrate how government policy can distort markets and favor one set of market investors over another. The question is why? What advantage does the Conservative Income Trust policy have to Canadians? How does allowing foreign-owned entities buy Canadian assets from Canadian investors help the country in the long term?

Plainly put, why are foreign investors favored over Canadian investors? Foreign entities can structure deals to avoid Canadian corporate tax, domestic small investors cannot.

Before the October 31st, 2006 announcement the three energy indexes (blue, green and magenta lines) positively correlated the price of oil (red line). As the price of oil rose or fell, the indexes moved in the same direction.

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Not so after the announcement. Not only did the TSX Energy trust index (green line) flatline, but the TSX energy index (non-Royalty Trust businesses - magenta line) also showed a slower rate of appreciation as the oil price increased. Why? Possibly uncertainty induced by a unpredictable Conservative government.

The market uncertainty doesn't exist in the United States where the S&P Energy index (blue line) continues to track the price of oil as it moves up.

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Clearly the Conservative policy has failed to meet it's objective of stemming tax leakage if favored foreign investors can still avoid a Canadian corporate tax bill and Canadian investors cannot. The policy has destroyed Canadian small investor wealth and market confidence. And foreign investors have a green light to avoid the national security test if they act fast.

How is any of this good for Canadians?

Related:
Treating the symptoms. Two Jims in a Jam!
Trust Takeovers to October 1st, 2007
The environment has now turned quite good for Private Equity

Harper's Happy Halloween leads to unhappy hollowing out and diminished futures for virtually all Canadians

Ottawa and Calgary events planned on October 31st

I want to bring to your attention two very important event based initiatives on the part of two CAITI members, who are seeking your involvement to assure its success.

In less than three weeks it will be Halloween 2007. The first anniversary of our misfortune at the hands of Stephen Harper. We probably all remember how and when we heard the news about Stephen Harper's broken promise to never tax trusts and to never raid seniors nest eggs. Turns out, never was short lived. Those were our nest eggs he happened to be raiding that particular evening and in the weeks and months ahead.

His reasons were dubious at the time, and have only become more dubious with the passage of time. Correction. His reasons have actually been proven to be baseless. Apart from the losses we have all experienced, Harper's actions are causing great harm to our country, its economic foundations, and its tax base. Of the 25 largest foreign takeovers in Canada over the course of the last 5 years, 7 are linked to the trust taxation. From a policy that has only been around for 11 months! Two of these deals really stand out.

The first is BCE. We all know that BCE and Telus and their announced plans to convert formed the sole rationale cited by Harper for the breaking of his promise. He said taxes would be lost. How was that even possible when neither BCE nor Telus were even paying corporate income taxes? Now BCE has been taken private under a mountain of debt by foreign private equity and a tax advantaged government sponsored pension plan. Why can they own what we can't and not be subjected to the same rules or even the same logic. How is that "leveling the playing field" How is that "tax fairness"? These parties are actively pushing us aside. Harper favours them to us. The net effect? The true irony? Canada will lose $793 million a year in taxes from BCE relative to it being an income trust. Harper has us in a race to the bottom.

Meanwhile we have a middle eastern oil company, Abu Dhabi Energy acquiring the undervalued Prime West Energy for $5 billion. We have foreign big oil buying up our energy trusts. More will soon follow This is a complete reversal of what trusts were able to accomplish over the past ten years, namely the repatriation of a large number of Canadian energy assets from foreign owners. Harper has turned that upside down. In the process, major taxes are being lost, as well as an essential investment choice and lost capital. In the end the price tag wil be $7.5 billion a year in lost taxes. Each and every year

All of this is to say, there is a rare opportunity near at hand to demonstrate your dissatisfaction with this grossly flawed policy. There are two events planned for Halloween by two very dedicated CAITI Members. David Marshall from Cornwall who is organizing a gathering in Ottawa, and Mike Beath who is organizing a gathering in his home town of Calgary. We can easily arrange to have these events covered by the media to heighten their effectiveness. Before doing so however, we have to assure ourselves that there will be sufficient attendees. For those attending the Ottawa gathering, David has arranged for all attendees to gain entry to the visitors gallery of Parliament to watch Question Period in person. It's quite the event, and Question Period in the House of Commons is the very center of Canadian politics. Transportation will be provided from Toronto to those wishing transportation, returning that same day. The departure point will be Yorkdale Shopping Mall, adjacent to Highway 401. For those wishing bus transportation, please let David know. To indicate your intention to participate, simply contact David or Mike at the co-ordinates below.

I am personally asking you to attend. I will be attending the Ottawa event. If there are other CAITI members who wish to organize similar events in their local areas, please let us know at contact@caiti.info and we will assist in getting the word out.

Many of you may not reside in close proximity to either Calgary, Ottawa or Toronto. In that case I would encourage you to ask a friend or relative who does, to attend in your place.

A strong attendance will provide physical evidence that neither we, nor this issue, are going away quietly and conveniently, which won't be lost on the media. Limited numbers will however convey the opposite message. Please strongly consider attending if at all possible.

Thank you very much,

Brent Fullard
President and CEO
Canadian Association of Income Trust Investors
www.caiti.info

647 505-2224 (cell)

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Ottawa, Ontario: October 31 - Gathering and Question Period Attendance

• Meet at the Justice Building on Wellington Street, rear of building, 12:30PM to 1:00PM
• Arrive on Parliament Hill 1:00PM
• Remembrance Gathering on Parliament Hill 1:00PM to 1:30PM
• Attend House of Commons visitors gallery for Question Period entering at 1:30PM
  

Ottawa Event Co-ordinator:

David Marshall
phone: 613-938-0810
email:
grumpymarshall@sympatico.ca

Ottawa Meeting Place Map - click on blue placemark for further information

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Calgary, Alberta: October 31- Gathering:

• Meet at 2:00 PM.

Stephen Harper's Constituency Office
Suite A203, 1600 90th Ave. SW
On west side of Glenmore Landing Shopping Centre, which is on northwest of 14th St

Calgary Event Co-ordinator:

Bruce Benson
phone: 403-285-8491
email:
BruceBenson@shaw.ca

Calgary Meeting Place Map - click on blue placemark for further information

The environment has now turned quite good for Private Equity

"Private Equity found a very difficult environment for about a year and a half with the Income Trust market. The Income Trust market bid up all sorts of properties and it was very difficult for private equity to compete. With the change in the tax laws coming down the pike, opportunities are out there again and we are seeing a lot of deals. The environment has now turned quite good, not particularly good for Income Trusts, but good for Private Equity."
Richard Schmeelk CAI Private Equity, New York, Sept 25, 2007



Richard Schmeelk describes the effect the Conservative 'Tax Fairness Plan' has had on the Canadian income trust and energy market.

Who is Richard Schmeelk?

Dick Schmeelk, based in New York, was a founding partner of CAI Private Equity in 1989. Throughout his career, Mr. Schmeelk has been involved in Canadian-U.S. financial matters. During his tenure at Salomon Brothers, the firm was recognized as the leading U.S. investment banking firm serving the Canadian public and private sectors.

Mr. Schmeelk had senior responsibility for Salomon Brothers' relationships with the Government of Canada, seven Provinces and a number of other public sector entities. He also advised many corporations including Bell Canada, Canadian Pacific Limited, Imperial Oil Limited and Northern Telecom Ltd. Source: CAI

What is Private Equity?

Equity capital that is made available to companies or investors, but not quoted on a stock market. The average individual investor will not have access to private equity because it requires a very large investment. Source: Investopedia

Related:
The lambs lie down on Bay Street
Income Trusts and Canada’s Energy Sovereignty . . . . Past, Present and Future.
Trust Takeovers to October 1st, 2007
Primewest Energy Trust -Bought for Nothing Down & No Income Taxes
New low looms for Canadian IPO market, PwC survey shows
U.S. Crude Oil and Total Petroleum Imports Top 15 Countries - EIA

Primewest Energy Trust -Bought for Nothing Down & No Income Taxes

The TAQA deal structure uses two corporations, both private, one to lend the funds and the other to own the equity. This permits the entire amount of cash flow to be pulled out of Primewest and directed thru the Canadian corporation to a non-resident entity to eliminate Canadian income tax. Flaherty has just signed an agreement with the US permitting interest payments to leave Canada without withholding taxes. His intention is to extend this agreement with other major tax jurisdictions. The withholding tax removal by Flaherty validates the use of debt by non-residents to purchase Canadian resident businesses.
Source: IncomeTrustResearch.com

Primewest - The First of the Majors to Go

The first of the large cap Canadian energy trusts is in process of being acquired by TAQA North Ltd. a subsidiary of Abu Dhabi National Energy Company for $C26.75 per unit. The update reviews the pricing of the deal and provides valuation parameters for Bonterra, Pengrowth, Canetic, Trilogy, Fairborne, Arc, PennWest, Enerplus and Crescent Point.

Our valuation approach has been to establish a lower end value based on the price a purchaser would pay for the proved plus probable reserves. This price is $2.50 per mcf for natural gas and $18 per bbl for conventional oil and $1 for undeveloped oil sands reserves. The Primewest transaction provides an arm’s length actual transaction for the large cap energy trusts to compare and validate our valuations. As an additional benchmark I consider the cash flow that was being used to pay distributions, which is now available to the purchaser to fund the before tax interest cost on borrowings should they decide finance the transaction. The cash flow from distributions is adjusted, if necessary for the potential need for distribution reductions. This number is supported by our revenue and cost per boe analysis which has been the backbone of our valuation methods for 3 years.

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The estimated replacement cost values have been listed on a table accessible under Energy Trusts on the front page of IncomeTrustResearch.com. These values have been available since Q4-06 following the release of the income trust taxation legislation.

On a replacement cost approach we valued PWI.UN at $23-$24 including the reserves acquired following the merger with Shiningbank. Just prior to the acquisition announcement units were trading at $20 which makes the offer appear to be at a large premium. Alberta oil and natural gas producer values declined last week following the announcement by the provincial government of a report recommending an substantial increase to crown royalty rates. As are result of the decline from the pending royalty review the offer from TAQA appears somewhat generous and the timing is very interesting.

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TAQA is a foreign purchaser with government ownership that could run afoul of Canadian regulators. Primewest has been very active in the Canadian trust lobby with senior executive George Kesteven as the President of the Canadian Association of Income Funds. It was just a matter of time until one of the major Canadian energy trusts would enter into a sale transaction to escape the impact of the trust legislation. It is interesting that Primewest who have been an aggressive advocate against the trust tax are the first to go, giving the appearance they are testing the waters and just before a possible federal election.

On a mcf basis TAQA paid $2.15 or $13.30 per boe. Primewest reserves are 70% natural gas and by this measure they paid less than the $2.50 going rate. The distribution which was being paid to unit holders totals $435M annually and is at risk of a 30% reduction. Even at the reduced amount the distribution would fully pay the interest on a 6%, $5B loan. TAQA is buying Primewest for nothing down should they choose to borrow the funds or they can use the distributions for reinvestment.

By our estimates TAQA paid a 13% premium to our replacement cost value and on a free cash flow basis the deal was priced at a 6% cap rate. As a result of this transaction we are including a free cash flow based value using a 6% loan rate to determine how much debt the purchase price can support. This establishes an upper end value. The TAQA deal structure uses two corporations, both private, one to lend the funds and the other to own the equity. This permits the entire amount of cash flow to be pulled out of Primewest and directed thru the Canadian corporation to a non-resident entity to eliminate Canadian income tax. Flaherty has just signed an agreement with the US permitting interest payments to leave Canada without withholding taxes. His intention is to extend this agreement with other major tax jurisdictions. The withholding tax removal by Flaherty validates the use of debt by non-residents to purchase Canadian resident businesses.

Another interesting aspect of the deal is that Primewest is weighted to natural gas where prices have been weakest in comparison to oil. The purchasers have elected to buy the commodity with the weak price trend in expectation of better days ahead, if not this year then within 3-5 years. TAQA has deep enough pockets with $800B in assets to be patient with the $5B purchase of Primewest. There is also the uncertainty about the Alberta government’s review of crown royalties that could increase royalties by up to 50%. This is another risk that TAQA is prepared to accept. Despite reports in the Globe that TAQA is flush with cash and is overpaying for Primewest, the numbers do not support this conclusion. TAQA appears to know exactly what they are doing and have made a very good purchase that includes bargain priced reserves and an excellent management team.

We are in the process of updating the table on energy trust values which reconfirms the lower end value ranges and adds an estimated upper end cash flow based value. The buzz from the Primewest deal will likely fade setting the stage for another possible purchase. If unit prices approach the lower end replacement cost values accumulation is recommended.

Pennwest has agreed to buy Vault Energy Trust paying $14 per boe, $2.33 per mcf including land. Vault is 68% weighted to natural gas. The metrics on this transaction are attractive to Pennwest and supportive of our $2.50 per mcf natural gas value benchmark.

We will be updating the replacement cost and cash flow based values for all energy trusts and advising as updated.

Recommended Prices by Trust

As comparables, replacement cost values for PWT, ERF and CPG are $30, $48 and $17-18 respectively. Our next most favourably priced recommendations are Pennwest Energy (PWT.UN)at $30.25 or lower, Enerplus (ERF.UN) at $48 or lower, Crescent Point Energy Trust $20 or lower.

This also brings into play Peyto Energy (PEY.UN) with a replacement cost of $20 and current price of approx. $18.50

Bonterra Energy Trust (BNE.UN)

Replacement cost value is $25 per unit, and on a cash flow approach using a 6% cap rate they are valued at $30 per unit. Crown royalty costs jumped in Q2 due to retroactive adjustment, however they still have one of the lowest crown royalty rates in the energy trust sector. Recommended at $28 or lower.

Pengrowth Energy Trust (PGF.UN)

At $18 per boe, total enterprise value is $4B net of debt , approx. $17 per unit at replacement cost. On a cash flow distributions should be reduced by 75% which still allows for approx. $250-$300M of free cash flow providing firm support to the $17 per unit replacement cost. Recommended at $18 or less.

Canetic Energy Trust (CNE.UN)

Canetic made a several expensive acquisitions to quickly build reserves during 2004-2006 when reserves were expensive. This has increased their average FD&A to $25 per boe among the most expensive of the energy trusts. On a replacement cost Canetic is worth $10-$11. Free cash flow is thin and we expect up to 80% cut in distributions which is supporting the $15 value. Appreciation above the $15 level is expected to be limited.

Trilogy Energy Trust (TET.UN)

On a replacement cost Trilogy is worth $7.50 per unit and free cash flow provides a value as high as $12 per unit. There appears to be considerable upside appreciation based on the $8 price as of Sept-25-07

Fairborne Energy Trust (FEL.UN)

On a replacement cost Fairborne is worth $6 per unit and free cash flow provides a value of $4 per unit. FEL is expected to cut distributions by up to 80%.

Arc Energy Trust (AET.UN)

Replacement value $20 per unit and cash flow is $26. Cash flow value includes a reduction of distributions by 30%.

PennWest Energy Trust

On a replacement cost for conventional reserves PennWest is worth an estimated $30 plus up to $6 additional for the 1B bbls of potentially recoverable oil sands reserves. On a cash flow basis after reducing distributions by 30% their value is estimated at $40 per unit. The recent acquisition of Vault Energy added 27M boe of reserves at a favourable cost of $14 per boe included land leases and increases total reserves by 5%.


A complete list of energy trust with estimate replacement cost values is accessible from the front page of IncomeTrustResearch.com under Energy Trusts.

Related:

Canadian Energy Too Cheap to Ignore - greenfaucet.com

Jim Flaherty's Folly - Diane Francis

The Abu Dhabi Put - The Motley Fool

Income Trusts and Canada’s Energy Sovereignty . . . . Past, Present and Future.

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. Our association’s position on Income Trusts calls for the repudiation of the Tax Fairness Plan in the name of fairness and good governance. As such, all existing income trusts should be fully grandfathered and 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 Finance performed that underlies its assertion of tax leakage fails to acknowledge ANY of the taxes paid by the 38% of income trusts that are (according to them) held in RRSPs and retirement accounts.To quote Jack Mintz: “Finance was wrong to treat the impact of [pension and RRSP accounts] as ZERO.” Proper inclusion of these taxes would result in tax neutrality. In any event, these theoretical analyses are only as good as their assumptions, data and methodology. Clearly Finance uses the wrong methodology. A more definitive and unassailable analysis can be had by simply looking at the real world. BMO Capital Markets performed such a real world exercise by looking at all 126 companies that converted to income trusts in the period since 2001. Here are the summary results:

Avg Tax Paid pre Conversion to Income Trust: $3.3 million x 126 companies = $415.8 million / year

Avg Tax Paid after Conversion to Income Trust: $6.1 million x 126 companies = $768.6 million / year (excluding deferred taxes)

Avg Tax Paid After Conversion to Income Trust: $9.8 million x 126 companies = $1.234 billion / year (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 is improved by a factor of 3 times for all taxes and 1.8 times if, like Finance, one totally ignores the present value of deferred taxes. This reality is a major contributing factor to the surpluses that Canada has been reporting in recent years, that Finance considers “strange and unexplained”, in their attempts to obfuscate the inconvenient truth about income trusts.

Cost of Capital Advantage of Income Trusts

As graphically demonstrated above, income trusts do not cause tax leakage. 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 afforded through investments in life annuities, GICs, bonds or high yielding stocks. Further, these very investors are more comfortable with the management discipline associated with management having to meet monthly distribution payments to unitholders. This investor preference manifests itself in higher market valuations for income trusts. 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 a cost of capital advantage can be a significant competitive advantage. This cost of capital advantage has been conferred on these companies by the capital marketplace and not through any “tax loophole” as Flaherty 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. Meanwhile PricewaterhouseCoopers has concluded income trusts are efficient at investing and growing.

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 succeeded in reversing 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 2006 acquisition of assets from ConocoPhillips pushes this total close to $10 billion. This is made possible by income trusts’ competitive cost of capital and ready access to capital markets (before Flaherty).

As a result of this repatriation, head offices and the key decision making functions remain in Canada. Decisions surrounding capital investment, jobs, safety, and the environment are driven by Canadians. Many of these acquired assets are being aggressively optimized by Canada's energy trusts, providing additional production and reserves with minimal impact to the environment. The environment is important to all Canadians and is benefiting from the capital decisions that the low cost of capital income trusts are making, specifically with respect to CO2 sequestration also known as greenhouse gas injection. Canada's greenhouse gas (GHG) challenges are well documented. As the Western Canadian Sedimentary Basin 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 to not pursue enhanced oil recovery 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 Enhanced Oil Recovery (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. This is a rare win-win-win situation for business, the environment and Canada’s energy security. 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, the corporate model and its growth-oriented investor base are 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.

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. In 2006, energy trusts will reinvest approximately $7 billion of capital into Canada’s Western Sedimentary Basin and operating and administrative expenditures are expected to total almost $6 billion annually. However the picture following Flaherty's tax is much bleaker as evidenced by drilling activity which is down by over 60% since Halloween.

Flaherty’s income trust tax regime is designed to shut down income trusts. In that regard, it is certain to succeed. In doing so however, his 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 tax is passed into law. Flaherty’s misguided policy announcement has created what is known in the business as an “event driven” buying opportunity. This is where an event artificially depresses the value of a publicly traded security to a level below its true worth. Flaherty has inflicted this situation on all 250 income trusts. True value in this context means the value that a private equity fund or other investor would be willing to pay for the business. In the normal course, income trusts traded at their true value. However, Flaherty’s actions have created an artificial discount, that these private equity funds are keen to exploit as they scour the world looking for such opportunities. Private equity is flush with capital and ready deployment of capital is their only major constraint. Flaherty has handed them a $200 billion capital deployment bonanza representing $140 million per trust of value arbitrage to be captured by foreigners. Canada’s incredibly lax takeover rules just makes this task even easier and more effortless for them. The $40 billion acquisition of BCE by U.S.-based KKR or Cerberus is a perfect case study.

Upon purchasing these vulnerable income trusts, these foreign buyers will revert 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 Flaherty imposed on the Canadian ownership of 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 interest payments will be made from pre tax cash flows and will flow to foreign tax jurisdictions free of any Canadian taxation. Flaherty's Budget 2007 assures foreign investors of this tax free outcome as the budget contains a foreign investor tax loophole that eliminates the 15% withholding tax previously paid by them. Overall, this strategy is known as “income stripping”. The consequence of this inevitable outcome is that it will induce tax leakage. This is the ultimate irony of Flaherty’s policy. The very policy that was designed to stem tax leakage which did not exist in the first place will actually induce tax leakage through the hollowing out of a growing and vibrant sector of the Canadian economy. Taken to the max, this strategy would result in a loss of the $1.2 billion in annual taxes paid by the 126 trusts referenced above and $6 billion per annum for all 250 trusts. $7.5 billion if BCE and Telus are included. Prior to becoming income trusts, most of these companies were private companies and were therefore protected from this opportunistic vulture takeover that has been induced by Flaherty. The combination of Flaherty and the fact that they are public makes them highly vulnerable. Takeovers will precipitate the $35 billion loss in Canadians life savings well before Flaherty’s 4 year phase in, which is nothing more than a mirage. Making 4 years into 10 years is simply another mirage, as it will only marginally slow down the inevitable takeout of these trusts.

When Flaherty announced his income trust crackdown, he indicated that the U.S. had done so themselves in 1987. This is just another in a long list of falsehoods advanced by Flaherty. What Flaherty did not tell Canadians is that the comparable market in the US to income trusts is today a $480 billion dynamic and growing market where the scope of eligible investors is being broadened by new U.S. regulation. A large part of this vibrant market is the Master Limited Partnership (MLP) market. $80 billion of MLPs are oil and gas infrastructure companies. These energy infrastructure MLPs are extremely well positioned to acquire key Canadian oil and gas infrastructure assets that are held in income trusts. There are no less than 10 such Canadian infrastructure income trusts. Given the higher values at which these U.S. MLPs currently trade relative to the Canadian infrastructure income trusts, there is considerable economic incentive for them to make a hostile bid for this low hanging Canadian fruit, not to mention considerable strategic value not just to these MLPs themselves but to overall U.S. energy security as well. These infrastructure assets control a large percentage of the delivery of Canada’s energy resources including ultimately, the direction, the flow rates, and the building of new pipelines.

These 10 Canadian infrastructure energy trusts with a combined market capitalization of $12.5 billion are responsible for:

• delivery of over 1 million barrels per day of conventional oil and oil sands – 50% of Canada’s oil production
• delivery of more than 0.5 million barrels per day of natural gas liquids – 70% of Canada’s NGL production
• transport over 2.7 billion cubic feet of natural gas per day – 25% of Canada’s gas production
• process over 6.4 billion cubic feet of natural gas per day – 63% of Canada’s gas exports • produce over 160,000 barrels of ethane per day – 66% of Canada’s supply
• operate over 10 million barrels of product storage
• spent $1.1 billion with planned expenditures of $2.0 billion over the next three years
• acquired $3.1 billion of assets of which $1.0 billion was from foreign owners

Income Trusts and Canada’s Energy Sector: Future

As noted above, the emergence of income trusts has resulted in a repatriation in ownership of Canada’s energy sector while at the same time creating a “triple bottom line” result. Flaherty’s 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 our strategic energy infrastructure assets are likely to fall into U.S. 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 project. Western Oil Sands is a corporation, not a trust and has a market value of $5.5 billion. Now that Flaherty has effectively killed the income trust market, two made-in-Canada alternative value maximization alternatives that would otherwise have been available to Western Oil Sands have been eliminated, making it more likely that it will fall into U.S. hands at prices lower than would otherwise be paid. By killing the trust market, Western Oil Sands is unable to convert itself into a trust as a value maximization/disposition strategy alternative. This conversion alternative would have led to a high level of ongoing Canadian ownership. It would have left operatorship of the Athabasca project in Canadian hands. Second, because of the restrictive growth constraints on existing trusts imposed by Flaherty, Canadian Oil Sands which is a trust and which has been an aggressive consolidator of interests in oil sands, will not be in a position to acquire Western’s 20% Athabasca interest. Canadian Oil Sands is a majority Canadian owned income trust. Given that these two value maximization alternatives have been frustrated by Flaherty’s actions, there is a greater likelihood that Western Oil Sands is now easy prey for foreign takeover and at prices lower than would otherwise have to be paid. $5.5 billion is a “price point” that almost assures this foreign owned outcome in the post Flaherty capital market world. Western Oil Sands provides a real time example of how the elimination of income trusts will cause ongoing dilution to the Canadian ownership and head office control of this important and strategic sector of the Canadian economy.
This is widely understood and acknowledged by those in the energy industry, for example this from the February 12, 2007 Barron’s article concerning Canadian oil sands; “We are absolutely convinced the big players there, Suncor Energy Canadian Natural and Nexen are likely to be acquired by the big (oil) companies. It is not surprising that Suncor is now starting to show up as rumored target for BP.” or this from the U.S. Oil and Gas Investor from December 2006: “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 U.S. 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, whose goal is “a secure and sustainable energy supply is essential for our economic prosperity in North America”. Whose prosperity? Whose security?

Other Unintended, Yet Infinitely Foreseeable 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;
• major irreversible flight of Canadian investment capital to other markets which offer sought after income-trust-like investment attributes, such as the U.S.High Yield Market, U.S. Tax Free Municipal Bond Market and U.S. MLP market;
• loss of confidence in the integrity of the Canadian capital markets on the part of Canadian and foreign investors, and the resultant 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.

The good news is none of this has to occur, as Flaherty’s folly is a man made problem. It will only take a majority of thoughtful MPs to veto this self-inflicted economic malfeasance and to recognize that Canada’s future energy and economic sovereignty is otherwise very much at stake.



The Hill Times, Energy Policy Briefing, p.30 - June 4/07

Income Fund Sector Calls on Government to Amend Bill C-52

Bill C-52 Contains "Clear Gaps" That Need To Be Addressed

OTTAWA, May 28 /CNW Telbec/ - In an appearance today before the House of Commons Finance Committee, George Kesteven, President of the Canadian Association of Income Funds, intends to call on the federal government to amend draft legislation pertaining to the taxation of income trusts.

Mr. Kesteven will stress that "clear gaps" exist in Bill C-52, the legislation that imposes a punitive 31.5% tax on income trusts, and ask that the following clarifications be made:

1. Clearly define how income trusts will be treated in legislative terms during the transition period to the new tax.

2. Ensure that there is a legislative framework in Bill C-52 to facilitate conversion to corporate status on a tax-deferred basis similar to subsection 85(1) of the Income Tax Act.

"We respectfully submit that the Finance Committee follows its own advice to the government earlier this year in its report on income trusts, by producing a separate piece of legislation that is comprehensive and includes the guidelines and conversion rules - and is not so broad as to have application to partnerships that are not listed on a public exchange," Mr. Kesteven will say in his prepared remarks. "Only then would all Parliamentarians and Canadians have a clear opportunity to see this issue on its own merits and properly address the income trust issues in this bill."

Mr. Kesteven will also highlight a litany of "unintended negative consequences" that have impacted Canada's income trust sector since Ottawa announced the new tax last Halloween. These impacts include the destruction of billions of dollars of investor value; impairing valuations, cutting off access to capital; and prompting the takeover of close to 15 trusts in the last 6 months, with more than 20 other trusts announcing that they are currently for sale.

"These consequences do not amount to tax fairness but rather the wholesale destruction of a valuable structure in the Canadian economy," Mr. Kesteven will state. "It is not tax fairness to impose a 31.5% tax when corporations on an effective basis pay only 5% to 10%."

Mr. Kesteven will also take issue with claims by government officials that they were prompted to impose the new tax on income trusts to stop "tax leakage."

"It is our contention that federal and provincial tax revenues will not be increased in any way under this Bill," he will say. "The playing field has not been leveled but in fact has been tilted in favour of private equity, foreign equity and pension funds - none of which pay taxes to governments, federal or provincial... At the end of the day, it is not tax fairness when Canadian investors have been disadvantaged and cut off from an investment vehicle that provides them with the cash flow needed for retirement."

About The Canadian Association of Income Funds (CAIF)

Formed in 2002, CAIF/ACFR represents and promotes the interests of Canadian income funds, publicly listed limited partnerships, income trusts and royalty trusts. Members include leading representatives of the major sectors of the income fund industry. Membership is open to all those involved in the funds industry.

For more information about the Canadian Association of Income Funds, please visit their website at http://www.caif.ca/

For further information: To arrange an interview with a representative of CAIF, please contact: Brenda Paul-Ishikawa, CAIF, W: (416) 469-0188, M:(416) 420-4538, communications@caif.ca

Related:

CANADIAN ASSOCIATION OF INCOME FUNDS News Releases

Brent Fullard on BNN - May 14/07

Related:
Chart A shows Clearly
Here is Chart B - A summary of Income Trust takeovers since October 31, 2006

To: Finance Minister Flaherty, Your Tax Leakage Analysis is Fraudulent

CLICK FOR FULL SIZE IMAGE

Okay Mr Finance Minister, Please explain this one

CLICK FOR FULL SIZE IMAGE