In Gwyn we trust? A fairy tale from a Conservative apologist.

This interview of Gwyn Morgan appeared on BNN Squeezeplay on October 31st 2007. CAITI has added commentary to highlight the contradictory statements of Gwyn Morgan and ask the questions we think that you, the small investor, would like us to ask.



Encana's share price performance vs. the TSX Energy Trust Index - October 31 2006 to November 1 2007



Related information:
Conservative spin check: What is Gwyn Morgan talking about?
Income Trusts are efficient at investing (PricewaterhouseCoopers)
Singapore's Trust model
Tax rates around the world

“Halloween massacre‘‘ still horror story for oilpatch one year later

TORONTO _ Major oil patch players say Finance Minister Jim Flaherty‘s “Halloween massacre‘‘ has turned into a full-blown horror story a year later, with oil and gas income trusts more prone to foreign takeovers and less able to access capital.

“We‘re not just a bunch of spoiled brats concerned because a toy has been taken away. This is something that is an enormous mistake,‘‘ said John Dielwart chief utive of Arc Energy Trust.

Dielwart, whose company was among the first to adopt the popular investment model, has been one of the most vocal opponents to Flaherty‘s plan to impose a 31.5 per cent tax hike on income trusts by 2011.

Dielwart said Flaherty made a big mistake in interfering in capital markets, which helped a $100-billion energy trust sector.

“It wasn‘t a gimmick, it wasn‘t based on artificial tax advantages. It was based on a very solid business model,‘‘ he said. “This was, if not the optimal model, it was pretty darn close.‘‘

Eilat warns that Canada‘s oil and gas sector _ owned and operated and run by Canadians _ will get back into foreign control “and I don‘t think anybody wants that.‘‘

One key example is PrimeWest Energy Trust, which Abu Dhabi-based state-owned energy firm TAQA is proposing to take over for $5-billion.

“We‘re going to see a lot more of them fall into foreign hands,‘‘ said Ross Freeman, a partner in Calgary‘s Borden Ladner Gervais LLP, but he adds that most of the activity won‘t happen until the four-year grace period comes to an end.

“The vast majority of the royalty trusts are still out there. They‘ve hung in there. They‘re trying to take advantage of the remaining grand fathering period. But they‘re under increasing pressure to do something and certainly there‘s a lot of pressure from overseas,‘‘ Freeman said.

He says the biggest losers from the income trust decision have been junior producers.

“Killing income trusts was a very, very severe blow, not just to the income trusts themselves, but to the whole junior sector, and that‘s where the impact, I think, was grossly underestimated by a lot of people,‘‘ he said.

With the weakening of that structure, juniors are getting less investment and fewer are being “gobbled up‘‘ by other trusts.

“The amount of financing the juniors were able to be doing just crashed. They just couldn‘t get investors any more,‘‘ Freeman said.

The majors, on the other hand, are doing ok, he said.

“They were never in the model of distributing their cash flow. They were not a yield investment. Even the very largest ones pay only very modest dividends. So clearly they‘ve been the winners of all of this.‘‘

They majors have also done well in the face of the income trust decision because it‘s brought their operating costs down, Freeman said. The cost of drilling has plummeted by more than 50 per cent over the past year, leading to the creation of far fewer wells.

“From an oil and gas company‘s perspective, that‘s a positive, it‘s cheaper to drill. Not so good if you‘re a drilling contractor,‘‘ he said.

Les Stelmach, an analyst with Bisset Income Fund agrees larger players may not have so much to lose in the short term.

“They‘re large, they have diversified asset portfolios, so they‘re less sensitive to changes in commodity prices or changes to royalty rates. They‘re certainly a viable business 2011. For smaller trusts, they, too can be very viable,‘‘ Freeman said.

He says smaller energy companies can also remain viable if they carve out the right course.

“The crux of the matter is they can‘t pay as much for property so they‘re less likely to be as acquisition focused as they were in the past,‘‘ he said, adding producers that have carved out specific niches will do better than ones that rely solely on acquisitions.

As the chief of one of the so-called “majors,‘‘ Dielwart said he disagrees that the bigger companies aren‘t taking as much of a hit. He said his company saw a 25 per cent decrease in capital from pre-Oct. 31, 2006 levels.

He also takes issue with the argument that values have somewhat recovered since the initial blow. Arc Energy units are trading about $7 below what they were a year ago, which Dielwart blames on the income trust decision.

“One one who suggests that values have recovered are just not doing their homework,‘‘ he said.

Meanwhile, ripples are being felt south of the border, too.

A Chicago couple, saying Flaherty‘s move has cost Americans and Canadians billions of dollars in lost investments, is using a provision of NAFTA to challenge the Conservative government‘s move.

“The Halloween 2006 income trust decision by the Government of Canada has had a massive financial impact on thousands of investors in Canada and the U.S. and we believe that it breached Canada‘s NAFTA obligations,‘‘ Marvin Gottlieb said in a statement Tuesday on behalf of himself and his wife.

“Because of this decision, more than $30 billion has been lost by individual investors in Canada and more than $5 billion has been lost by energy trust investors, including Elaine and me, in the United States.‘‘

Source: Oilweek Magazine - Canadas Oil and Gas Authority

Creating a Canadian Corporate Advantage - Dion speech to the Economic Club of Toronto

Excerpt from Oct 12 Speech:

Our fourth priority for the Speech from the Throne is a plan to create a strong Canadian economy. And…surprise, surprise that is what I want to talk to you about today, here at the Economic Club of Toronto. How to generate more investment, higher living standards, and good jobs for ourselves and our children. I want to thank the Economic Club for giving me the opportunity to talk about this issue.

We need this plan, especially given the fact that the Harper government has done more harm than good to Canada’s competitive position.

They are in the process of squandering $12 billion per year to pay for their two point cut in the GST, money that could otherwise have been used far more productively.

Their original interest deductibility proposal was a frontal attack on the competitiveness of Canadian companies and denounced as the worst tax policy in 35 years. As reported in the press yesterday, their new version of interest deductibility will still cost Canadian companies billions and will serve mainly to enrich foreign governments. It is beyond belief. The Prime Minister has not listened to common sense. It is not too late for him to do so.

We expect the Speech from the Throne to address economic measures including infrastructure, post secondary education, research and development, the manufacturing sector, labour market shortages and middle class tax relief.

But today, I want to talk about an important policy I believe Canada needs to create more investment. To create rising living standards. To create the jobs of tomorrow in the Canada of today. To create a competitive tax system. To create a Canadian corporate advantage.

I am talking about the necessity to further reduce the federal corporate tax rate, deeper than has been already announced.

The previous Liberal government reduced the federal corporate tax rate from 28% to 19%. The Conservatives took the “bold step” of going further…to 18.5% in 2011. I would go deeper than that and I will tell you why.

My conviction that corporate tax cuts must be on Canada’s economic agenda has been strengthened by a process of consultation with parliamentary colleagues, workers and Canadians who want better jobs for themselves and their children. I am convinced that a further reduction in the corporate tax rate cut is the right thing to do.

My conviction has been reinforced by what I have heard from experts and business leaders at round tables and other forums across the country. I am thinking in particular of the outstanding Montreal conference of September 10th where experts and business leaders seemed to speak with one voice – but in both official languages! - a lower corporate tax rate is a powerful weapon in the federal government’s arsenal to generate more investment, higher living standards and better jobs.

It is true that business leaders I have spoken to have also called for an extension of the Accelerated Capital Cost Allowance for manufacturing and processing industries. This is especially true with a Canadian dollar at par. It has never been more affordable for Canadian businesses to invest in new machinery and equipment. But today I will focus on the corporate tax.

I will give you three reasons why we must deepen the cuts to the corporate tax rate. It is a good economic policy as such within the Canadian economy. Second, it will help us compete with other countries. Third, it will strengthen our economic sovereignty. Let’s develop these three points.

It is a good policy for an economy like Canada’s. Why? Because living standards are driven mainly by productivity. Productivity is driven mainly by investment. How, for the sake of good jobs and rising living standards, can we encourage Canadian companies to increase their investments?

The answer is simple. If you lower the corporate tax rate, you lower the cost of capital for Canadian companies. Therefore, these companies are induced to spend more on capital equipment.

It is important for Canada to increase capital spending. Right now we are not doing very well. In fact, Canadian companies invest $1600 per worker less than US firms and $700 per worker less than the OECD average.

This brings me to my second point, competing with other countries. Today the Canadian dollar is at around par with the United States. A low Canadian dollar was at best a mixed blessing, but it did create a competitive advantage for our exports and an inducement for companies to locate in this country. How, for the sake of good jobs and rising living standards, can we create a new Canadian advantage that relies on something other than a weak currency?

By now it is clear that my answer is to create a new Canadian advantage based on a lower corporate tax rate.

Some may question why Canada needs a specific advantage to win in global competition. The answer is that every country seeks an advantage and that Canada especially needs one given the fact that our neighbour is the world’s largest economy.

As a destination for investment in North America, Canada is not top of mind. As the world’s only superpower, the United States is always top of mind. So we need a big hook to snare investment, including Canadian investment, that might otherwise go south of the border.

We already have some good arguments for investing in Canada – for example, our skilled work force, our internationally respected status as a nation, our successful multicultural and bilingual society. But corporations are oriented to the bottom line, and one of my biggest hooks as a future Prime Minister would go straight to the bottom line: come to Canada and you pay a much lower corporate tax than in the United States.

How would the United States react to this Canadian advantage? It could after all match Canada’s corporate tax reduction. But here’s a case where Canada’s small size is an advantage. If Canada creates a big corporate tax gap vis a vis the United States, there is unlikely to be any reaction south of the border. We’re under the US radar screen because we’re small.

My third and final argument for a lower corporate tax rate is that it would strengthen Canadian companies against foreign takeover. We want our companies to be predators rather than prey. The best way to do that, for the sake of good head office jobs and other benefits, is to strengthen our companies by taxing them less. It lowers their cost of capital. It better equips them to take on the world.

To conclude, let me sum up the argument. A key competitive advantage for Canada used to be our weak currency. Now that our dollar is at par, and we have lost this weak currency advantage, a key advantage must be a competitive corporate tax rate.

A tax advantage is better than a weak currency advantage. I can’t think of a country that has succeeded on the basis of a weak currency. But I can name several countries, including Sweden, Denmark, and Ireland, that have done very well by creating a low corporate tax environment.

I would much rather be the Prime Minister of a country that grows investment and good jobs through a competitive tax regime than a country that aspires to greatness through a devalued currency.

Some will say that a cut in corporate taxes is a right wing policy. I’m sure my friend Jack Layton will say this. But to believe this is to believe that Sweden, with its low corporate tax rate, is the hot bed of neo-conservatism while the United States, with its very high corporate tax rate, is a socialist paradise – or to quote Stephen Harper when he described Canada – “a second tier socialistic country”. A low corporate tax rate is not a right wing policy or a left wing policy. It is a sound policy.

The world does not owe Canada a living. For a richer, fairer, greener Canada we need to create a Canadian corporate advantage. We need a more competitive Canada.

Read the complete speech