CRA Form T1032 codifies Harper's two tiered pension system

Lest you think terms "tax fairness" or "leveling the playing field" are lofty concepts that Stephen Harper actually believes in, as opposed to arbitrary and whimsical concepts that he trots out when it serves his purposes, you need to take a look at the CRA Form 1032 issued in October 2007 on the matter of income splitting for seniors. Here are the words on Form T1032 (see attached) that exclude the 75% of Canadians who do not have pensions, unlike MPs, Senators and Civil Servants:

"Exclude from the amount at line A of this form any RRIF, RRSP or other annuity payments received by your spouse or common-law partner (other than amounts received due to the death of his or her spouse or common-law partner). (1) "

Form 1032 is the form used for the 14% of Seniors who will benefit from income splitting.

Income splitting has a cash value of up to $12,000 per year in tax savings. There are however, two prerequisites to enjoy this massive tax benefit. You have to have a spouse or common law partner, and you need to have pension income. This automatically excludes 75% of Canadians. RRSP and RRIF income is explicitly excluded.

How can this measure possibly be contained in a piece of legislation entitled The Tax Fairness Plan?

This income splitting measure was held by the CONservatives to have been a form of mitigation to the income trust tax. How completely absurd, since the income trust tax is specifically targeted at the 75% of Canadians who don't have pensions, whereas the PREREQUISITE for income splitting is that an individual have pension income. RRSP/RRIF income is explicitly excluded.

This is just another example of how Stephen Harper is creating a two tiered pensions system in Canada. These are four main measures to bring Harper's grossly discriminatory two tiered pension system into effect:

(1) Income splitting only applies to 25% of Canadians with pension income (only half of whom have an eligible spouse), excludes the 75% without pension income. Measure benefits all MPs, Senators and Civil Servants.

(2) Pension plans can own income trusts in private form, free of the 31.5% income trust tax. RRSPs are double taxed.

(3) Pension plans are free of growth restrictions.

(4) Alleged tax leakage, is permissible if incomes trust are held by a pension plan.

The pension plans are laughing all the way to the bank. No doubt they were consulted on this beforehand by the Harper government. Otherwise, how could pension plans like Teachers have come out with statements like this on November 1, 2006:

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Teachers' response to new federal income trust policy
November 1, 2006

The Ontario Teachers’ Pension Plan has advocated for a taxation policy on income trusts that does not discriminate against pension funds, and we are pleased to see that this is the case with the government’s announcement yesterday (October 31, 2006).

The reality is that, in a protracted period of low interest rates, it is important to find alternate investments with yields that help make up the difference. Income trusts have allowed us to do that in recent years. The challenge will be to find the investment vehicles that will replace the income and cash flow that income trusts have represented to us, but we are confident that our investment team will find them. The four-year implementation period for this new policy will enable us to gradually make any necessary adjustments to our portfolio.

There is good news for pensioners and other seniors over age 65 in this new policy, which will help take the sting out of the new tax policy on income trusts for them: the age exemption tax credit will be increased by $1,000 and income splitting will be permitted.

Contact:

Deborah Allan
Director, Communications and Media Relations
Ontario Teachers' Pension Plan
(416) 730-5347
deborah_allan@otpp.com

Dr. Michael Popovich - Tax fairness plan masks Harper's broken vow

Letters to the Editor
London Free Press
October 27, 2007

The first anniversary of the Oct. 31 implementation of the tax fairness plan is almost upon us.

Will we ever forget Stephen Harper's promise just prior to the last election: "Don't forget , the Liberals were going to tax income trusts. Don't forget we will never let that happen. We will never raid seniors' hard-earned money."

However, Harper did tax income trusts within nine months of taking power and thousands of small investors, mainly seniors, had to suffer the consequences of a $35-billion loss to their savings. The only beneficiaries were corporations like Manulife that had competing products to sell. Private equity firms and pension funds were allowed to buy up these same trusts and hold them tax-free.

Despite running on a platform of accountability, there have been no attempts made to show any verifiable justification for this action -- unless 18 blacked-out pages count.

Seniors and small investors across Canada, whose only fault was to try to make ends meet, were the collateral damage in this plan to satisfy the needs of the ultra-rich.

As the next election approaches and you hear Stephen Harper chant, "Promise made, promise kept," you might want to reassess his abysmal record on promises.

Dr. Michael Popovich
Rodney, Ontario

Source: London Free Press

Related:
Stephen Harper on Income Trusts - Election 2006
Stephen Harper on Accountability - Election 2006

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

Energy Trust Takeover Keeps Canada's Conservatives in Tough Spot

Yet another round of his ongoing royalty trust blunder was played by Canadian Prime Minister Stephen Harper this week as he stated any protectionist legislation regarding royalty trust acquisitions by foreign buyers would be put off until next year.

Because last year's bombshell that Canada would change the way it treated royalty trusts was fraught with political risks, not only did the ruling Conservatives pull it off with surprising ease, they've dodged all the bullets since. This latest one, however-- the announced takeover of PrimeWest Energy Trust (PWI) by Abu Dhabi's national oil company-- may be a tougher bullet to dodge. Here's a quick summary of the big royalty trust political events of the last year, capping with the latest:

1) Late last year-on Halloween, fittingly-the minority Conservative government in Canada announced a plan to prohibit the creation of any new royalty trusts and to force all existing trusts to convert to normal corporations by 2011, a 180-degree reversal from every promise it made on the topic, both pre- and post-election.

• The Political Risk: barely a year earlier, in late 2005, the then-ruling Liberal government simply floated the idea of changing the tax status of royalty trusts and voters revolted, particularly retirees who relied on the hefty dividends the royalty trusts paid. In fact, it became one of the key issues which toppled the tenuous ruling coalition and helped to sweep Conservatives into power for the first time in 15 years.

• The Political Solution: when the time came for the Conservatives to go back on their word in late 2006, they didn't just float an idea-they had a plan. That strategy consisted of well-crafted baubles for senior citizens, tax breaks for the retirement set carefully planned to mute the uproar that would have been expected. The plan worked; while CARP (Canada's AARP) eventually came out against the proposal, its reaction was slow and half-hearted, due in part to its happiness with income splitting and other tax goodies they were given.

2) The next big challenge was the budget process in the Spring of 2007, during which the Conservatives needed to pass the "Tax Fairness Plan" that contained the royalty trust tax change they had proposed months before.

• The Political Risk: because the budget process is by definition a confidence measure in Canada's parliamentary system, the government can fall and new national elections can result if an officially tabled budget doesn't pass. Being a minority ruling coalition (Conservatives have the most seats in parliament but not a majority of them), the Conservatives need the votes of at least one of the minority parties in order to pass its budget and avoid national elections.

• The Political Solution: Conservatives bought the votes they needed from the Bloc Quebec, which received a huge package of tax transfers from other Canadian provinces in return for their support of the budget. Thus, the Halloween proposal became enacted law.

3) Finally, the announcement on September 24th that TAQA, the Abu Dhabi national energy company, would be acquiring PrimeWest Energy Trust posed yet another challenge for the Conservatives.

• The Political Problem: shortly after the Conservatives announced their proposed change to the royalty trusts and the stocks got clobbered as a result, energy trust CEOs warned that they had been made sitting ducks for acquisition by foreign buyers. At the time, Finance Minister Flaherty brushed off the claims as self-serving propaganda on the part of the energy trust CEOs who opposed the tax change proposal, but TAQA's bid for PrimeWest-at a 30% premium-proved the trust CEOs correct. The Conservatives' tax law change had perhaps set the stage for the selling of Canada's vital natural resources to foreign buyers.

• The Political Solution: this one clearly has the Conservatives in a quandary. At first, Prime Minister Harper reacted swiftly, using the Middle-Eastern origin of the buyer to float the idea of blocking the deal on national security grounds. However, this deal was TAQA's 3rd takeover of the year in Canada, and one of those purchases has already closed; if it wasn't a national security issue then, why would it be now? Since that wouldn't make sense, he then backed off and said such protectionist legislation would be coming soon, but that the TAQA deal would be reviewed based on existing laws, preserving its ability to complete the PrimeWest deal. Even this solution wasn't ideal however, as it would keep the topic of the TAQA deal in the news, reminding Canadians that the energy trusts were indeed trading at fire-sale prices as a direct result of the change in their tax status.

Ultimately, there has been no political solution to the PrimeWest takeover, and this week's announcement by Canada's Conservatives that no such national security takeover legislation would be crafted until next year shows clearly they don't quite know how to make this problem go away. They must be hoping the topic will die down, that they'll have time to quietly pass such legislation at some point in the future.

Will this work? Maybe, but the fact still remains that the TAQA takeover of PrimeWest signaled clearly that Canadian energy trust assets are very inexpensive. In reality, a foreign acquirer might actually step up any similar plans in hopes of getting a deal done now, before any new legislation that would block such foreign buyers is tabled next year.

Regardless, the royalty trust tax change was a huge mistake, and the lack of any clever political play in the aftermath of the PrimeWest takeover shows that Harper, Flaherty and their team will have an increasingly difficult time covering up that fact.

Note: click here to listen to my podcast interview with Roger Conrad about current energy trust valuations in general and the PrimeWest takeover, in particular.

Disclosure: Author has a long position in PWI

Source: Seeking Alpha

C A I T I - O N L I N E: "Chart A shows clearly"

C A I T I - O N L I N E: "Chart A shows clearly"

Here is Chart B

From "Chart A shows clearly"

A summary of Income Trust takeovers since October 31, 2006

Announced        Nov 6, 2006 
Acquired         Halterm Income Fund      
Ticker           HAL.UN
Buyer            Macquarie Infrastructure Partners
Value (millions) 173
Buyer Info       US$30B New York based infrastructure inv firm ,
                 parent company Australian

Announced        Dec 4, 2006
Acquired         Alexis Nihon REIT
Ticker           AN.UN
Buyer            Homburg Invest Inc.
Value (millions) 919
Buyer Info       Investment firm with lots of properties
                 (Based in NS, Canada)

Announced        Dec 20, 2006
Acquired         Calpine Power Income Fund
Ticker           CF.UN
Buyer            Harbinger Capital Partners
Value (millions) 880 US
Buyer Info       (Alabama) Private equity/real estate/
                 distress situations

Announced        Jan 15, 2007
Acquired         Sunrise Senior Living REIT          
Ticker           SZR.UN
Buyer            Ventas, Inc. (NYSE: VTR)*               
Value (millions) 2,280
Buyer Info       US based REIT

Announced        Feb 1, 2007
Acquired         Lakeport Brewing Income Fund
Ticker           TFR.UN
Buyer            Labatt Brewing Company Ltd
Value (millions) 210
Buyer Info       Labatt is owned by InBev (Belgium)

Announced        Feb 4, 2007
Acquired         Great Lakes Carbon Income Fund
Ticker           GLC.UN
Buyer            Oxbow Carbon & Minerals Holdings Inc
Value (millions) 786
Buyer Info       Part of the Oxbow Group a private energy company
                 based in US (Florida)

Announced        Feb 9, 2007
Acquired         Norcast Income Fund
Ticker           NCF.UN
Buyer            Pala Investment Holdings Ltd
Value (millions) 87
Buyer Info       UK (Jersey), international alternative 
                 investment fund

Announced        Feb 14, 2007
Acquired         Entertainment One Income Fund
Ticker           EOF.UN
Buyer            Marwyn
Value (millions) 177
Buyer Info       UK based investment firm (PE, MBOs, etc)

Announced        Feb 16, 2007
Acquired         Amtelecom Income Fund
Ticker           AMT.UN
Buyer            Bragg Communications Inc
Value (millions) 129
Buyer Info       Bragg owns Eastlink, a private telecom competitor
                 based in the Maritimes

Announced        Feb 26, 2007
Acquired         Clean Power Income Fund
Ticker           CLE.UN
Buyer            Macquarie Power Income Fund (MPT.UN)
Value (millions) 419
Buyer Info       Canada based Income Trust

Announced        Mar 18, 2007
Acquired         Brands Income Fund
Ticker           ABF.UN
Buyer            Associated TorQuest Partners
Value (millions) 43
Buyer Info       Canada based private equity firm

Announced        Apr 1, 2007.
Acquired         KCP Income Fund
Ticker           KCP.UN
Buyer            Caxton-Iseman Capital Inc.
Value (millions) 804
Buyer Info       New York-based private equity firm

Announced        Apr 3, 2007
Acquired         Gateway Casino Income Fund
Ticker           GCI.UN
Buyer            New World Gaming Partners
Value (millions) 886
Buyer Info       JV of Publishing and Broadcasting Limited (PBL) and
                 Macquarie (both Australian)

Announced        Apr 10, 2007
Acquired         Liquor Barn Income Fund
Ticker           LBN.UN
Buyer            Liquor Stores Income Fund (LIQ.UN)
Value (millions) 158
Buyer Info       Competitor, Canada based Income Trust

Announced        Apr 16, 2007
Acquired         VOXCOM Income Fund
Ticker           VOX.UN
Buyer            UE Waterheater Income Fund (UWH.UN)
Value (millions) 109
Buyer Info       Canada based Income Trust

Announced        Apr 16, 2007
Acquired         UE Waterheater Income Fund
Ticker           UWH.UN
Buyer            Alinda Capital Partners LLC
Value (millions) 1,740
Buyer Info       US (NY) based private equity firm

Announced        Apr 24, 2007
Acquired         Thunder Energy Trust
Ticker           THY.UN
Buyer            PSPIB/Overlord Financial
Value (millions) 406
Buyer Info       Public Sector Pension Investment Board (Canadian PP)

Announced        Apr 30, 2007
Acquired         Custom Direct Income Fund
Ticker           CDI.UN
Buyer            EdgeStone Capital Partners
Value (millions) 237
Buyer Info       Canadian based P/E

Announced        May 4, 2007
Acquired         Canada Cartage
Ticker           TRK.UN
Buyer            Nautic Partners
Value (millions) 252
Buyer Info       US based Private Equity (group of buyers)

Mr Layton: Which part of the TFP don't you understand yet?

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