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

mike watkins dot ca : Flaherty's Fiscal Fumbles

"FFF - Flaherty's Fiscal Fumbles - destined to become a regular feature. Today's installment: Flaherty's moves have only enabled more corporate tax avoidance." Mike Watkins dot ca

Recently a $13 billion dollar deal concluded, allowing Teck to buy the remaining shares of Fording Canadian Coal Trust. Despite all the talk of the on-going credit crunch, the overly generous moves by the Bank of Canada and Flaherty's Ministry of Finance have made it possible for banks to work with Teck to obtain the necessary financing and conclude the deal.

No new jobs will be created through this transaction. There is no net benefit to Canada.

Yet Canadian taxpayers are footing a big chunk of the bill, by providing a taxpayer-backed credit backstop, and through being shafted as Teck avoids paying a $4 billion dollar tax bill as a result of this transaction.

While this exercise in tax avoidance plays out under our very noses, lets think back to the last time tax avoidance was a subject in vogue in Conservative politics in Canada.

On October 31st, 2006 Jim Flaherty, then and now the Conservative Minister of Finance, announced that Income Trusts would in the future be subjected to new taxation. The move was particularly controversial as the Conservatives had campaigned only months earlier in part on a promise to leave the income trust sector alone.

The aftermath, dubbed the Halloween Massacre, saw the income trust market plummeting on the news, erasing billions in market value in the weeks to follow. Small and large investors alike, including many of Canada's pension plans, were significantly impacted by the on-going turmoil. Now more than two years later, many still feel betrayed.

Stephen Harper and Jim Flaherty's volte-face on trusts was defended as a sign their government was serious about fairness in taxation. Flaherty said trust conversion was "a growing trend to corporate tax avoidance". From a CBC News article:

By some estimates, the federal and provincial governments stand to lose as much as $1 billion annually in tax revenue to trusts. There are now more than 250 income trusts in Canada.

Trust conversions are increasing in popularity because trusts do not pay corporate tax. Instead, they pay out most of their income in distributions to unitholders, who then pay tax on those distributions.

Flaherty said that situation could not be allowed to continue. "This trend has caused me growing concern," he said. "It's not right and it's not fair."

Bringing both pieces of the puzzle together:

• In October 2006 Conservative Finance Minister Jim Flaherty closed what he called a "loophole" that companies could exploit to avoid paying their fair share of taxes, a loss to taxpayers controversially estimated at the time at $1 billion a year.
• In fall 2008 that same finance minister, backed by Stephen Harper appointed Mark Carney, governor of the Bank of Canada, enabled Teck Cominco to avoid paying $4 billion in corporate taxes.

Flaherty's Fiscal Fumble has cost Canadian taxpayers at least $4 billion in avoided corporate taxes plus we are even footing part of the bill which makes this deal possible in the first place.

The deal smells so bad that even those in financial circles are fuming about it.

Courtesy of Mike Watkins dot ca

Related:
Fording tax avoidance deal poses questions

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

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

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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?

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

Harpers Happy Hollowing to Date

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