Thursday, November 02, 2006

Tough Love

There is no shortage of commentary in MSM this morning regarding Income Trust fallout.

The Globe claims to have the inside scoop on how this all came down "Income-Trust Crackdown: The Inside Story".

Ironically, it was the courtesy call placed to Finance Minister Jim Flaherty by BCE's Michael Sabia that appears to be the catalyst in the equation.

Astute investors might have picked up some nuances. When the PM was speaking at the Toronto Club after BCE had announced its planned conversion, Harper was asked point blank about the issue:


“Harper hummed and hawed and basically avoided answering,” said one CEO in the room. “I took it as a sign that this was something the government was worried about.”

The market never caught on. Indeed, Mr. Flaherty's decision was made several weeks ago, with the intervening time spent hammering out last-minute details.

I recall several times when I heard Flaherty being asked by MSM about the BCE and Telus announcements, and he always expressed concern. That should have been a warning sign right there.


We now come down a fundamental question - What is integrity? Is it better to keep a promise no matter how much the variables change as time progresses, or is it more principled to break a promise for the greater good; even at the risk of political peril?

It would have been so easy for the government to turn a blind eye to what was obviously turning into a very serious domino effect of corporate tax evasion and unsound financial practices.

The Toronto Sun's Linda Leatherdale caught up with forensic accountant Al Rosen for his POV:

Bay Street's outspoken critic of income trusts, Al Rosen, applauded Flaherty for having the guts to clamp down on what he calls a dangerous investment scheme, which countries like Australia and the U.S. have banned.

"Seniors have to understand there is a fair bit of accounting gimmickry holding up trust values," said Rosen, a forensic accountant with Rosen & Associates. "When they understand how the tricks work, they'll be glad they got out."

Rosen, who's tracked returns on income trusts, estimates only 20% of them are on solid footing. His advice is unless you own one of the more solid trusts, "you should be out while the chances are still okay," Rosen said.


So if we accept that it was the right move, was it done the right way? Some people like Garth Turner suggest that it could have been done in stages, to soften the blow to investors.


I think the minister of finance could have declared a moratorium on new conversions, struck a blue ribbon panel to study the industry and eased in regs over the past few months making it crystal what direction the feds were going in. That would have allowed for a more orderly, less panicked correction, and kept from scaring the crap out of a few million seniors. It would have been a kinder blow. But if you’re a prime minister planning an election in a few months, and want nasty things done now so people will forget about them, well, you pick another route.


But if there's one thing the stock market hates, it's uncertainty. Perhaps the Finance Minister reasoned that it was better to rip the bandage right off, rather than one painful hair at a time.

Some financial advisors are saying that now is a great time to hunt for bargains in the stock market. If that kind of attitude prevails, the market will recover. The political fortunes of the Conservative party is another thing.

It will depend on whether voters see this measure as a broken promise or rather a necessary intervention to protect investors in the long term, and ensure the continued national economic health.


* * * *

Another great analysis by Terence Corcoran at the National Post - "Flaherty fix killed a gimmick".

23 comments:

Steph said...

I think the easily media-influenced people will see this simply as a broken promise. People who look into it in any depth will take the time to consider this question you posed:

"Is it better to keep a promise no matter how much the variables change as time progresses, or is it more principled to break a promise for the greater good; even at the risk of political peril?"

Certainly any thoughtful person will realize that it is indeed the latter. The only issue then worth debating would be if this is indeed for the greater good. The majority of people seem to be conceding that it is.

Joanne (True Blue) said...

Thanks for your input here, Steph.

Considering that it is almost political suicide, one would have to assume that it was done in the interests of the country rather than the party.

Some may argue that it was necessary to finance the next GST reduction, but that is in the distant future compared to the very real possibility that the government will likely be defeated sometime within the next year.

Joe Calgary said...

People have completely missed the boat on this...

What Harper originally said was that he would not touch Income Trusts without creating a support program designed for Seniors.

Guess what, he did something for Seniors, and closed the loop-hole at the same time.

Where people are really missing the boat is that they all think Harper thinks like the Martin Liberals did... about a day and half into the future.

News for you folks, Harper is a long term player, and thinks 10 moves ahead like any good chess player would.

Look what has happened here:

Every province in the Country that counts for votes, just got a huge revenue boost to their taxbase. In Alberta for example, it equates to $400 million in additional revenue.

In Alberta, where one could say the biggest overall hit took place yesterday, the only true damage done was to small trusts looking to develop the Oilsands... the big ones will barely burp over this.

In Ottawa, Jack Layton is suddenly Stevo's best friend, and thanks to a couple of bones thrown by Harper, now looks like the most effective option on the table for left leaning voters.

Harper has in 2 days effectively shown the Liberals to useless, obstructionist, and generally ineffective as an opposition.

He just negated the Bob Rae effect of pulling voters from the NDP to the Liberals, and most likely left Iggy with a completely split Liberal party in the next election.

On top of this, he's given every existing trust four years to get ready for the new tax changes, while allowing Seniors to enjoy tax breaks and income splitting now.

Guess whats next?

Jack Layton is going to get another bone thrown to him in relation to the time table implementation of the "Clean Air Act", further pounding the left leaning liberal base down and moving them to the NDP.

In about 2 years, a whole new slew of Tax Credit programs will be announced, almost exclusively for the OilSands, allowing the major trusts to become revenue neutral again, and still provide higher than conventional rates of return.

Meanwhile, Harper just went a long way towards fixing the fiscal imbalance on paper for Quebec, Ontario, and Alberta, and BC.

So whats next? Can you say "Jack Layton, leader of the official opposition".

Heh:)

Joanne (True Blue) said...

Harper is a long term player, and thinks 10 moves ahead like any good chess player would.

Joe Calgary, you nailed it! Congratulations!!

What a great piece of punditry (and not even an F-word this time!!!).

Look out Don Martin! Joe Calgary's after your job!! (only Joe is much, much better).

PGP said...

Pulled the bandaid off with one quick yank.....yes it hurts!

Good thing there are so many lemmings throwing their bodies off the end of the earth though! Gives us a chance to pick up the pieces and make the best of it.

liberal supporter said...

Liberal or Conservative, the markets always try to punish any government changing any rules without telling everyone in advance.

They'll get over it. But the government may not get the increased revenue they are hoping for, as the new rules also allow ownership to move offshore:

http://snipurl.com/112lu

Sara said...

for one thing if anyone looses 20% on their investment I'd be asking my advisor why. They are high risk investments, have you ever heard of don't put all your eggs in one basket...

on another topic Jo, in Question Period Bev Oda said that it was the government of ON that stopped the games from coming to TO.... hmmm MQsquinty again eh

Dirk said...

This is really too much. If Dalton were in Harper's shoes now, we'd be hearing cries of "yet another broken promise" and how Liberals are all about screwing over seniors and hoarding taxes.

I actually agree in principle with Flaherty's announcement on taxing income trusts, but you've got to admit that the lead-up is terrible. There are valid reasons why many columnists and non-partisan people up on their current affairs are disturbed by this. Last year, when Goodale first mused about taxing income trusts, Harper and Solberg would tell anyone who would listen that the Liberals should leave income trusts alone. And in their election literature they reiterated their commitment to not taxing income trusts. Joe Calgary -- I haven't seen any of those statements where Harper says he'd create an alternate program for seniors if he taxed income trusts. I have, however, seen many CPC and Harper commitments to not tax income trusts, with no qualifiers.

On many conservative blogs, including this one, people are using bandaid analogies like PGP's and are celebrating Harper's responsible government. Again, I'm glad a stupid decision was fixed, but the CPC and its supporters shouldn't be congratulating themselves. If Harper amd the CPC are truly the farsighted advocates of responsible government they say they are, they'd have endorsed taxing income trusts from the beginning, and indicated as much in their campaign literature. That would have been responsible.

Joanne (True Blue) said...

in Question Period Bev Oda said that it was the government of ON that stopped the games from coming to TO.... hmmm MQsquinty again eh

lol! I just watched QP on Garth's site and saw that. Gee that's too bad. There was some nice provincial land in Caledonia...

liberal supporter said...

The games wouldn't have come to Toronto in any eveny, but Expo 2015 might have.

The feds offered 600 million, the projected overrun is 700 million to 2.2 billion. The feds claimed some regulation prevents them from "backstopping" (pay the rest of the overrun, whatever it is) and they think Ontario should do that. They cited BC backstopping the 2010 WInter Olympics, and think Ontario should do the same.

Ontario says they can't afford it. Remember the fiscal imbalance?

Strange day, Ontario Liberals fiscally prudent, and Ottawa CPC making a tax grab...

vicki said...

joe calgary..the layton-enviro move IMHO was to shock Layton. All the whining in the House usually gets no real response. I think Harper knows Layton cannot come up with anything better...and basically called his bluff..it will be interesting to watch. Bottom line: ...Harper is a few steps ahead.
Why haven't we heard in the media how well the stocks and economy have been in the last few months?The only one I know so far that is groaning about the stocks is a 'retiree' that is very rich....no sympathy from me.

Joanne (True Blue) said...

But the government may not get the increased revenue they are hoping for, as the new rules also allow ownership to move offshore

L.S. Sorry, I'm not familiar with that. Maybe Garth has some insight.

Vicki - All great points. I'm sure that low-income seniors aren't too worried about income trusts. They're just trying to find something to eat other than tea and toast, having had no money to invest in the first place.

Joanne (True Blue) said...

Dirk, we can't all see into the future. Sometimes situations change. You have to be flexible. A lot of innocent people were affected though, that's for sure.

I'm sure the opposition will use this as ammunition in the next election.

Dirk said...

"Dirk, we can't all see into the future. Sometimes situations change."

Nothing here changed -- last year RBC exects openly discussed the option of converting the firm to an income trust. There are no new trends here. People have been saying for well over a year that income trusts represent a huge loss of federal tax revenues. While Goodale was openly thinking about taxing the trusts, Harper and the CPC were adamant that the status quo remain. If you want the quotes to back it up, check out Conservative Christian's blog entry on the matter -- some anonymous person posted about two pages worth of Harper and CPC quotes from last fall.

While I'm glad this problem was fixed, it should never have become a problem in the first place. Both the Liberals and Conservatives did not act responsibly.

Swift said...

LIIS, LIES, LIES


Goodale and Flaherty lied abouty the need to kill trusts to stop the tax leakage! #0 billion dollars has been lost by trust investors because of lies. Retirees are forced into poverty because of lies. Non trust holders taxes will be higher because of lies. Canadian trust investors will lose billions of each year income after 2011. The shortfall of revenue from the taxes not collected from trust investors will have to be paid by the rest of Canadians.
Halloween trick or treat? Flaherty decided trick, it's sure no treat for most Canadians even if they didn't own a trust unit.,

Mary said...

I like your input Joe Calgary!
You make a lot of sense!

Joe Calgary said...

Yeah well Swift, one man's lie is anothers vague comment with no specific intent. Live with it, get over it.

Better yet, show me a politician who doesn't backpeddle at some point in his or her career, and I'll show you a Camel sitting in the middle of a farm field at the foot of the rockies.

(He really is there too)

Joanne (True Blue) said...

To be fair, we need to be sympathetic to the losses sustained by many innocent Canadian investors. Many of them volunteered to get this government in power. That would really add insult to injury.

Swift said...

I juust realized that the amount of extra tax paid by a trust holder is way underestimated by my example of Joe in a previous post. I should have done as foloows. If joe has a stock that pays him $100 dollars he gets taxed on a hundred dollars at less than his regular tax rate, thanks to the dividend tax credit. This means that even a top tax bracket individual pays less than $50 in taxes. When the company converts to a trust the distribution might be $300. This is not an unreasonable example; remember the company profits are split three ways and the trust pays all profits to the unit holder. thus the high tax bracket individual pays almost $150 dollars in tax on the trust distribution. By paying over a hundred dollars more in tax on what was a $100 dividend trust holders are avoiding tax? Strange math you are using.

Swift said...

Some more information on our new system of fair taxation. Trusts sometimes pay out more money than they make in profits. This portion of the distribution is known as return of capital. In a company money that is not profits is never taxed. NEVER! Well maybe if the company has lost money there is a time limit you can carry forward your tax loss, but for a profitable company without tax losses this is never taxed.

Real estate investment trusts typically have a large portion of their distributions classified as return of capital. CREIT, a large real estate trust pays its unitholders $.1067 each month for each unit held. Of this amount $.04713 is return of capital. If CREIT were still a company this money would not be taxed at all except in the unlikely case, for a company, it was given out as a dividend. But since it is a trust, like other long established trusts, it gives out a large amunt of money that ewould be able to be retained tax free by a company.

When the unit holder gets the money it will be taxed sooner or later as capital gains. in other words the government collects more tax from a REIT than it would from a regular company. Now you know why Flaherty didn't kill the REITs the government is collecting, not just as much tax, but even more tax, even though the REIT never pays taxes. Did somebody say that trusts were a way to avoid taxes?

Swift said...

Some more information on our new system of fair taxation. Trusts sometimes pay out more money than they make in profits. This portion of the distribution is known as return of capital. In a company money that is not profits is never taxed. NEVER! Well maybe if the company has lost money there is a time limit you can carry forward your tax loss, but for a profitable company without tax losses this is never taxed.

Real estate investment trusts typically have a large portion of their distributions classified as return of capital. CREIT, a large real estate trust pays its unitholders $.1067 each month for each unit held. Of this amount $.04713 is return of capital. If CREIT were still a company this money would not be taxed at all except in the unlikely case, for a company, it was given out as a dividend. But since it is a trust, like other long established trusts, it gives out a large amunt of money that ewould be able to be retained tax free by a company.

When the unit holder gets the money it will be taxed sooner or later as capital gains. in other words the government collects more tax from a REIT than it would from a regular company. Now you know why Flaherty didn't kill the REITs the government is collecting, not just as much tax, but even more tax, even though the REIT never pays taxes. Did somebody say that trusts were a way to avoid taxes?

Swift said...

For those of you who think my position o trusts is purely because I have lost money on my investments I'll give this answer. Did I have trusts? Yes. Did I loose money? Yes. Am I going to be able to recover? Yes. Why? Because my non trusts have done VERY WELL OVER THE YEARS.
How well? Before the trust meltdown the average annual return on my portfolio was almost twenty percent, I have been managing this portfolio long enough that even Flaherty's Halloween trick won't have changed the average return much. Find out how many mutual funds have that kind of return over a period of more than a year or two. So I expect my portfolio to be back to where it was on Halloween quite soon.

I realize that most people do not do as well in the market as I do. It's going to take them much longer to recover. For the average pensioner, relying on capital gains to put food on the table is a losing proposition. Capital gains are not as reliable as the distributions. Most people (and most mutual fund managers) have trouble just matching the market.
Killing the trusts is a much bigger problem for most people who need a regular income from their investments than it will be for me.

I was concerned enogh about Caladonia and Ipperwash to go to the march for justice, even though we were told that we were risking our lives. I don't know anybody who lives in either town. Injustice is injustice. If you only fight against it when you're affected it will never be eliminated. And if you don't fight against injustice when you are affected, it will not be eliminated.

Flaherty has not given a valid reason to kill the trusts and this has hurt a lot of people directly. It hurts all Canadians indirectly. McWimpy has abandonned the residents of Caledonia and wasted millions of dollars of taxpayers money. Now he's trying to pass the bill for his incompetence on to all Canadians. History shows that people who don't stand up for freedom and justice soon won't have either.

Joanne (True Blue) said...

Swift, I'm glad your portfolio will recover.

I admire your passion and sense of responsibility.

Too many people have the attitude that as long as it doesn't affect them, no need to get involved.