Many investors had a lousy weekend licking their income trust wounds in the wake of Jim Flaherty’s Hallowe’en bombshell announcement. Oppositon MPs were ready to pounce when the fiannce minister walked into QP today, taking up the cause of small investors and also big corporations whose plans were dashed.
For his part, Flaherty hung tough, refusing to apologize and attacking the Liberals for having no real idea what they’ere doing on the income trust file. Was this any comfort to anyone? Is there a reason they call it question period, instead of answer period?
To view the video, click here.
25 comments ↓
Please consider that the only investors that will be hurt are Canadian pensioners. Working Canadians and Americans will not be hurt.
For those in Canada
(1) For working Canadians, the new tax on distributions means virtually nothing changes. In fact, the net result might well be a tax cut, not a tax hike, with a current tax rate of 46 percent on dividend income. That means whether paid at the source or upon receipt, the new rate of 45.5 percent is a tax cut on the net cash flowing into their accounts.
(2) It’s actually the non-taxable Canadians that are going to be hurt—again. Right now, the tax liability for non-taxable or tax-deferred Canadian pension or retirement accounts is nil. And with the new changes, the result will be a net rate of 31.5 percent. This means that you will be hiking taxes on retirees (including union members and other tough voter groups) by that 31.5 percent. This, in turn, means that the public-sector pension funds will have to be topped off by Ottawa one way or another, given the trillion-dollar shortfall in current liabilities. Trusts were closing that gap–helping to reduce the cost to the government of that trillion dollars, which, if the tax law stays, will now have to be paid. So if you take away some cash now, you will only to have to return it in the pending years to come. That’s not too smart.
For those in the US.
(1) Anyone owning trust units in a non-taxable or qualified tax-deferred account will dump them. With the tax rate going from 15 percent to 41.5 percent, the trusts won’t work any more for non-taxable or qualified retirement or pension accounts in the US. This means that Canada won’t get the tax with the elimination of non-taxable retirement investors in the US. Right now, 15 percent is bad but not an insurmountable burden for retirement account investors in the US. But at 41.5 percent, it becomes a deal breaker. US Pensioner’s investment will leave and you wont’ even get their 15 percent any more.
(2) For taxable US investors, the current deal has 15 percent withheld, which is recoverable from Uncle Sam with a mostly dollar-for-dollar credit against US tax liabilities, thanks to the tax treaty between the US and Canada. The pending legislation brings the net taxes to 41.5 percent, which, if the trusts continue to operate as currently structured, Uncle Sam will simply funnel the liability back to the Canadians with the same tax credit on our IRS forms. This means that potentially, if the trusts work their distributions the right way, i.e., the change just might have a zero impact for taxable account investors in the US, on thier net after-tax cash flows from Canadian trust investments. And the Canadian Dept of Finance won’t get one extra net dime from US taxpayers.
Now consider the negative impact!
Beyond the net impact on tax liabilities, there’s more happening in the Canadian market for trusts.
With the massive selloff in trust share prices, many of the quality companies, particularly those with quality assets and revenue streams (which include all of our petrol and business trusts inside the Portfolios of Personal Finance), will be ripe for takeover.
Most of the trusts have little voting control over the net companies, as most of the shares are trading in the public markets. This means both publicly traded US and overseas companies can grab some very nice companies at a discount to their recent market valuations.
But forget about just the public companies grabbing trusts; think private equity.
US and offshore private equity investors and funds will pick off trust shares and pull them into their stables of big cash-generating businesses. And with the revenues running against leveraged debt costs, it will be quite easy to not only take over control of Canadian companies by private equity firms but also to run the books to cut out the Canadian Dept of Finance from taxable profit streams.
This is what’s behind some of the bouncing in many trust shares in today’s markets.
There were other ways to achieve the same result in respect of income trusts which would have lessened the pain to seniors and middle class people like us. Existing income trusts could have been grandfathered. The tax relief period could have been allowed to be longer than 4 years. The tax rate levied in 4 years could have been a special lower rate. In short, you and your party have done nothing to protect this family from a $13,000 loss. Once again, the little guy takes it on the chin. Spare us your bull about saving Canadians …. we represent a family that is representative of many Canadians that your party just royally screwed.
To our tally as of today, it’s going to cost you 11 votes in the next election. We hope to increase that total exponentially.
For starters, we’re telling our family and close friends that all we want as a gift for Christmas and birthday is their promise not to vote Conservative in the next election.
As for this family, take it as a cast in stone promise we WILL NEVER EVER VOTE CONSERVATIVE IN OUR LIFETIME. We are going to do everything in our power to see you all defeated in the next election. We have 13,000 reasons for this.
If your not getting it, WE ARE DAMN FRIGGIN ANGRY!!!!!!!!!!!!!!!
P.S. Tell your leader he can stick it where the sun don’t shine.
My mother always told us that Integrity is one of the main principles in life that we must protect and endeavor to build while growing up. She also told us that a liar is worse than a thief. The recent action of The Newly elected Tory Minority Government with respect to Income Trusts leads me to question if mother was in fact correct.
I was a new recruit, a new Conservative Supporter liking the new young face of Mr. Harper and looking forward to integrity in government. The blatant disregard of a Campaign Promise with regard to Income Trusts together with the pain and suffering it has AND IS causing the senior population in Canada is reprehensible.
My Vote, as well as ALL of my family’s votes in the next general election will be for a party with Integrity and campaign ethics. Will the Conservative party meet these tests next go around?????
A Very Disappointed Retiree,
Steve
“P.S. Tell your leader he can stick it where the sun don’t shine.” by A May
All these people who rant about telling your leader this or tell your leader that. Who are these people trying to tell. Garth is an Independant so he is his own leader I would believe. I don’t think the Prime Minister would really care what Garth had to say to him as he is not his leader I believe.
When A May says “we will never ever vote Conservative in our lifetime” I think you might be running out of parties to vote for. Conservatives lied about the income trust. Liberals lied about the GST. Could maybe try the NDP if they ever get to power I am sure there will be some lies told by them that come to the surface. I can’t see what all the fuss is about. If you trusted the party for their word then that seems to be the problem in the first place. Politicians lie as a baker bakes bread. it is what the do for the most part. Garth is cast from a different mold however and unfortunately people like him seem to be few and far between. Regards
One thing to keep in mind is that the trust sector has greatly outperformed the market over the last few years. Unless people bought heavily into trusts right before the decision, they are probably still sitting on fairly impressive gains. Much of those gains are basically due to the capitalization of the tax savings into the share price.
Curiously, everyone is making noises about how unfair it was to end this special treatment, but no one ever suggests that these investors compensate taxpayers for the huge investment gains they made as a result of not paying tax. Those gains were made at taxpayers’ expense.
Wel – since all parties basically support this move, it was inevitable to make a decision that affects a few to not have a situation that would devastate the whole county’s economy , and no party will reverse this decision these invewstors will just have to collect those dividends for another four years and those IT companies will just have to avoid paying taxes for another four years and hopefully other money markets will fill the gap.
Already ManuLife is advertising a monthly dividend plan.
Geoffrey Laxton on 11.06.06 9:03 am
Re;
Old enough to remember on 11.05.06 12:41 pm
As Garth said the main issue about income trusts is that Prime Minister gave his word to not tax them and now he has reneged. I am 41 years old and generally a prudent investor. In my investment in the income sector most risks are mitigated by the fact that I have a diversified portfolio of over 80 income trusts. I took a calculated risk by concentrating in income trusts. The only risk that I didn’t account for in this investment was that Prime Minister Harper would lie to seniors! I had no idea that he would actually lie to seniors about income trusts and announce that he would tax their retirement income over and above current over taxation. Sheesh!
————————-
“As Garth said the main issue about income trusts is that Prime Minister gave his word to not tax them and now he has reneged.”
Geoffrey, other than preoccupation, what is the purpose for repetition about something of which most people are in agreement?
“I am 41 years old and generally a prudent investor.”…..”I had no idea that he would actually lie ”
Geoffrey, unfortunately you have been taught a lesson at some cost. There is an old German adage, to wit: “Ve gedt too soon oldt, und too late schmardt.”
“I took a calculated risk….by concentrating in income trusts.”
Finally, someone candidly admitting culpability. The operative word being “calculated.” Geoffrey, congratulations for having the courage to look into a mirror. May I infer a tacit admission that your decision was based SOLELY on INSIDER INFORMATION?
BTW, in an earlier post you stated that for the past 9 years your occupation is, “a fully licensed stock broker.” In another you advised, “Now I owe my broker an additional $15000.” Aren’t you both one and the same?
I respect anyone’s sensible view and their conviction of its’ merit. The logic and new information thus presented, gives cause for open minded bloggers to reflect, and reconsider an opposing position. That is the reason for debate, as far as I’m concerned. Anything else is just so much mud slinging.
In that light Geof, I enjoy reading, and look forward, to your posts.
Shannon on 11.06.06 7:01 pm
Shannon,
The whole problem with the income trust issue is that they have been villified as an investment by several people that have somehow caught the ear of Jim Flaherty. Please read the other side of the story. I know that Garth doesn’t like links to outside sites too much, but this has a lot of information as to why Income Trusts are good for the economy. Please read and give me your opinion. I would appreciate hearing your point of view.
Geoffrey
Garth if you don’t approve of the link I won’t post it again. I have no affiliation with this site, it is just very informative and a nice summary.
http://www.acuityfunds.com/Acuity/AcuityWeb2001.nsf/8decb0fd3ba9c74585256ac60074725a/aea829665cf3d8e4852570c3005bbf0f/$FILE/Income%20Trust%20Consultation%20Report%20November%202005.pdf
I can’t believe the number of people who are shocked that Mr. Harper lied about income trusts and then they go on and on about how dishonest politicians are. Well, the only reason politicians lie is because voters reward dishonesty. The only way to get elected is to tell voters that you will spend more on health care, more on education, more on military, etc. and at the same time you’ll give them deep tax cuts and pay off the debt. Of course it is impossible to earn less, spend more, and pay off your debt, but if you promise voters to do such miracles, they will vote for you in droves. If you are honest and tell them that if you to spend more on health care then you have to raise their taxes, then you won’t get a single vote. So being honest gets you nothing and lying gets you the PMs chair. As long as the voters reward lying, politicians will lie to get elected. So stop whining – it’s your own fault that you don’t use your brain when casting your ballot – Santa does not exist and there is no such thing as a free lunch. But voters never learn from their mistakes and fall for the same spend more and pay less gimmick over and over again.
Steve on 11.06.06 6:49 pm
Steve,
I really feel that you don’t understand how income trusts work and why they are good for the Canadian economy. Please the above link and let me know what your opinion is.
Respectfully,
Geoffrey
To Steve, ON, When it comes to integrity, the first thing to be able to do is to say you got it wrong.
Given the mess Mr. Flaherty made of Ontario finances, I would be last one to support him. However, in his opinion, he has come to the conclusion that the election promise of not touching income trusts was wrong…and he has said so!
He could have tried to hide the tax changes in some omnibus bill, for example explaining the income splitting provisions (a good thing) in the upcoming bill but not the tax treatment on income trusts (good/bad depending on your situation)…that would have been lying and lacking integrity!!
So while he may not know what he’s doing, I don’t think integrity is the issue!
You are right on and I wish I could vote for you—Honesty is old fashioned but it is still the best policy.
Irate Tolerant on 11.06.06 8:11 pm
Irate Tolerant,
I am glad that you enjoy my posts.
Here are my responses to some of your points:
“Geoffrey, other than preoccupation, what is the purpose for repetition about something of which most people are in agreement?”
I am not sure what you think that I am repeating that most people are in agreement with. I am only trying to educate myself and learn from others or teach others something that I know.
“May I infer a tacit admission that your decision was based SOLELY on INSIDER INFORMATION?”
In my industry “insider information” means specifically that one has access to material non-public information about a publicly traded company’s finances. I am not sure what context you mean, but I assume you mean I have inside information about the investment industry, which is true.
“BTW, in an earlier post you stated that for the past 9 years your occupation is, “a fully licensed stock broker.†In another you advised, “Now I owe my broker an additional $15000.†Aren’t you both one and the same?”
I shall try to explain this apparent double speak. It might surprise you to know that although I am “fully licensed” I work for a discount brokerage from which I derive a salary. My wife is expecting so I dare not go on straight commission. I have an outside brokerage account that is overseen by my father who is also a broker. So it is not one and the same.
I respect open and honest debate and invite discussion on matters that are of utmost importance to people’s lives, such as the income trust issue.
Your comments and insights are appreciated. May we all learn together.
Geoffrey
Also, it is difficult to know how much to reveal of oneself at first in public. You think to yourself, will I get into trouble for saying that? It is a liberating experience revealing oneself in public and describing one’s frustrations and insights. It is like going to nude beach for the first time in St Martin!
One can hope to a make a difference in this world.
Geoffrey
I think I know how you feel. — Garth
Unfortunately, it seems that the average Canadian is going to lose out when foreign private equity firms move in to scoop up the income trusts. The economy will suffer because of it. The government receives revenues from income taxes, corporate taxes, import duties and GST. The problem is that the Conservatives should have cut income taxes and corporate taxes deeper and maintained the GST at it’s current level. Now that the GST is cut, they are frantically looking for sacraficial goats to slaughter to make up for lost revenue with the GST cut, which is debatably not the most prudent thing to cut. So they go after income trusts, which had a net positive effect on the Canadian economy. When I read about what income trusts detractors say in the newspaper it kind of reminds me of the inquisition. They don’t understand them so burn them at the stake!
I watch with incredible frustration as the Conservative government blames Income Trusts for Billions in so-called “Tax Leakage”. And then they relate this imaginary Tax Leakage to the funding health care in Canada. LIARS turned SPINNERS!
The government has done an excellent job of avoiding any discussion about the real victims of their proposed Trust tax, the average Canadian investor, who’s Billions in investment savings have evaporated, thanks to the Tories.
I am detecting people becoming angrier every day here. And as some have said, not only they, but their whole family and anyone else they can convince WILL NOT be voting Conservative. Nothing hits people like hits to the wallet.
Interesting to hear from a 41-yr old. Seniors are not the only ones affected. Many who have put money into mutual funds for educating their children or for retirement income are also affected by this.
The Conservative Party should put a moratorium on future conversions and leave the existing funds alone.
To Garth, the only MP worth anything,
I have not seen one iota of any proof that there is a tax leakage.It might sound that there is, but one has to take into account all the one time CG’s one must pay for trusting.
Then the 15% holding tax on US citizens.
Plus, many people are in a higher tax bracket then the corporation rate.
Yet ,you will vote on something that needs to be studied before destroying 35 billion dollars and Canada’s reputation.
Otherwise, we are in the same class as Russia and Cuba.
Thea – I do so agree. A year or so ago, our local newspaper published a story on the best prime minister we NEVER had – referring to Robert Stanfield. I remember that time – I was not yet old enough to vote – when Robert Stanfield, lacking in charisma and charm but packed with brains, honesty and integrity, lost out to the charismatic, double-speaking, arrogant Pierre Trudeau.
Pierre Trudeau brought us double-digit inflation, double-digit interest rates and double-digit unemployment. And yet Canada lapped him up. Even today, he is still revered and I cannot understand why. I was affected by his mark on Canada – I lost my job because my employer was weighed down by high interest rates and I also had to postpone buying a home because of the job loss and incredibly high interest rates.
We do reward dishonesty. Jean Chretien did not scrap the GST as promised and yet we voted him in for a second term. Despite the Ad Scam scandal, we voted in Paul Martin who proceeded to make promises which cost us dearly. And, he did nothing substantive about Ad Scam.
Thea, unless we develop a collective brain, politicians will continue to lie in order to get into power.
While I do not condone lying, Stephen Harper had the cards stacked against him – personal attacks from the opposition and the media, hyperbole from the other side, etc.
I am not especially pleased about some of his turnabouts and I do hope that he makes some intelligent moves, especially in light of the green plan which pretty much sucks. I cannot envision another term with the Fibs in power, at both federal and provincial levels.
Here, in Ontario, we have had one slap in the face after another from the Fib provincial government.
I do not trust the NDP because I see them as rank hypocrites. I do not trust the Greens because, despite the best of intentions, they have no experience in running a country. If I had the choice, I would vote Rhino because at least they are good for a laugh – might as well have fun while being screwed, right?
So, fellow Canadians, will we demand honesty or will we continue to vote for the most charismatic liar?
Geoffrey,
Thanks for the reply. Please allow me to clarify my questions.
Perhaps I was mistaken, but I sensed that you were harping on Harper’s LIE.
Repitition is often necessary, but I frown on repitition for repitition’s sake.
The insider information comment was a clumsy way of asking; If Harper hadn’t made his infamous statements re taxes/trusts, thereby influencing you, and given your knowledge of market conditions, would you still have purchased stock on margin? Please explain your reasoning for either choice.
BTW, it behoves me to further clarify, that in my opinion many investors naively believed without reservation, that Harper’s promise constituted a guaranteed assurance. Plunging into the market for that reason alone, is tantamount to acting on insider information.
Certainly no comparison is intended, nor can be made with the information Martha Stewart received, except that in both instances a profit was expected.
I don’t believe this poll for a minute.
More propaganda from Can West Goebbels .
Tories steady in polls despite income trust uproar
Norma Greenaway, CanWest News Service; Ottawa Citizen
Published: Saturday, November 04, 2006
OTTAWA — Public support for the Harper government is holding at the strength it scored on election day nine months ago, despite the political storm this week over its flip-flop on taxing income trusts, a new poll has found.
Indeed, the national survey by Ipsos-Reid conducted for CanWest News Service paints a picture of an electorate that is virtually unmoved since voters gave Stephen Harper’s Conservatives a slim minority last January.
If an election were held today, the Conservatives would garner 37 per cent of the vote, up one point from the election. The Liberals would score 29 per cent, down one point, and the New Democratic Party would get 19 per cent, up two points.
The Bloc Quebecois would get nine per cent, down two points, and the Green party five per cent, exactly the same percentage as on voting day.
In Quebec, the Bloc stood at 38 per cent, down five points from the last poll in August, whereas Tory support was almost unchanged at 21 per cent, and the Liberals were down three points to 19 per cent.
“It (the survey) shows there is a lot of sound and fury out there about a number of issues,” said pollster Darrell Bricker. “But it doesn’t really seem to have percolated down into affecting partisan choice.”
The survey, conducted amid the furor over Tuesday’s surprise tax announcement, suggests Canadians are not rushing to punish the government. “It’s a fairly elite issue,” Bricker, president of Ipsos-Reid, said in an interview. “This is a stock market story. People know markets go up and down.”
Given the massive coverage of Harper’s reversal in income trusts, anger over the issue would have shown up in the survey if it were there, he argued.
Bricker said polling over the years has shown “stock market stories” have very little impact on how Canadians view political parties, or the health of the economy.
In this case, he said, Finance Minister Jim Flaherty managed to cushion the impact by balancing the new taxes on income trusts with significant new tax breaks for seniors.
The poll of 1,002 adults was conducted Tuesday through Thursday. In a sample this size, the margin of error is 3.1 percentage points, 19 times out of 20.
In other findings, it said a slim majority, 54 per cent, agreed with the statement that “Canada is better off today than it was one year ago.” Fifteen per cent of those surveyed agreed strongly with the statement.
Those living in Ontario (51 per cent) and Quebec (43 per cent) were less supportive of the statement than their counterparts elsewhere.
Despite the relatively upbeat mood, the findings show the Conservatives are still not in majority territory, and the Liberals, despite being leaderless, are still in the game.
“We’ve locked ourselves into this kind of minority scenario,” Bricker said. “The good news for the Liberals is that they haven’t dropped off the face of the planet. And the bad news for the Tories is that they haven’t been able to break out of this.”
Bricker predicted that once the Liberals have a leader on December, voters will start waking up and looking more seriously at the federal political choices.
Canadaians are notoriously slow to anger but once they are,look out .
This poll must have been conducted the day of and the day after the Income Trusts announcements .
I’d take this one with a huge grain of salt .
I’m troubled by the way Harper and his cronies organize tax policy. It seems rather than helping everyone, they selectively give hand outs to their favourite groups. Hence, we are soon getting a crazy quilt of special tax hand outs for groups that meet the approval of the religious right – namely one income, married, heterosexual couples with children enrolled in sports and who go to church. Pity those who are single parents, single people, widowed or gay. The tax burden falls to you people! When, Mr. Harper will all Canadians get an income tax cut or will we need to be a fundamentalist Christian to get that????
I guess we all need to live pious lives where women stay home and cook and look after our three children who are in bible class while the man goes out to earn money. That’s the “typical” , “average” family who will benefit from that hypocrite Harper’s tax policies.
see BP on 11.06.06 5:40 pm
for good explanation of income trust tax ramifications.
Anyone who is a cheerleader for income taxation measures and keeps saying how only investors who received poor advice from their financial advisors care to debate Seymour Schulich concerning income trust taxation?
Excerpt from article:
“Count Seymour Schulich, one of the country’s savviest owner-investors, is among the list of Canadians who are outraged by the recent decision by the federal government to start taxing income trusts in four years’ time.
Schulich, who along with partner Pierre Lassonde formed Franco Nevada and Euro Nevada in the early 1980s before selling to Newmont Mining for a major, major pile a few years back, has taken his outrage, via e-mail, to Jim Flaherty, the Minister of Finance.
“I believe you could have achieved your goal by grandfathering the existing trusts, banning new ones and putting a levy on the payouts to non-Canadians,” said Schulich, who is probably the largest individual investor in Canadian Oil Sands Income Trust, the country’s largest income trust. Schulich bought two million units in the trust two years back — because of splits, he now owns 10 million.
“To decimate the savings of Canadians who had faith in the Conservative government election pledges is unacceptable,” wrote Schulich, who is well-known for being one of country’s largest benefactors to universities. (For instance, the business school at York University is named after him because of the large donation he made.) He is also a member of the Order of Canada.
“The way they are doing it is wrong. I think it will cost them the next election,” said Schulich, who believes the government will lose the next election by what amounts to a decision to take on the retired people.
“Don’t mess around with the seniors. Today, with the Internet, they can organize,” he said in an interview, while adding that he is prepared to give the government the benefit of the doubt for the economic rationale for the decision, namely worries about productivity and investment in and by the trust sector.
Like a number of other investors Schulich — himself a senior citizen — would like to have some private time with Flaherty to ask him a couple of questions: What are you doing and why are you killing a $200-billion part of the country’s capital markets? As a follow-up, Schulich would tell Flaherty that he believes the government can get where it wants to go without doing this.
As well, he would point out some international comparisons that show four years isn’t that long before the taxes start to roll. For instance, he would tell Flaherty that the Australian government allowed 10 years and the United States three years before the tax kicked in.”
“Schulich wants to bend Flaherty’s ear
Says income trust move ill-advised, poorly executed”
Barry Critchley, Financial Post
Published: Monday, November 06, 2006
http://www.canada.com/nationalpost/financialpost/story.html?id=3a0c28c6-d90c-40e4-9f6f-f915bf7f4d1b&rfp=dta