|Print Version||Income Trusts|
As campaign slogans go, Expect More ranks right up there with the best of them. Simple, to the point, and full of hope. Will the government listen?
It's Time to Expect More is the latest move in the income trusts' attempt to bring the government to the table for meaningful consultations on tax changes that have adversely affected millions of Canadians. Sponsored by the Coalition of Canadian Energy Trusts, the campaign has been launched in Conservative heartland. Radio and print ads will play out over the next five weeks in Calgary. Plans are afoot to roll the campaign out beyond Calgary and into other provinces if enough interest is aroused.
The ads encourage Calgarians to send letters to their MP. The letters end by saying
This is about more than energy trusts in Alberta. It's about demonstrating honesty and respect for Albertans. It is never too late to get it right!
True enough. To add your voice to the campaign, click here.
Posted On Jul 11 01:01AM
Posted On Jul 08 11:29AM
To give you some perspective my portfolio is up 2.3% for the year. No one in their right mind id fully invested in this market. If you are down only 3% there is a good chance your portfolio will recover. You have to get red of the Trust's that have a high pay out ratio when the time is right. I took a loss on TPW.UN. I just purchased FCE.UN. You can see my strategy. Preferred share continue to recover.
Pierre Trudeu was re-elected after he told the bigest lie in Canadian history. John Cretian turned lieing into an art form. He told the same lies over and over. He got re-elected over and over. There must be some logic to this.
Posted On Jul 07 11:49PM
Lashing out in all directions? I don't think so. I have asserted that Flaherty's "Tax Fairness Plan", which he claimed on the basis of bogus study would prevent $500million annually in tax losses, is demonstrably unfair and will actually create significant annual tax losses. Everything I have posted has been to support that allegation, and most of it has been to address comments you have made. The result has been some lengthy, perhaps even long-winded posts, but it is hardly fair to characterize them as "lashing out in all directions". Incidentally, while my critiques may have been extensive they are far from exhaustive. There is a lot of material at http://caiti-online.blogspot.com/ that you might be interested in. (Be prepared to spend several hours).
As for me attacking you personally, well, I suppose accusing you of being a Tory operative when you aren't could be construed as a personal attack. I would be more inclined to call it an insult myself, but regardless, I retract the comment and apologize for it.
Not that it matters, but no, I did not sell my trusts after Flaherty's Folly played itself out. My portfolio was down 20% after the income trust tax was announced, as of Friday it is down 3%. According to you and the Tory spin-doctors, that means I have now recovered and have not lost anything. I disagree emphatically, for 3 reasons.
- The TSX index and the Income Trust index are both up about 16% since the trusts took the big hit. Conclusion, if Flaherty had not imposed his tax my portfolio would now be up around 16% instead of being flat. Had the general market gone down 10% instead and I tried to blame my whole 30% loss on Flaherty's tax the Government's apologists would, quite rightly, point out that Flaherty was not responsible for the last 10% of it. Well, neither can he deny that he is responsible for the fact that my portfolio is not 16% higher than it was October 31. The bottom line is income trusts are not worth as much as they were before he introduced the tax. The $35 billion of wealth destruction Flaherty inflicted is no myth, it is still with us, systemic and permanent.
- Since the tax was announced, I and other income trust investors have absorbed significantly more in distribution cuts than we have received in increases. In other words, our monthly income is down, substantially. Perhaps not all of the cuts are Flaherty's fault, but there's no denying a big portion of them are, and who knows what increases we might have received but didn't because of his action. This loss is permanent and will never be recovered, unless you make the ridiculous assumption that somehow the tax will ultimately stimulate the values and distribution capabilities of the trusts.
- The real pain is yet to come when the tax is imposed. The tax means that for those investors who have their savings in registered plans will see up to $.65 out of every $1.00 received in distributions go to taxes; 30% on distribution by the trust and the rest when the funds are withdrawn.
I have trouble understanding why it matters whether a decision is made for technical or political reasons. Are politicians never to be held accountable for anything? If significant promises are broken for reasons that do not stand up to logical analysis, have severe negative consequences, is "it's only politics" really all the justification that needs to be offered? The bottom line remains;
- the Tories imposed a tax they emphatically and frequently promised they wouldn't,
- they refuse to reveal the details of the study that purportedly justifies their action,
- their analysis makes the ridiculous assumption that registered plans do not and never will generate any tax revenue,
- other publicly available, fully transparent studies that have not been credibly challenged contradict the government's position.
If the government believed their analysis and acted accordingly, they are reckless and incompetent. If they did not believe it and have passed the act for other, undisclosed reasons they are liars. Either way, they are not fit to continue in power.
Posted On Jul 06 10:06AM
You are lashing out in all directions. You are expecting a technical debate on a political subject. Expert opinions on the size of the tax leakage just do not make a lot of difference. The decision is a political decision. You should not attack me personally. I am a private individual and represent no one but myself. I have a point of view that is different than your s. I hope my opinion is of some value to you. I was fortunate enough to profit from the incident because my investments were conservative and diversified. I suspect you sold your Income Trust’s when the price went down. I was very tempted to do that myself. I chose to keep my Trust’s and had the courage to purchase more while the price was down. I was fortunate that the price recovered.
Investing has a lot to do with politics. Governments are prone to making abrupt changes in policy that affect the value of your investments. This is why we diversify. When “Wage and Price Controls” were an issue the government made it a major election issue and promised not to implement them. Within months of being elected the government changes it’s mind. A lot of people lost a lot of money. This was the biggest lie that was ever told in Canadian politics. Looking back on the issue, I think it was the right thing to do at the time. Lesson learned: governments make decisions that they perceive as being for the greater good of Canada. Technical arguments do not always affect political decisions.
You cannot ignore the fact that you were unlucky and you made bad decisions.
My point of view is simple. Any one who owned conservative income trusts on October 31 and had the courage to hold on to those Trust’s, has now recovered all of their money. The market price of trust’s dropped when the decision was announced but most of them have recovered. The $25 billion loss is a myth. It was only a temporary drop in market value.
Interest rates (a decision of the bank of Canada) had a similar affect on Preferred Shares about a month ago. I lost $3000. As of today I have recovered about 60% of the loss. Government decisions affect the market every day.
Posted On Jul 03 01:10AM
And speaking of the former MP from Hamilton, she now writes a newspaper column, one of which clearly illustrated she lacked an understanding of how income trusts worked and what would be the impact of the new tax. I wrote this little story to help her understand the issue. Perhaps you will find it useful.
A Fable, the Flaherty Income Trust Tax and It's Regrettable Outcome.
The Ingawdwy Trust was a mature, stable business with predictable cash flow from selling religious memorabilia. It had 4 unitholders, each with 1,000 units:
- Sam - an American investor of average means. Paid US income tax, but as a non-resident of Canada filed no Canadian tax return.
- James - a wealthy fifty-something lawyer with a well-diversified investment portfolio. Some of his investments, including his Ingawdwy units, were in a self-directed RRSP, but he also had a substantial non-registered investment account.
- Sheila - An ex-MP newspaper columnist of somewhat-better-than-average means (she declines to disclose her age). All her savings, including the Ingawdwy units, were in an RRSP.
- Jane - a 65 year old widow of modest means. Her income consisted of her survivor CPP, OAS, and the income from her Ingawdwy units that she held in an RRIF. Her annual income tax bill was typically about $500.
Every month Ingawdwy paid $1.00 per unit or $4,000 to 5 payees. James, Sheila, and Jane each received $1,000. Sam got only $850, Ingawdwy sent the other $150 allocated to his units to the 5th payee, Revenue Canada. Sam was not too happy about this $150 withholding tax, but he did get some relief since he could use it as a tax credit against his US taxes. Each $150 withheld reduced his US taxes by $75. Not great, but tolerable.
When Flaherty's tax was implemented, Ingawdwy still had $4,000 to distribute each month. However, $1,200 (30%) of it now went directly to Revenue Canada, leaving only $2,800 for the unitholders, or $700 each. James, Sheila, and Jane each got their $700, but Sam was still stuck with the 15% withholding tax or $105, so he ended up with only $595.
Note that Ingawdwy's financial position was unchanged. It still issued 5 cheques every month to the same payees. The only difference is that Revenue Canada now received $1,305, the Canadian investors $700 each, and Sam got his $595. To suggest any kind of burden was put on Ingawdwy is not even spin, it is an outright lie. By any reasonable interpretation the entire "burden" was borne by the unit holders. Still, Revenue Canada got what it wanted, right? Well, unhappily there are always unintended consequences; the unitholders did have options.
Seeing more than 40% of his allocation going to Revenue Canada, Sam was not pleased. And to really rub salt in the wound, since the withholding tax was now a smaller amount the $75 he used to get as a credit against his US taxes was reduced to $52.50! In disgust, he sold his units to James at a substantial loss. He is now active in an extremist group whose objective is getting Alberta to secede from Canada and join the USA. Consequently, Revenue Canada lost the withholding tax it had expected to keep.
James didn't do too badly. He unloaded a few equities he had been waiting to sell, bought some strip bonds, and swapped the Ingawdwy units out of his RRSP, replacing them with the bonds. With the units now non-registered he was eligible for the tax credit, so every $300 that Ingawdwy sent to Revenue Canada that had been allocated to his units resulted in a $300 reduction to his income tax. He grumbled a bit about his cash flow, since he had to wait until filing his tax return to claim the benefit, but had to acknowledge that getting the units from Sam on the cheap probably made up for it. (He subsequently acquired even more units, but let's not get ahead of ourselves.) So, the $600/month Revenue Canada was collecting every month from Sam's and James' units was now being lost on James' personal taxes.
Sheila, being of a rather stormy temperament, was even angrier about the new tax than Sam, even though her cost was less. She demanded her financial advisor find her a way out. With considerable reluctance, her advisor outlined the "meltdown" strategy. Sheila could take out a very large personal loan and invest the proceeds, the interest on that loan being a deductible expense for income tax purposes. She could then withdraw the Ingawdwy units from her RRSP. This withdrawal was taxable income, but with a sufficient investment loan interest expense her total taxable income was unchanged. This was a very risky strategy and her advisor strongly advised against it. However, Sheila was determined that Revenue Canada was not going to benefit from this "unconscionable tax grab". She signed the affidavit her advisor insisted on which acknowledged she was proceeding against his counsel, the janitor witnessed it, and she went ahead with the plan. This put her in the same position as James, the $300 Ingawdwy was paying every month generated by her units was completely offset by a $300 reduction in her personal tax. So, Sheila carried on, grimly satisfied that she had cleverly and legally avoided the tax. However, there was a psychic cost she now has to bear. Before her savings were simply a benign asset that was happily reviewed every 6 months or so and otherwise ignored. Now, every day she anxiously checks the equity markets and interest rates, fearful, and rightly so, that a combination of low markets and high interest rates could inflict a serious loss on her before she can get that investment loan paid off. So far the markets have been stable, but the risk is always there and she is far from comfortable with it.
And what of Jane? Unfortunately, Jane had no option. She had no financial assets other than her RRIF and had neither the resources nor the inclination to take out a significant investment loan. Her only choice was to accept the $300 cut to her income. There was no practical investment alternative and no tax credit. So here Revenue Canada did in fact achieve a real increase in their collections, on the back of the most vulnerable of Ingawdwy's investors. Well, at least they did for a while.
Over time, the burden of this $300/month tax reduced Jane to bona fide destitution. Her RRIF, which she had expected to sustain her for life, ran out in only 5 years as she sold her units to James to cover her living expenses. At that point she no longer paid any income tax, and she now qualifies for $600/month in Guaranteed Income Supplement.
So, the $1,200 Revenue Canada collects every month from the Ingawdwy Trust is now entirely offset by credits against James's and Sheila's personal taxes. It no longer collects either the $150/month withholding tax from Sam or the $500/year income tax from Jane. And they are now on the hook for a $600/month expense to pay Jane's GIS!
Happily, Jane is a feisty ol' gal and is reasonably sanguine about her circumstances. She is in good health, and is determined she will live to at least 110 "to make that SOB Flaherty pay in full, and then some!". Her doctor says her chances are very good.
MORAL: Greed generates it's own punishment.
Posted On Jul 03 01:03AM
You are very excited about this topic. I have to assume that you lost money on Income Trusts.
"Excited" doesn't quite cut it. Try "Angry", "Supremely p'd off", or better yet "Mad as H***". Yes, I lost money, and I had considerably more than 15% of my assets in income trusts, in no small part because Mr. Harper himself promised, emphatically, unequivocally, and frequently, that "A Conservative government will protect seniors and NOT tax income trusts."
Since you won't (can't?) offer any rebuttal to my arguments and simply persist in repeating the Tory talking points I have to assume you are an active member of the Conservative Party. Probably an assistant to an MP or something.
These studies remember are only projections. They are based on assumptions. You must admit that there is tax leakage. The tax leakage is sufficient to encourage BCE, and Telus to spend a small fortune to convert. The exact size of the leakage is really not that important.
Constantly repeating something that is wrong does not make it correct. Of course studies are projections based on assumptions, and when different studies come to different conclusions one has to make a judgement as to which starts with the more reasonable assumptions and is logically more sound. On that basis, the overwhelming preponderance of evidence is that the tax leakage is minimal or non-existent. So, no, I do not admit that there is tax leakage.
We have a government study that, according to Flaherty, concludes the income trusts will be responsible for $500 million annually. They refuse to make the details available for public scrutiny. We do know they make the preposterous assumption that the government will never collect any taxes from RRSPs, RRIFs, and RPPs.
We have several studies, prepared by credible economists, which conclude the government is wrong. These studies make reasonable, conservative (small c!) assumptions, are publicly available, and have not been credibly challenged.
Seems like a slam-dunk to me. The government's study is bogus, and using it to support the implementation of this tax was incredibly irresponsible.
Funny you should bring up BCE and Telus. Ostensibly one of the biggest motivations for the Tories to introduce the tax when they did was to prevent them from converting to trusts, which was supposedly going to cost the treasury so much in tax leakage. Neither corporation has paid any tax for several years, nor were they expecting to for at least another 4 years. Had they trusted tax collections from them would have been immediate and substantial. Now BCE is being taken private under a leveraged buyout and as a standalone enterprise will, under a Flaherty type analysis, pay no tax for decades. (Of course, as I've pointed out, Flaherty's analysis is bogus. Insofar as BCE's distributions will be used by the Ontario Teachers' Pension Plan to fund pension payments there will be significant taxes collected on those withdrawals.)
Governments are voted into power to provide leadership. The decisions they make are not always popular. Wage and Price Controls, Free Trade, The National Energy Program, and the GST are all examples of government leadership. ….. Sometimes politicians have to break their promises.
Yes, sometimes governments have to do unpopular things, and when they do they better be right. The Liberals' NEP was judged bad policy and it cost them dearly for a generation. Now I and others in my situation know exactly how the victims of the NEP felt; the income trust tax policy is terrible policy. And it's going to cost the Tories substantial support for a generation. Make that three generations - many of us are grandparents. The wound may be small, but it goes right to the bone. And it festers.
The GST on the other hand has now been generally accepted as sound policy. But it does remind me that a certain MP in Hamilton actually had the decency to put her decision to support her party when it broke a promise to rescind the GST to the judgement of her electors. Oh how I wish Harper would do the same. He would have a tough time keeping his seat, and the exposure it would give the issue would certainly help our cause.
Income Trust will be taxable after 2012. That’s not going to change.
Unhappily you are probably correct. However, there will be a general election before than, and I think the odds are significantly more than 50% it will end up being a 10% Liberal tax rather than a 30% Tory tax.
Posted On Jul 01 01:54PM
You are very excited about this topic. I have to assume that you lost money on Income Trusts. As an investor I can share your pain. I just lost $3,000 on Preferred Shares. But like the Income Trusts, Preferred shares (if they are quality investments) will recover. Investing is taking risk. You have to have a lot of different strategies to succeed. If you have more than 15% of you portfolio in Income Trusts, you are taking a huge risk. You don’t win all the time.
I didn’t mean to discard your study so lightly. I’m sure that some very talented people burned the midnight oil to come up with a projection. The whole purpose of the exercise was to prove how large the tax leakage was. These studies remember are only projections. They are based on assumptions.
You must admit that there is tax leakage. The tax leakage is sufficient to encourage BCE, and Telus to spend a small fortune to convert. The exact size of the leakage is really not that important. It is now a thing of the past.
Governments are voted into power to provide leadership. The decisions they make are not always popular. Wage and Price Controls, Free Trade, The National Energy Program, and the GST are all examples of government leadership. Some of these decisions are still with us today. Others were short tem solutions. Income Trust will be taxable after 2012. That’s not going to change. If you still own your Income Trusts you are probably getting more than 5% dividend. Don’t underestimate the value of the dividend. You can afford to wait until the price recovers as long as the company is making money.
Good investors look ahead to the next paradigm. They don’t dwell on the last one.
Wage and Price controls, in case you don’t remember, were implemented within month of an election. During the election Pierre Trudeau promised vehemently that he would not implement Wage and Price Controls. Sometimes politicians have to break their promises. I believe it was justified at the time. No one really knows what the studies proved.
Posted On Jun 29 05:28PM
Figures don't lie, but people with a vested interest can use them to prove any point of view.
Respectfully, sir, this is a cop out. To follow your logic means no argument, no matter how rigourously presented and how logically sound it may be needs to be accepted; it can simply be dismissed as someone's "point of view". To challenge a study on the basis that you don't accept one or more of the premises or that the logic behind it is unsound is fair ball. To reject it simply because it reflects someone's p.o.v. is intellectually dishonest; it's the equivalent of saying "My mind is made up - don't bother me with facts or logic".
Don't you find it the least bit offensive that the government broke a significant promise on the basis of such a study which they refuse to make public? A study which is contradicted by several other studies that are publicly available, fully transparent, and which IMO have never been credibly challenged? Personally I think it's outrageous, all the more so when we were promised transparency by our "new" government. Shame on James Flaherty and the Department of Finance for not releasing it. Shame on the Conservative caucus for not demanding it. And shame on the Senators for not forcing them to release it as a condition for passing the budget itself.
The amount of the tax leakage is somewhat irrelevant. There is tax leakage and there has to be some justification for taxing one company and not another.
You won't rebut the arguments that state otherwise, but you continue to assert there is tax leakage. I say the onus is on Flaherty and the DoF to prove there is tax leakage, and if it's there the amount is hardly irrelevant. If it is small relative to the damage it inflicted on the capital markets in general and the income trust investors in particular then it was irresponsible to say the least to proceed with the tax.
Your comment about taxing one company (i.e. a corporation) and not another (i.e. an income trust) perpetuates a misunderstanding about the impact of the new trust tax. The reality is the trusts themselves will not be affected directly at all. (They will be affected indirectly, adversely and significantly, but that's another story). The only adjustment the trusts have to make will be to increase the amount paid to Revenue Canada and reduce everyone else's accordingly, total cash flow and all other financial metrics will be unchanged. This is not ideology or opinion, it is mathematically demonstrable fact. The burden of the new tax falls entirely on the unitholders who will find their distributions reduced by 30%, not the income trusts paying those distributions. This is materially different from corporate taxation. If there were no corporate tax, then theoretically corporate profits could be accumulated as retained earnings indefinitely and Revenue Canada would never collect any tax. (I presume you're aware that if an income trust retained any profit it would already be taxed at the highest personal rate in its jurisdiction, so unlike corporations the publicly traded trusts are virtually compelled to distribute all their earnings)
If there were not tax leakage then there would be no reason for companies to converting to Income Trust’s. If all companies converted to Income Trust’s we would be in serious trouble.
Yeah we sure wouldn't want anymore enterprises like Trinidad Drilling; one that has increased its distributions by 45% annually since trusting in 2002, which, coupled with the increase in the number of units, means Revenue Canada is now collecting at least 400 times as much in taxes. Much better we should have more enterprises like Hollinger Inc., a company so focused on enriching Messrs. Black & Radler that the common shareholders have seen virtually all of their equity disappear. A company whose bankruptcy will generate losses that will deprive Revenue Canada of more taxes than it paid in the last 50 years. And no, tax leakage/avoidance was not what was driving the demand for income trusts; it was the demand for income on the part of investors. Plus the fact that many of us think the discipline imposed on management by the trust structure is a good thing for the unitholders.
Income Trust's are companies that were exempt from tax as an incentive to get ordinary people to purchase shares. This was designed to develop the resource. The resource is now developed and paying well. The tax break is no longer justified. It was nice to get the dividends and capital gain while it lasted, but it is not fair taxation.
Very misleading. Trusts have been around for centuries. They were not introduced as a tax incentive to develop a specific resource; they were adapted to that end, just as they have been adapted to structure mutual funds, settle estates, manage assets for minors, politicians, and other incompetents, and 1001 other things. And even if we accept your claim that one resource is now developed, why should the structure not be available for those that aren't? If it was okay to leave the structure in place so Pengrowth could develop its natural gas assets, why shouldn't it be left so AlterNRG could develop its clean coal technology and assets?
As for your comment about tax breaks and fair taxation, you are buying into Flaherty's spin; calling the legislation a "tax fairness plan" is pure, Orwellian double speak. I claim there is no tax break, and the new tax makes the system considerably less fair. Without the new tax, the income trusts distribute all their earnings to the unitholders, and they report that income and pay taxes on it according to their circumstances, just the same as they would for any other taxable income. Simple, straightforward, and equitable; Revenue Canada collects the same taxes from economic activity whether it is generated from proprietorships, partnerships, salaries, interest, or income trust earnings. Under the new tax, the total tax burden on the earnings of a publicly traded income trust held in a RRSP, RRIF, or RPP will be as much as 65%! (30% initially by the trust, the rest when the beneficiary brings withdraws what's left from the registered plan). How is it fair to discriminate against IT distributions compared to other earnings? I concede the same inequitable burden is imposed on corporate dividends in registered accounts, but two wrongs don't make a right and neither do two unfairnesses create fairness.
And it gets worse. Only the publicly traded income trusts, the ones ordinary investors have access to, are subject to this new tax. Wealthy individuals and institutional investors will still be able to establish private trusts which will be free to invest as before without the new tax burden. And for investors with sufficient savings to have a combination of registered and open savings and a truly diversified portfolio the trust assets can be moved out of the registered plans and replaced with cash or debt instruments, thus avoiding the double taxation hit. It is the small investor of limited means who will bear the burden of this new tax. If there is any justification at all for Flaherty's new tax, fairness is definitely not it.
I have projected my income for 25 years. Under the new budget my wife and I will bring in about $70,000 a year and pay about 12% tax for the rest of my life. The government can only give seniors tax breaks like that when they tax all companies fairly.
Well done. (I do mean that sincerely). But don't you feel just a little bit guilty that someone still in the accumulation phase of their life and saving for their retirement is going to have to do so against the wind of a 30% tax levied as they go along that wasn't there when you were still building up your savings? As for the government's ability to afford current tax rates, as I have argued the imposition of the new tax is going to impair it rather than help.
Posted On Jun 28 08:01PM
I have projected my income for 25 years. Under the new budget my wife and I will bring in about $70,000 a year and pay about 12% tax for the rest of my life. The government can only give seniors tax breaks like that when they tax all companies fairly. Getting rid of tax havens will help also. The money that I put into my RRSP gave me a tax deduction of 24%. Seniors are well served in this new budget.
Posted On Jun 28 12:24AM
Michael Sabia of BCE was instrumental in getting the Tories to implement this tax, probably more out of concern for his freedom to manage the company's resources as he wished than any general concern about equity in the Canadian tax system. How ironic it is that the tax has created a situation that will restrict his control even more than conversion to a trust would, and perhaps take him out of the picture altogether. The tax drove down BCE's share price to the point it appears they will be selling out to a private equity consortium, a deal that will leave the enterprise with so much debt and interest expense there will be no profit and no income tax, probably for decades. Nor will Revenue Canada collect any tax on that interest expense or the conversion fees since they will be paid to foreign interests. And to really rub salt in the wound, investors holding existing BCE debt have seen the value of that paper plunge by up to 20%. Talk about lose lose lose; Sabia loses, Revenue Canada loses, and the investors lose.
I suppose it's unfair and deeply insulting to suggest "politician" has become synonymous with "hypocrite"; after all there are many hypocrites that are not politicians. Nevertheless, it's the hypocrisy of Willams, MacDonald, Calvert (my Premier BTW), and Casey the really bugs me. They all got up in arms over the broken promises on equalization payments, but not a peep out of them on the much worse broken promise on taxing income trusts. Fundamentally the equalization payments amount to how the pie is cut up; as the BCE example illustrates the unforeseen (I hope!) consequence of the income trust tax is going to be a smaller pie for all of us.
Posted On Jun 27 09:07PM
Posted On Jun 27 01:11PM
The NDP is in favour of taxing Income Trusts. Which side are you on?
Posted On Jun 27 09:27AM
Posted On Jun 27 09:14AM
Posted On Jun 26 07:51PM
Posted On Jun 26 04:10PM