Jim Flaherty’s income trust policy was clearly designed at the outset to kill the income trust market place on behalf of the narrow self interests that benefit from such an outcome. Self interests like the life insurance industry whose inferior products such as life annuities and variable rate annuities did not capture the same investor preference as income trusts, would benefit from such a move and therefore lobbied hard for such a move. Also the self interested CEOs of corporations who were loathe to give up the freedoms of the corporate model and the compensation schemes like executive stock options for the more disciplined world of the income trust model, and they lobbied hard to remove income trusts from the investment landscape.
The following quote from the Globe and Mail story of November 2, 2006, entitled “Income-trust crackdown: The inside story”, makes both of these connections very clear:
“High-profile directors and CEOs, meanwhile, had approached Mr. Flaherty personally to express their concerns: Many felt they were being pressed into trusts because of their duty to maximize shareholder value, despite their misgivings about the structure. Paul Desmarais Jr., the well-connected chairman of Power Corp. of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico.”
Power Corporation is the controlling shareholder of two large life insurance companies, Great West Life and London Life, both of whom would benefit by destroying income trusts as a competing investment product that was very popular with Canadians saving for retirement and in providing essential retirement income. Power Corporation would prefer a Canada in which Canadians are more captive to the products offered by Power Corporation. This is their idea of leveling the playing field, namely having the government removed the competing team (income trusts) from the field altogether.
Meanwhile the conversion announcement of Telus followed shortly thereafter by BCE, provided the perfect fear mongering circumstances to kill income trusts. It was obviously an entirely staged event by BCE, as they simply were acting in a way that was designed to co-opt the government into killing income trusts as this Financial account reveals:
"Income trusts didn't have much appeal. We weren't particularly interested in doing an income trust but we thought if we announced we were doing one, it would force the government into a decision," said the source close to the company who asked not to be named."
Which probably explains why this reaction to Jim Flaherty’s Halloween Massacre income trust announcement occurred:
“In Montreal, the mood was decidedly more upbeat. Sources said BCE's Mr. Sabia was a reluctant convert to the trust model, and 'there was dancing in hallways at Bell' after Ottawa's announcement.”
Which is in stark contrast to this reaction contained in the same news article:
“At Telus headquarters in Vancouver, where it was still midafternoon, the reaction was disbelief.”
In short, all of Canada was “gamed” by those with a desire to kill income trusts.
Gamed by those CEOs and directors who knew their shareholders wanted them to consider becoming trusts to maximize value and whose fiduciary obligation was to do that very thing, rather than do an end run around their shareholders by making a bee line to Ottawa and to have Ottawa sabotage that option by killing income trusts.
Gamed by BCE, who were clearly attempting to raise the false specter of their conversion into a trust and the belief on the part of the public that tax revenues would be lost, which is a total falsehood since BCE was not even taxable at the time and Ottawa would have collected $553 million more in taxes from BCE as a trust than BCE as a corporation. See: Mythbusters.
And gamed by Ottawa who falsely told all Canadians the patent lie that income trusts cause “tax leakage” when the only thing that causes tax leakage is the fact that Ottawa leaves out all the taxes that it collects from the 35% of income trusts held in RRSPs, the proper inclusion of which (under the Auditor General’s accrual accounting guidelines) would result in no tax leakage, and therefore no policy justification for killing income trusts. See the definitive study conducted during the Public Consultation round under Finance Minister Ralph Goodale by HLB Decision Economics entitled “Tax revenue implications of income trusts” which shows there is no tax leakage, here.
The disciplines of the income trust model versus the non-disciplines of the corporate model, explain why investors will pay a “premium” for a given company that is a trust model company rather than a corporate model company. Some commentators like to mislead the public into thinking this “premium” arises due to some tax advantage, which is hardly the case since income trust distributions are taxed at roughly twice the rate of dividends and since we know that there is no tax leakage caused by income trusts, so why would any premium be assigned to a benefit that is non-existent?
There does exist one aspect concerning income trusts versus common shares that may explain a small portion of why income trust are valued more highly than than common shares of the same company that is tax related and that relates to RRSPs. Income trusts are efficient investments to hold inside of an RRSP in a way that common shares are not, for the fact that any monies earned inside an RRSP are taxed as income, whether they be interest, income trusts distributions or dividends. In this fashion dividends lose their tax advantages within an RRSP, whereas income trust distributions do not, since they are treated the same way inside of an RRSP as they are outside.
The Marshall Savings Plan, in one of the many forms that it could be engineered to take, could be made to resolve this discrepancy and could be designed to preserve the dividend tax credit for dividends received inside an MSP, since these dividends (like income trusts distributions inside an MSP) would be paid out to the account holder in the year received and the account holder would declare and pay taxes on this income/dividends.
In a strange twist of irony, this is exactly what Stephen Harper contemplated in his National Post Op ED of October 25, 2005 in which he stated:
“The [Paul Martin] government claims that income trusts enjoy an unfair tax advantage over corporate dividends. If they believe this, then the answer is not to shut down a valuable investment vehicle, but to cut the double taxation of dividends. In short, level the playing field and let the market decide between income trusts and dividend-paying companies.”
The Effects of the Marshall Savings Plan on Income Trust Investors:
The effect of the Marshall Savings Plan on investors is that it corrects that aspect of the income trust market that was directly targeted by Jim Flaherty’s trust tax measures, namely income trusts held in RRSPs. Because income trusts held inside RRSPs comprise such a large proportion of the overall market, namely 40%, and because these income trusts could not easily be moved out of RRSPs and into outside accounts where the effects of the new 31.5% tax was less, without incurring huge taxes upon withdrawal ( in cases where withdrawal is even permissible, this is where corrective measures needed to be taken. The Marshall Savings Plan is that corrective measure, as it allows income trusts held inside RRSPs ( as well as LIFs and RIFs etc. ) to be transferred without triggering a gain or disposition tax, into an MSP., and since the MSP requires the holder to recognize the income trust distributions received in that year as income and taxes as such, there is no longer any valid basis to claim tax leakage is occurring and hence no need for the 31.5% tax.
As such, if the tax regime is defined on a basis that is consistent with the fact that there is no tax leakage and consistent with the need to have a truly level playing field between trusts held privately by pensions funds that pay no tax and income trusts held by MSPs this will revive the income trust market and the trading value of income trusts which will make them less susceptible to unwelcome takeover, while returning the market to its once vibrant self.
SUPPORTERS
