1197440405 http://www.itrustinstitute.org/commentary/ NEWS WATCH en newsroom@itrustinstitute.org Copyright 2007 2007-12-12T03:49:00-05:00 http://www.itrustinstitute.org/site/accounting_firm_deloitte_suggests_income_trust_rules_a_mistake/ http://www.itrustinstitute.org/site/accounting_firm_deloitte_suggests_income_trust_rules_a_mistake/#When:02:49:00Z Deloitte has written a newsletter to suggest that, “Since the fateful announcement on October 31, 2006, there have been 40 announced or completed trust buyouts versus 14 deals over the equivalent year-ago period. We have seen the trust population of 256 shrink by more than 15% to 215. Market conditions such as foreign exchange fluctuations and commodity prices also had an impact on this decline, but the trust tax announcement was certainly the catalyst for the sell-off.” The report goes to show how policy objectives had opposite and negative effects on Canadians. Deloitte had some expectation of this, as could have the government. The firm wrote on that, “In December 2006, Deloitte hosted an event for trustees and management of income trusts, and their investors, bankers and advisors. The participants were asked to estimate the number of trusts that would still exist at the end of 2010 – and 87% responded “fewer than 100.” A decline of this magnitude is inline with reality and translates into almost 40 trusts per year. “Of the 40 deals that originated since October 31, 2006, 31 have closed and 9 are pending completion. Many other trusts have been targeted (see the hit list of what’s left to buy) during this period, with at least one publicly disclosing a takeover attempt that was subsequently terminated. The figures are: -- 25 business trusts have been taken over, 14 by foreigners and six by domestic private equity. -- Six energy trusts have been taken over, three private equity (two foreigners). -- Five REITs have been bought out, two foreign and one private equity. -- Four power and pipelines trusts have been scooped up , two by foreign private equity. In total 40 takeouts, 20 foreign and 24 private equity neither of which will pay taxes possibly ever. “Energy trust activity remained consistent year over year, although there were two foreign buyouts as opposed to exclusively trust mergers prior to the announcement. The REIT and Power & pipelines sectors experienced an increase in interest by foreign buyers and Canadian pension funds. The characteristics of both of these sectors lend well to the infrastructure-based investing that many pension funds and foreign buyers are looking for, and should result in continued buyout activity.” “Buyers in the 40 announced deals were equally split between strategic and private equity, as well as between domestic and foreign. But in terms of tax revenue for the Canadian government, the news was not so balanced: 70% of the purchasers are tax exempt pension/private equity funds or foreign buyers who pay little if any tax in this country. “What structures were buyers using to acquire trusts? In 22 of the 40 transactions, trust units were acquired; in the other 18, the purchaser acquired shares of subsidiary corporations, trusts or partnerships. The method of acquisition has significant implications for the buyer, trustees and unitholders. The entity left “holding the bag” has to bear the cost and risk associated with the wind-up of the engineered trust. A caveat for future purchasers: all parties should consider the implications of a proposed structure when assessing the value and risk of an offer for a trust. “Based on our involvement with over 20 income trust buyout transactions in the past year we believe that the buyout momentum will continue. The current M&A slowdown is primarily driven by “mega” transactions exceeding $1 billion in size. The income trust market, particularly the business trust segment, is comprised of medium-sized companies that are ideal for financial and strategic buyers. Clearly, volatility in the income trust sector is far from over.” Not a single objective announced by Flaherty and Harper was achieved: -- The tax burden has not been shifted off families. Some $1.372 billion in taxable distributions will now be used to make interest payments on loans to acquire these income trusts. No taxation as a result. -- Bringing Canada’s approach to taxes in line with other countries. Wrong. This is now a made-in-Canada botch up. REITs have been hampered by new rules, unlike the U.S., and energy trusts have been severely wounded, unlike the U.S. Deloitte’s report highlighted the renewed calls by upset income trust investors for an inquiry or—as Deloitte has already done—a panel of experts. The conclusion is that the income trust rules have hurt the market and tax base. Diane Francis provided insight in here Finanical Post column, stating that, “Deputy Finance Minister Mark Carney, under questioning in Parliament last week on his “qualifications” to be the Bank of Canada’s Governor, said he convinced the Tories to destroy income trusts, costing two million investors $35 billion in one year. The policy’s purpose? To stop tax leakage...The policy’s result? It has done the opposite and created multi-billion dollar tax leakage.” Francis suggested that, “So far, 40 of 259 income trusts have been taken out, permanently wiping away $1.372 billion in annual taxable distributions. Their new owners have spent $39 billion acquiring them and will divert the $1.372 billion to make interest payments on the loans raised to acquire the trusts. No tax on that. More will follow until none are left. And furthermore, “The $39 billion has also contributed toward the over-priced Canadian dollar because most of the buyers were foreigners.” She said, “Everybody knew this would happen except Carney, Flaherty and Harper who trotted out the tax leakage as an issue. A new Deloitte Canada report last week provides a depressing, predictable summary of events. Also see the numbers for yourself...But instead of a pink slip, Carney is promoted.” Policy, Taxation 2007-12-12T02:49:00-05:00 http://www.itrustinstitute.org/site/trust_tax_bill_passes_into_law/ http://www.itrustinstitute.org/site/trust_tax_bill_passes_into_law/#When:12:07:00Z On Friday June 22, the Canadian Senate approved Bill C-52, which includes the trust tax rules that impose more than a 31% tax on distributions to unit holders effective in 2011. It fulfills the Conservative intentions to tax trust owners as announced on October 31, 2006 in a surprise reversal of Party policy and public promises. Not all political parties are committed to letting the Bill stand as law.  But change will only come with new results in the next election. Not all financial experts see a clear way to enact the law in 4 years time.  And many of the income trust executives in Canada, particularly in the energy sector, see need to lie down in their fight against the “Tax Fairness Rules”. The tax has been described as onerous and blamed for hurting investors by destroying their sources of income, particularly important for retirees.  The tax has been blamed for the sell-off of public companies into the hands of private equity as well as the sell-off of Canadian based businesses into foreign hands.  More than two dozen income trusts have either been sold or have engaged in an exploration of sales opportunities. Passage of C-52 is marked in time by the nearly simultaneous announcement that 182-year-old ED Smith, the jam maker in Ontario had been sold to an American pickle maker.  Bruce Smith, the company CFO is quoted by John Partridge in the Globe & Mail, as saying, “I would say it’s highly unlikely this process would have taken place without the change in the legislation. It created challenges for us to raise capital and was one of the leading reasons we got into this strategic review process.” The Minister of Finance, Jim Flaherty, has repeatedly denied that he or his government should take blame for the perceived negative consequences of their legislation.  Meantime, some Ottawa insiders report that further market-controlling legislation may be in the works to clamp down on foreign sell-offs. However, that is not saying much. As the trust tax news announcement came as such a surprise with such devastating effects on market prices, market participants are living in “disaster mode” so that nothing can really be a surprise.  Policy, Taxation, Social Security 2007-06-22T12:07:00-05:00 http://www.itrustinstitute.org/site/opposition_party_proposes_canadian_friendly_tax_policy/ http://www.itrustinstitute.org/site/opposition_party_proposes_canadian_friendly_tax_policy/#When:22:49:00Z Liberal Leader Stephane Dion has said that the changes to the tax system introduced by the Conservative government has threatened the competitive ability of Canadian businesses.  Specifically, new taxes on income trust distributions have resulted in more than a dozen foreign takeover attempts in less than half a year. The trust tax, along with other government policies could threaten Canada’s economic sovereignty, according to Mr. Dion. He is proposing specific remedies to what he describes as mistakes. Policy, Taxation, Social Security, Economic and Development 2007-04-16T22:49:00-05:00 http://www.itrustinstitute.org/site/tax_policy_triggers_canadian_tax_revenue_loss/ http://www.itrustinstitute.org/site/tax_policy_triggers_canadian_tax_revenue_loss/#When:10:52:00Z When the Minister of Finance announced a new form of tax on Canadian income trust owners, Jim Flaherty caused a stir as many finance professionals anticipated that a consequence of his policy would be the buyout of income trusts by foreign buyers. The implication of that occurrence was that Canadians federal tax revenues would shrink with loss of taxable Canadian ownership.  They and others observed that if the intent of Mr. Flaherty’s policy was to end the income trust market, because he deemed trusts somehow “bad”, then his policy was not about making policy to protect Canadians from tax losses at all.  His policy was focused on “putting an end” to a growing public market and so was intended to destroy a tax once worth $200 billion with annual income streams of close to $20 billion that was ultimately taxable. National newspapers are beginning to report on the current situation in the Canadian trust market to show that such anticipation of outcome has already been seen in measurable reality. This is news in so far as, with rare exception, the national newspapers have doggedly reported the Conservative Party line on the justification for tax policy and frustrated the interests of informed citizens and professionals in the process. The tide may have turned towards factual reporting. And the news confirms the problem that Minister Flaherty has created for Canadians with his policies. For example, the Globe & Mail reporter, Steven Chase, has just reported that “Resulting takeovers could cost Ottawa as much as it hoped to recoup, critics say”. He reported that, “Ottawa will see as much as $73.2-million in annual tax revenue drained from its coffers as a result of 11 trust takeovers since the trust levy was announced on Halloween last year, calculates Sandy McIntyre, a senior vice-president at Sentry Select Capital Corp.” And he goes on to show the basis for Mr. McIntyre’s observations which include trust buyouts announced only following the tax policy news as if a consequence of the policy: TARGET - FOREIGN BUYER Halterm Income Fund - Australian private equity Lakeport Brewing Income Fund - foreign company Norcast Income Fund - Swiss private equity Entertainment One Income Fund - U.K. private equity firm Amtelecom Income Fund - Canadian income trust Great Lakes Carbon Income Fund - U.S. private equity Associated Brands Income Fund - Canadian private equity KCP Income Fund - U.S. private equity group Gateway Casinos - Australian private equity firm Calpine Power Income Fund - U.S. hedge fund Mr. McIntyre is reported to estimate that the tax losses include both an explicit loss of $60-million in tax revenues and another $9.4-million in deferred taxes that remain “unpaid until some indefinite later date” so fall within Minister Flaherty’s definition of “tax leakage”. The facts according to Mr. McIntyre suggest that an “additional 5 per cent of the existing income trust sector snapped up by such investors would cost Ottawa another $165-million in annual lost revenue” and take approximately “15 per cent of the trust sector to be bought out” by foreign firms “before Ottawa was losing annual tax revenue equivalent to what it said eluded its grasp before the trust tax.” Numerous experts have been heard supporting Mr. McIntyre’s form of thinking.  And some suggested then and again now that his measures are still too conservative in favor of government tax policy working the way it was intended. It is not news that many think that the 31.5% tax on income trust distributions and the stop to new equity issues will sap Canadian tax coffers rather than protect them as proposed as reason to add the new tax. It is news that the proof of policy detractors’ arguments has now been reported in a clear way to the public. Such useful measures of policy remains, however, in the business pages of major newspapers like the Globe & Mail. Members of the iTrust Institute suggest that Canadians might understand policy implications and be proud of their major news media at the point that such facts about tax losses caused by government policy are shown on the same front pages in which stories were placed to promote Conservative policy. Policy, Taxation 2007-04-09T10:52:00-05:00 http://www.itrustinstitute.org/site/parliamentary_committee_report_recognizes_trust_tax_problem/ http://www.itrustinstitute.org/site/parliamentary_committee_report_recognizes_trust_tax_problem/#When:18:05:00Z Following its study of income trust taxes, the Finance Committee has released its report on findings and recommendations: “Taxing Income Trusts: Reconcilable or Irreconcilable Differences?” (PDF, 183 KB in printable format).  Two significant alternatives are offered to the pending 31.5% on distributions to income trust owners. The Committee is recommending in this report that change from the current tax scenario is essential.  The current policy was as “devastating” to Canadians as it was shocking in breaking a Conservative election promise. Specifically, the paper proposes that either the 31.5% tax be reduced to 10% or the government should extend the tax-free period for trusts from 4 years to 10 years. These are two proposals previously announced as suggestions from the Opposition Liberal Party and Bloc Quebecois, respectively. Overall, the report recognizes the Prime Minister Steven Harper’s Conservative government set tax policies hurt Canadians. In addition, the report calls for the government to release information to support its calculations of tax losses due to income trusts. During public hearings it became clear that Department of Finance officials may have made mistakes and that if they did then they “would not admit it”.  And public requests for background details garnered documents with blackened out statistics. The report recognizes both direct testimony to the Committee through hearings, as well as written submissions including that from iTrust Institute. While the report includes suggestion that remedies are required to reduce the impact of taxes on trusts, the report supports the notion of a moratorium on new trust issues. Despite hearing the facts and concerns of Canadians and despite their participation in the Finance Committee, the Conservative Party and the NDP are rumoured to be making their own recommendations in a report.  The two parties are working together to suggest that trusts “are bad” and that tax on trusts is necessary and fair.  Neither group, however, seems able to follow-through on election promises and maintain economic protections for Canadians, let alone deliver policy that reduces tax on working or retired Canadians. During public hearings on income trusts, the Finance Committee received testimony and submissions that suggested that the trusts tax was a tax on individual Canadians, despite Conservative suggestion that the tax was like a corporate tax on companies with trust issues. The report says that, “It is imperative that a democratic government be as transparent as possible when levying a new tax so that it can be held to account by its citizens.” The document further suggests that the members of parliament should be given opportunity to vote on the trust tax itself without mingling the vote with other proposed reductions in tax. Policy, Taxation 2007-02-28T18:05:00-05:00 http://www.itrustinstitute.org/site/open_letter_to_liberal_finance_critic/ http://www.itrustinstitute.org/site/open_letter_to_liberal_finance_critic/#When:13:19:00Z Letter to John McCallum, MP and Liberal Finance Critic Good morning Mr. McCallum Congratulations on making a specific tax proposal (10%) to address the income trust requirements and consider the real impact on Canadians. As a Canadian, I thank you for that initiative. We would also observe that the potential strength of your proposal might be lost on Canadians, particularly in the realm of pre-election rhetoric and political campaign advertising. On the other end of the spectrum, the Liberal proposal can be seen as a moderate approach to “grandfathering” of trusts. And therefore, the proposal may be misunderstood or considered weak due to inherent inconsistencies.  If further issues of income trusts are prohibited, then the policy promises to dampen the potential benefits of the income trust market as described by the Bank of Canada in terms of market efficiencies gained through diversification possible with (and so in principle within) the asset class. As a non-partisan organization that was not given voice in the public hearings hosted by the Finance Committee, we see there as being potential merit in hosting a public discussion of our own, specifically to consider your new proposal as it appears to be the only one arising in a certain way from the Finance Committee hearings. If we hosted an event, then would you care to present your proposal directly to analysts and the public during the forum?  Would you be open to moderated public questions in regard to it? If so, then what timing would be most appropriate or workable for you?  Knowing that you have, no doubt, been approached with feedback on your proposal by financial analysts and others, could you suggest other potential participants to provide thoughtful analysis of your proposal? We welcome suggestions in that regard. The Institute would like to arrange for an unbiased and experienced moderator for the session and involve other panelists or speakers. We envision the forum as a web based discussion that can involve people from across Canada and can be easily recorded so that it can be offered as a recorded a/v resource from our web site to those unable to attend. We would undertake such an initiative on a cost recovery basis, perhaps charging a nominal fee to participants who attend via the Web. In our work in 2005 to put together a Roundtable to discuss income trusts in line with Ralph Goodales’ public consultation, we found that a web-based event might be more manageable, affordable, welcoming and democratic as a forum for presentation and dialogue than a local event requiring physical facilities. Please let me know your thoughts and whether such an opportunity to attend would be of interest to you. If, on the other hand, you feel that the Finance Committee hearings and report process will provide further clarity that minimizes the utility of a public forum about your proposal, then I’d appreciate your guidance in that regard. Thank you for your consideration. I would look forward to hearing from you again at your convenience. Sincerely, Leslie Hayman President, iTrustInstitute Policy, Taxation 2007-02-22T13:19:00-05:00 http://www.itrustinstitute.org/site/liberal_party_proposes_alternative_to_conservative_income_trust_tax/ http://www.itrustinstitute.org/site/liberal_party_proposes_alternative_to_conservative_income_trust_tax/#When:21:05:00Z After the third day of public hearings by the Standing Committee on Finance, the Liberal Opposition announced a plan that involves a repeal of the 31.5 per cent tax on income tax distributions in 2011.  The Finance Critic for the Liberals, John McCallum proposed that it be immediately replaced by a 10% that will be paid by the companies and would be refundable to Canadian residents. Furthermore, the Liberals are proposing that the tax revenue be shared equitably with provincial governments. Policy, Taxation 2007-02-13T21:05:00-05:00 http://www.itrustinstitute.org/site/finance_committee_preliminary_hearings_on_income_trusts/ http://www.itrustinstitute.org/site/finance_committee_preliminary_hearings_on_income_trusts/#When:03:45:00Z The schedule has been set with an interesting set of presenters offering a potentially diverse range of ideas to the committee including people with some wonderful information along with opening witnesses including those with questionable data.  The quality of committee members’ questions makes or breaks the value of the hearings. 2 Hours on Tuesday January 30th - (changed) Witness List 1 2 Hours on Thursday February 1 - (changed and possibly further changing) Witness List 2 Where will the allocated additional 2 hours come into play?  Who will have a say at that point? We will watch the Finance Committee Web site and schedule. The meetings will be “televised”.  If so then, it would be useful to watch the hearings and compile here, any and all key questions that need to asked, but aren’t within the hearings. A note sent this week to call for “factual hearings” was rather tame, but provided as an example, questions related to the first witness - Diane Urquhart.  The iTrust Institute’s initial comments and questions triggered positive response from government officials and others. How best to engage in the process if not on the witness list? The Institute is consolidating a Brief and a list of questions with pertinent factual background to provide Committee Members on an iterative basis.  Tuesday questions gathered for Monday.  Questions from the first session set out for use Thursday.  Tuesday and Thursday questions and background gathered for the 3’rd leg in the Committee process. Thoughtful member, guest and advisor input is . ADDENDUM In its wisdom and with leadership from Liberal members of the Finance Comittee, it has decided in a brief third day of closed-door discussion, to assemble a third day of public hearings for February 13. CONTRIBUTIONS BY THE INSTITUTE iTrust Institute provided facts and questions to the committee members in preparation for Day 1 of the hearings. iTrust Institute Follow-up Brief with Facts for Hearings 2007-02-01.pdf Observations for the Third Day of Closed-door Hearings Policy, Taxation, Social Security, Need for Participatory Decision Making, Need for Stable Regime: Confidence, Economic and Development, Market Regulation 2007-01-26T03:45:00-05:00 http://www.itrustinstitute.org/site/institute_cautions_against_misleading_reports_in_finance_hearings/ http://www.itrustinstitute.org/site/institute_cautions_against_misleading_reports_in_finance_hearings/#When:11:00:00Z The non-partisan research and education organization, iTrust Institute has warned that the pending hearings about income trust tax are of significant importance to all Canadians. Policy, Taxation, Social Security, Need for Participatory Decision Making, Need for Stable Regime: Confidence, Economic and Development, Market Regulation, Business Fundamentals 2007-01-25T11:00:00-05:00 http://www.itrustinstitute.org/site/request_to_appear_in_public_hearings/ http://www.itrustinstitute.org/site/request_to_appear_in_public_hearings/#When:21:27:00Z ABBREVIATED COPY OF NOTE: TO: Clerk of the Finance Committee This note follows up on my phone call earlier today in which you welcomed an email note to the Finance Committee address. This is a request to appear before the Finance Committee as an expert witness to address considerations of income trusts, their taxation and implications for Canadians and the Canadian economy. Policy 2007-01-19T21:27:00-05:00