On October 31st, 2006, the TSX closed at 12,344.59 (if my math is right from this article). This was the last close before the Conservative government announced the plans to tax income trusts.
The S&P/TSX composite index fell 294.2 points or 2.4 per cent to 12,050.39 after the announcement late Tuesday that trusts will be taxed more like corporations — the biggest single one day drop in the index in two and a half years.
The market dropped dramatically the next couple of days as investers sold frantically.
Today, November 15th, 2006, the TSX closed at 12,425.37, over 80 points higher than it was before the announcement.
I know that the value did not come back in the same places, but it just goes to show you that if you are diversified enough in your portfolio, you probably are richer than you were the day before the announcement.
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Check out my recent article. I broke down the situation of the TSX for someone who was posting some fairly depressing comments about a previous post of mine.
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William (#1) Thanks for the supporting link. I knew the Wealthy Barber wouldn’t steer me wrong with dollar cost averaging because luckily my preauthorized plan buys on the first of every month and I got me some deals November 1st thanks to panicky investors.
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I just want to say that unfortunately Harper and Flaherty will not be able to dismiss millions of loyal Canadians with retirement accounts that hold income trusts no matter what percentage of their portfolios they are. In order to stop the tide of foreign investors paying only 15% tax on income trust distributions, for some reason, Flaherty’s advisors told him to slap a 31.5% tax on income trust distributions to tax deferred retirement accounts in 2011. Goodale analyzed the situation and decided against it in 2005 because he realized it would be too damaging to Canadian seniors and younger investors trying to supplement their after tax earnings. He should have known before he made such a negative impact on the market and should have Flaherty. Aside from the importance of a diversified investment portfolio, it is patently unethical for Stephen Harper to promise to never tax income trusts and then go ahead and tax them. See today’s National Post article:
Harper’s mistake needs correcting
PM’s credibility on the line over income trust rules
Diane Francis, Financial Post
Published: Saturday, November 18, 2006
Link is here
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The TSX rebounded? How could this be?? Does this mean all the dire predictions from the wise and respectful pundits are wrong? Those poor helpless people who declared themselves to be destitute as a result of the income trust decision aren’t really destitute?
Geoffrey, the income trust decision doesn’t effect millions of loyal Canadians. Sorry to burst your bubble. The income trust decision effects those few Canadians who have investments in those 200 plus companies which are income trusts. If anything, this effected more Americans than Canadians. The vast majority of Canadians DON’T have investments in income trusts. Those who do must realize that playing the stock market, including mutual funds, is inherently risky and NOT SUITABLE for retirement funds for those on fixed income.
This is just another example of the MSM believing their own bullshit and the Opposition’s outrage.
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I sit in front of the stock market every day, I am a broker. I am not politically motivated by what the opposition says. Most registered retirement income fund accounts that I see at work hold income trusts.
According to Jack Mintz, Canadian tax deferred retirement accounts hold 39% of income trusts and non-resident owners hold 22% of income trusts:
“For pension and RRSP account holders, also estimated to hold 39 percent of trust units”
“The tax cut faced by non-resident owners, holding about 22 percent of trust units, is smaller than for pension plans and RRSP account holders at this time..”
Jack Mintz
link is here
For the government to punish Canadians holding income trusts to shake Americans out is despicable. I voted Conservative and agree with most things Stephen Harper does, but this is wrong. Did you read the article below, and where are you getting your information from. I sit in front of the stock market everyday and have been since 1997. I worked in the stock market in 1987 too.
“Harper’s mistake needs correcting”
PM’s credibility on the line over income trust rules
Diane Francis, Financial Post
Published: Saturday, November 18, 2006
link is here
I have talked to many brokers (most have been brokers for 30+ years) about income trusts in retirement accounts and they tell me that the only way they can get the investment returns so that their clients don’t outlive these accounts is to at least buy some income trusts. This isn’t about market risk, this was about Canadians taking Stephen Harper at his word. If you want to discuss lying philosophically, I am prepare to crack open my philosophy primary texts too.
American ownership of income trusts?
US investors who hold Canadian royalty trusts receive no benefits and place no burdens on the Canadian government. The dividends they receive from Canadian royalty trusts are taxed at 15%, the same tax rate that Canadian residents pay on the dividends they collect from any US stocks they own. The 15% tax rate is determined by a tax treaty between Canada and the US.
Perhaps Stephen Harper should have renegotiated the tax treaty, instead of punishing tax deferred accounts in Canada!
As for foreign tax leakage:
“Trust model has attracted foreign businesses to Canada and increased tax
revenue from foreign sources
The trust structure has drawn foreign businesses into Canadian jurisdictions in at
least two ways. First, many Canadian trusts have used their more attractive
capital structure to purchase foreign companies. There are over 40 income trusts
with at least 20% of their revenue based in the U.S. These cash flows are
generally taxed in Canada in the hands of Canadian unit holders. Second, at
latest count, 16 foreign companies had set up head offices in Canada and
chosen to list as trusts on the TSX. Again, these businesses generate
productivity benefits for Canada through banking fees, listing fees, head office
and operations employment, and taxes paid by Canadian unit holders on
distributions and capital gains.”
link is here
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“Not even a month ago, Forbes published an article espousing about what investors should do about Canadian income trusts. But their crystal ball prediction broke when the Canadian Minister of Finance, Jim Flaherty, unleashed a vindictive tax law to levy additional taxes on trusts. The new taxes are vindictive because the decision only came at the heels of announcement by 3 major Canadian corporations to convert into income trusts – Telus, Bell and Encana.”
Link is here
I thought that I would post at this site because it sums up how I feel about Harper and Flaherty reneging on their promise to not tax income trusts.
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link is here
Sunday, November 19, 2006
Harper’s Income Trust Stupidity
Stephen Harper and his Finance Minister Jim Flaherty have destroyed their credibility and unethically sideswiped investors because of a lack of policy imagination in dealing with some of the underlying problems concerning income trusts.
I don’t disagree that problems exist and that, obviously now, Stephen Harper’s pledge to leave them alone was foolish.
But their approach has been even more foolish and they have, in essence, attacked Bay Street’s excesses and unnecessarily harmed Main Street.
While I’m sympathetic with the need for change – see the underlying hidden problem described below – I’m totally unsympathetic toward a Prime Minister who breaches his contract with voters. It’s even more egregious considering that he could have met challenges and also his commitment by grandfathering existing income trusts and preventing future ones.
Instead he chose to destroy his reputation and tens of billions in value.
This is a blunder which the government must recant and revise soon. One lifeline is going to be extended next week, according to sources, by tax expert Jack Mintz who is recommending that the income trusts be restructured over the next decade, not the next four years. This would help a bit.
The real underlying problem regarding income trusts is their popularity among American, and foreign, investors who had snapped up some 40% of the total.
At the same time, Main Street was doing the same and some 40% was held in RRSPs.
Herein lies the rub.
RRSPs eventually pay taxes on income trust distributions, so the corporate taxes that trusts don’t pay are taxed eventually. RRSPs are a tax deferral system which was set up by a predecessor Tory regime so that ordinary Canadians could look after their old age themselves.
But the foreign and offshore owners only pay 15% tax.
When distributions cross the border, Ottawa gets a 15% withholding tax according to negotiated tax treaties. In the U.S. and Britain, this 15% Canadian tax is deductible against their own taxes (already lower than Canadian taxes), thus making income trusts hugely attractive.
In other words, Ottawa eventually got its pound of flesh from Canadian RRSP and non-RRSP holders but could not tax the foreigners beyond 15%.
So the foreigners flooded in and Bay Street obliged by convincing companies to convert to trusts.
Unchecked, this spelled disaster.
It would have encouraged foreign ownership and continued to put upward pressure on the Canadian dollar, thus hurting Canadian exporters.
But that was no reason for Harper to do what he has done.
His other choices included reducing taxes on all corporations to level the playing field or renegotiating tax treaties.
The best and most honorable solution was for the Prime Minister to keep his promise by grandfathering the sector already in existence so that people were not financially damaged, further reduce corporate taxes and ask for voters to understand why he had to change his mind.
So why wasn’t this done?
I don’t know, but there are several likely explanations: Ignorance of options or consequences; a lack of integrity in terms of the importance of keeping promises; or, most likely, an inability to stand up to the Canadian corporate leaders who argued, behind closed doors, that grandfathering was unfair to those who hadn’t had time to become income trusts.
None of these are acceptable excuses.
Governments have a right to change future policy direction but not to retroactively tamper with past policies and damage people. And politicians have a right to change their minds, but not to break promises made only months before even if they obviously did not understand the consequences of their pledges.
The whole matter is doubly disappointing because the Tories, unlike the party alternatives, are supposed to understand free enterprise and business. They are supposed to value and enhance the principle of individuals taking responsibility for their lives whenever possible.
Instead, we have a king-sized policy train wreck that had better be cleaned up soon.
posted by Diane Francis @ 10:10 AM
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I would like to mention as a stock broker that a lot of seniors protect their portfolios with stop loss orders. In other words they put stop loss orders on every position in their account say at 15% below the current market. Of course most seniors were dealing with trick or treaters or their grandchildren on the night of October 31st and did not even hear about the income trust announcement come the morning of November 1st. The result was all these people were sold out of their income trust positions with stop loss orders that were triggered 20% below the market. This explains a lot of selling activity right after 9:30am. Could someone suggest another way for seniors to protect their portfolio other than stop loss orders and listening to promises from Stephen Harper?
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Geoffrey Laxton (#7) the answer to your question is the answer to the question “how do i protect myself from ANY major section of the market having the floor drop out?” and it is to diversify. People can harp all they want that seniors invest heavily in income trusts vs. other sections of the population but the reason for that is that it is a way to hold your value while making income.
If someone younger has the same level of greed they can also try to hold their value and make income the same way. i.e. if it’s too good to be true, it probably is.
The governments mistake wasn’t in changing the rules, it was in making the promise. But being in a position of opposition at the time the promise was made, I am sure they did not have all the facts, nor did we have the onrush of corporations applying to become Income Trusts to avoid taxation at the time this took place.
And I must also point out that no money was lost. Just paper value. Since the Income Trust investments are still tax free for four years, you would think people would have turned around and BOUGHT the next day instead of sell.
I must point out that I have no financial background. I just know that putting all your eggs in one basket is bad. My grandmother (a senior citizen) taught me that one.
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Please read post #8 to see why many senior accounts sold off automatically. Also, Flaherty had a choice of cutting corporate taxes which are too high and uncompetitive with the rest of the financial world or raise income trust taxation. He should have cut corporate taxes. The GST cut is a political candy that really doesn’t make sense. Do you feel good now that you save around $3 / week when you shop? You can save more clipping coupons.
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Geoffrey Laxton (#9), That sell off order is insurance. Not everyone buys it and not everyone needs it but it IS an insurance nonetheless. If some got caught because they set up a sell order, then they took advantage of the insurance, and if the income trusts have not returned in value (which many have not) then there is still plenty of time to buy them back. If the speculation is that over the next four years they will continue to drop in value due to the sell off, then the insurance paid off.
As for the GST, that is a whole different issue and it probably saves most people more than $3 a week. And when the government drops it a further percentage that savings, whatever it is, will double.
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An addendum to point 10 on the GST. If we count EVERY Canadian, including children, babies, non working people, students, etc. the $5Billion the 1% GST drop cost averages out to $3.20 per Canadian per week (estimating there are 30 million people in the country). Since there are children and non working citizens to consider, the average GST savings to employed or retired people is far higher than $3.20 per person per week.
And to comment on clipping coupons, if you can save more every week clipping coupons that is something you can continue to do and save even more. Clipping coupons and the GST cut are not mutually exclusive ways to save money.
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Geoffrey, be honest- did you vote Conservative in the last election? If your feelings about Harper and Flaherty were swayed by this taxation announcement, I’m guessing you’re one of that tiny percentage of Canadians who has investments in the stock market that were impacted. Most of those people voted Liberal in the last election although it looks like many of them might vote Conservative in the next election… at least those who aren’t blindly partisan.
Thanks for posting Diane Francis’ entire post from her blog. Incidentally, posting an entire post is generally considered a breach of netiquette. A link and a paragraph is enough. If I wanted to read the entire post, I would follow the link. I did follow the link and took a look around to see what Francis is all about.
Diane Francis is a transplanted American who describes herself as being a small ‘c’ conservative which, according to her estimate on her blog, puts her just left of the Democrats in the States. A MSM journalist who figures she’s left of the Democrats, in my estimation, is not a small ‘c’ conservative; she’s a broken-glass liberal… and I bet she had money in income trusts too!
Investor.ca feels taxing income trusts is vindictive because the Conservatives took action to stem a tide of mega-corporations from shielding their earnings under an income trust. Oh, boo-hoo! Telus’ quarterly profit was $319.6 million. That’s profit, not gross. And you want to shield these guys from taxation?
If the GST cut has such a minimal impact, why did the Liberals fight the cut? I find that $3 very hard to believe. I know the cost of living in Vancouver is high but I’m sure I save more than that on my fuel costs alone!
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13. I don’t follow the point in your first paragraph, I am not sure what you saying. I did vote Conservative, but what does that have to do with anything else?
Regarding the second paragraph, I apologize for breach of netiquette and I will keep this in mind.
In the third paragraph, I am not sure where she stands in the political spectrum is important to the points that she makes in her articles. Hell, William F. buckley makes counter points and people don’t question his political affiliation.
In the next paragraph, you show a misunderstanding of flow of capital in the economy. Corporations don’t really pay tax. Anytime money leaves a corporation it is going to people. People are taxed. Aside from this, you sound like a the CAW union economist with your point:
http://www.caw.ca/news/factsfromthefringe/issue109.asp
Are you sure that you aren’t an NDPer?
I am working on an article concerning the effectiveness of the GST cut. From what I have read, it would be better to cut corporate and personal taxes instead of cutting the GST which is a consumption tax.
Respectfully,
Geoffrey Laxton
Hon. BA, FMA
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“Unfortunately, the allegation of tax leakage has been so much hammered in the media and some political circles that is has
become a widely accepted truth without much questioning and discussion. It was nevertheless the official rationale underpinning the decision to tax the trusts.”
More details here:
http://www.caif.ca/content/IncomeTrustsTax.Fortin.pdf
Taxation of income trusts was it worth the cost and the turmoil?” By Yves Fortin November 2006.
Yves Fortin is an economist specializing in international finance and public finance. He acquired extensive economic and financial policy experience as well as knowledge of capital markets during his long career with the Canadian Government, including the Department of Foreign Affairs, and the Department of Finance and a number of international organizations.
Respectfully,
Geoffrey Laxton
Hon. BA, FMA
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Sometimes I post an entire article with a reference link because the links expire, but here is a link only:
Hamilton Spectator Link
(Website Comment: OfficiallyScrewed.com has edited the above link from a complete URL to a text link for the sake of visually fitting onto the page. We encourage all links to be pasted in HTML format to help us maintain a visually pleasing site)
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Golly gee! You have letters after your name! I’m so very impressed. If you require further adulation, let me know and I’ll genuflect before I post.
The concept of political affiliation reflecting in economic and/or taxation policy is fairly well known and established. Conservatives cut personal taxes. Liberals add personal taxes. Dippers never met a tax they didn’t like. People don’t wonder about WFB’s political affiliation since he publicly acknowledges he is a conservative and/or libertarian. Strangely enough, you even refer to this concept when you jibe that I might be a Dipper. By the way, I’m not a Dipper.
My point was your disappointment with Harper and Flaherty might be reflective of your political convictions rather than this particular policy change. Even Francis acknowledges the Liberal income trust policy had flaws and the Tory commitment to leave income trusts alone was ill-considered. Yet, she describes their change of policy as vindictive and claims Harper and Flaherty have fatally damaged their reputations. This hardly sounds like the balanced perspective of a journalist who claims to be a small ‘c’ conservative. Since you’re the one who quoted her…
I’m not an economist and my knowledge of corporate capitol flow and taxation is limited. I’m but a simple tax-slave whose understanding of capitol flow is limited to being disgusted by how many deductions appear on my pay stub after governments have their way with my salary.
In reading through the assorted statements you’ve made and/or quotes you’ve posted, I still don’t understand why it’s such a bad thing to keep foreigners from taking profits out of Canada at a lesser tax rate than Canadians are paying. So either I’m missing something or you’re not articulating your objections clearly.
Since you obviously much more knowledgeable about this, perhaps you can tell me what percentage of Canadians were directly effected by the income trust decision. I’m guessing it’s less than 10% and most of them are only marginally effected.
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Geoffrey, your link appears intact and it leads to a “letter to the editor” to a newspaper.
It appears this letter was designed to evoke an emotional response. Emotion-based arguments
are the hallmark of the left. Are you sure you voted Conservative, Geoffrey?
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Geoffrey, I am not a financial management accountant, but I do have some financial experience. From the article you link to there is a quote “I need a regular monthly income, therefore, I invested in income trusts within my RRIF. I have encouraged my son and daughter to follow my footsteps as well and make regular deposits into their RRSPs.”
This one line has me quite peeked. If someone wants a monthly income there are several ways to get it. But if that way is to sit on their RIF with the bulk of the RIF in an income trust so they can draw a nice sized income without reducing the RIF holdings, then that is a diversification risk the holder took. They could have been more diversified, and slowly wittled away at the RIF as it was meant to be, and left the RIf diversified to protect from hits like this.
I agree with the emotional comment Mac makes. The letter is one of many, but I can point to as many financial or analyst comments stating it was the right thing to do for the country.
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16.
The point of me showing letters is that I am not just an armchair critic. I have a Hon. BA and I have an FMA (Financial Management Advisor) designation from the Canadian Securities Institue. I am also licensed as a Registered Representative in every province and territory in Canada except Quebec.
My political convictions are such that I have been accused of being extremely neo-conservative. Here is a link I sent to someone supporting my arguments and was told that my position is extreme right.
“Canada: Two Wrongs Don’t Make a Right”
http://www.informit.com/articles/article.asp?p=673519&rl=1
I think that instead of income trusts being taxed the same way corporations are, corporations should have their tax cut to match income trusts. I also believe that individuals pay too much tax, especially on payroll, capital gains, double taxation of dividends, GST, PST, property tax etc.
17.
“Emotion-based arguments are the hallmark of the left.”
You’ve got to be kidding!
18.
I am just trying to illustrate to people that seniors relied on income trusts in their portfolio and Harper promised not to tax them. So the point is that Harper broke a promise. Why bash seniors! I just want to underline that I want Harper and Flaherty to succeed and get re-elected, but they need to adjust their income trust decision so that tax deferred accounts don’t get taxed at 31.5% with no benefit of a dividend tax credit. As for foreign investors, they pay 15% on Canadian dividends as we pay 15% on US dividends by tax treaty. If Harper and Flaherty don’t like that deal they should renegotiate the tax treaty, not punish seniors!
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Article illustrating why seniors owned income trusts.
Income trusts may come back in different form
Mon, November 20, 2006
By NEIL MURRAY, LONDON FREELANCE WRITER
Link is here
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I wonder how many seniors living on a single pension are writing angry letters to the editor demanding Flaherty’s head on a platter for allowing pension splitting? Oh wait- those are the lower-middle class folks, well used to being used & abused as tax-slaves. They don’t write letters (angry or otherwise) they just get along…
The income trust decision does not strongly effect the majority of seniors. In fact (as I’ve pointed out) the income trust decision only effects a privileged few Canadians and foreign investors. Far more people were effected positively by the pension splitting initiative.
I’m sorry if I’m sounding fed up, Geoffrey, and I don’t mean to attack you personally. I’ll remember to genuflect to your designations and registrations and honours before I send this post. I’m just a simple man who has spent his life working, only to watch governments, specifically Liberal governments, steal away half of my salary for no good purpose. So when someone jumps up and down about the non-Liberal government not taxing foreigners who are taking profits out of Canada instead of average Canadians, especially without explaining why, my cynicism gets biting.
Incidentally, the article you linked is titled “Election Aftermath: A Report from La Jolla Economics” and has nothing to do with Canada.
Liberals and Dippers like to throw the neo-con label at anyone who dares to challenge their emotion-based arguments… and no, I wasn’t kidding about such arguments being the hallmark of the left. If someone threw the neo-con label at you, you can’t be all bad. The true neo-cons are strong social conservatives. Hopefully, you’re not one of those…
I’ve asked a number of questions which you haven’t responded to so far. Is this because you don’t know the answers or because the answers support my arguments, not yours?
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Interesting LFP article. Evidently, the author agrees the income trust decision is not the screaming hairy end of the world and feels another vehicles for investment will develop.
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21.
You have to scroll approximately halfway down the page to get to the article I am mentioning. When you say the “income trust decision does not affect the majority of seniors” and you ask “since you obviously much more knowledgeable about this, perhaps you can tell me what percentage of Canadians were directly effected by the income trust decision. I’m guessing it’s less than 10% and most of them are only marginally effected.” I submit the following by a market expert in income trusts:
“Betrayal of Trust
Only 19 days have passed since Flaherty stunned the income trust market with the tax bombshell. The Federal officials are justifying their actions with a number of reasons. The need to prevent losing tax revenues that apparently occurs when corporations convert to income trusts. Others reasons given are trusts deplete the capital, another is investors need protection from the allure of high yields and the inevitable scam artists that find their way into any fast growing sector of the securities markets. By our calculations the loss of wealth resulting from the new tax rules has been $54B. As of the Friday November 17 market closing prices of the 250 trusts we cover were valued at $191B, down from $245B as of October 31. The loss of wealth has been massive and will impact even future generations. If 70% of trusts were held by Canadians either directly or in RRSPs the $35B of wealth would have been in a position to grow and eventually be taxed by the government. This wealth would also have been available for inter generational transfers. The compounding effect of income trust growth when based on the pre collapse value of $254B of which $175B is held by Canadians, results in losses in the $100B range 10 years from today. A large portion of trusts were held by seniors and eventually the wealth will pass to the next generation, so more than just the seniors need to pay attention to the new tax rules. The education fund for the grandchildren is taking a hit along with the retirement income of grandma and grandpa.”
When you say “investor.ca feels taxing income trusts is vindictive because the Conservatives took action to stem a tide of mega-corporations from shielding their earnings under an income trust. Oh, boo-hoo! Telus’ quarterly profit was $319.6 million. That’s profit, not gross. And you want to shield these guys from taxation?” my answer is that corporations don’t really pay tax. Corporate dividends flowing out of a corporation are taxed at a corporate rate and then they are taxed again at the individual rate. Unfortunately, tax deferred accounts can’t get back the money from this double taxation because they are entitled to the dividend tax credit.
I appreciate all your questions, but I figure if I can convince you of why it is wrong to tax income trust distributions at the corporate level, perhaps I can convince Harper and Flaherty. Keep me on my toes, it fine tunes my arguments!
Geoffrey Laxton
As for avoiding your questions, you can be certain that I shall try to address all of them as I can.
I too am fed up with the tax regime left over from the Liberal government, this is why I voted Conservative. I sincerely hope that this Conservative government will carry through with all their promises to cut taxes, especially the promise concerning income trust taxation. By the way many Canadian income trusts do a lot of business in the US, but the taxes from these profits go to the Canadian government.
Don’t bother genuflecting on my designations, the only important thing that I wanted to make clear is that I sit in front of the stock market everyday and see what a broad section of Canadians do with their money, that is all.
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errata from post 23
Unfortunately, tax deferred accounts can’t get back the money from this double taxation because they are NOT entitled to the dividend tax credit.
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As for income splitting, sigh.. when you say “I wonder how many seniors living on a single pension are writing angry letters to the editor demanding Flaherty’s head on a platter for allowing pension splitting? Oh wait- those are the lower-middle class folks, well used to being used & abused as tax-slaves. They don’t write letters (angry or otherwise) they just get along…”
Here is a good article to read:
“Only rich couples benefit from income splitting”
Kathleen A. Lahey says Flaherty’s `Tax Fairness Plan’ is the antithesis of fair
Nov. 5, 2006. 01:00 AM
Link is here
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Lahey’s article is typical of today’s yellow journalism. Lahey aims to prove a point and ignores anything which doesn’t agree with her presumptions.
In this case, Lahey claims the only ones who will benefit from income splitting are the rich, those who can afford to have one spouse stay at home. There was a generation or two of couples who weren’t rich yet did exactly that… and those boomers are now retiring… or are already retired. They’re not rich but mom stayed home and dad brought home the bacon. I guess Lahey figures this generation has forgotten the last one? I could go through and dissect the entire article but to what purpose? She’s right in one thing- the rich will benefit from pension splitting- but she makes that sound like a bad thing.
I’m certain I’ve read articles linked to StatsCan which claimed better than 50% of Canadians make little or no preparations for retirement… and less than 9% fully utilize their RRSP allotment. So how many Canadians go beyond their RRSP and put together a substantial nest egg? How many of those invest their RRSP in income trusts instead of lower or no risk investments? By the time you finish whittling out the Canadians who DON’T invest in income trusts, there’s not many left who do.
As for that supposedly massive loss when the income trust decision was made, there is only loss if those folks sold their stocks. I understand your assertion that some folks set an automatic sell if the stock drops but that’s going to be yet another small percentage of that small percentage. Since then, the TSX has recovered and moved into record territory again, has it not? Is it not reasonable to assume some of those income trusts have recovered… and those who sold might have bought into something else which went up… like the rest of the market?
One of the basic tenets of investing which I learned was to consider that any money placed in the stock market had the potential to disappear should a stock tank for some reason. In other words, anyone who places their entire retirement funds into stocks, whether income trusts or otherwise, is a fool. Yes, I’ve seen those pretty charts which show how the stock market in general and mutual funds in particular make greater profit than the assorted interest-bearing vehicles. At the end of the road, the stock market remains a riskier investment.
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Unfortunately, the Canadian economy is currently geared towards two income earning households. If there is only one person earning income and the wife stays home with the children, the Canadian economy punishes this, as prices in the markets are geared toward two people making $45,000 each. I shall try and respond to your reply this evening. I have to go to work now, I shall be home at 8:00pm.
Geoffrey Laxton
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Here is the Current Tax System for Income Trust Distributions in your Retirement Account:
For Canadian “Tax Exempt” Accounts
Income Trust — pays distribution x — CRA takes cut of 0% tax — investor receives distribution x minus 0% tax — investor pays tax at highest marginal tax rate when withdrawn from Canadian “Tax Exempt” Account!
Here is the New System for Income Trust Distributions in your Retirement Account:
Income Trust — pays distribution x — CRA takes cut of 31.5% tax — investor receives distribution x minus 31.5% tax — investor pays tax at highest marginal tax rate when withdrawn from Canadian “Tax Exempt” Account! Therefore, the Income Trust distribution is “DOUBLE” taxed in the hands of the retired individual and not given benefit of dividend tax credit.
The Conservative government is trying to say that they are taxing income trusts, when in effect they are taxing retirement account double!
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I’m super-busy at work (I hate that!) but I’ll get back to you in the next couple of days. Who ever thought I would want to read up on taxes??!? Thanks for trying to teach me, G!
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We all have to work our asses off, probably because 49% of our income goes to tax!
Here is an e-mail I received from the Prime Minister in response to my complaints about his plan to tax income trust distributions twice in retirement accounts.
From : Prime Minister/Premier ministre
Sent : November 21, 2006 9:49:54 AM
To : “Geoffrey Laxton”
Subject : Office of the Prime Minister / Cabinet du Premier ministre
Go to previous message | Go to next message | Delete | Inbox
Dear Mr. Laxton:
Thank you for your e-mail message regarding the government’s decision on income
trusts. I am pleased to have this opportunity to respond.
I understand your disappointment with this decision. We recognize that Canadian
investors, including many pensioners and seniors, have made important
investments over the years and benefit from the current income trust structure.
However, Canadians must trust that their government is watching out for them and
is upholding the values that define us, like fairness. They expect us to fix
problems, right injustices and close loopholes.
As you know, over the past few months we have seen a clear tax avoidance trend
in the creation of new income trusts. Corporations are converting to these
structures and the decisions are based largely on tax considerations. The sheer
number and size of the Canadian companies attempting to gain short-term tax
benefits was threatening Canada’s long-term economic growth. Corporations have
used this tax rule to create an economic distortion. This year alone there have
been almost $70 billion in new income trust announcements.
Canada’s New Government strongly believes that the tax system must be
progressive, fair and competitive. It must provide the right incentives to
create an economic advantage for companies to invest and grow. The tax system
must create an advantage for Canada, not an unfair advantage for some Canadian
corporate taxpayers. The current income trust situation is not fair.
When corporations don’t pay their share of taxes, this burden is shifted onto
the shoulders of hardworking individuals and families. We have taken decisive
action to protect the best interests of all Canadians. Our Tax Fairness Plan
will restore balance to the federal tax system and level the playing field
between income trusts and corporations.
Our plan is the result of months of careful consideration and evaluation. The
measures we have chosen represent a major tax reduction. The Tax Fairness Plan
will deliver over $1 billion of tax relief annually to Canadians. The plan
includes:
1) A distribution tax on distributions from publicly traded income trusts.
2) A reduction of the general corporate income tax rate of one half
percentage point effective January 1, 2011.
3) An increase in the Age Credit Amount by $1000 from $4,066 to $5,066
effective January 1, 2006. This measure will provide tax relief for low
and middle income seniors.
4) The government will permit income splitting for pensioners beginning in
2007. This will significantly enhance the incentives to save and invest
for family retirement security.
The Tax Fairness Plan restores balance and fairness to Canada’s tax system. It
will ensure that our economy grows and prospers, while bringing Canada in line
with other jurisdictions. It is the responsibility of the Government of Canada,
not corporate tax planners, to set our nation’s tax policy. Taxes must not be
shifted unfairly onto the shoulders of individuals and families. We have
developed a plan that upholds the value of fairness and delivers major positive
changes in tax policy.
Once again, thank you for taking the time to share your thoughts. I invite you
to visit the Department of Finance website at
http://www.fin.gc.ca/news06/06-061e.html for full details regarding the Tax
Fairness Plan.
Sincerely,
The Rt. Hon. Stephen Harper, P.C., M.P.
Prime Minister of Canada
I don’t agree with his assessment and I will break it all down and analyze what he is saying here in as impartial a manner as I can muster.
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Here are then Opposition Leader Stephen Harper’s words written in an Op Ed Article. The irony is actually too painful to ponder right now.
Questioning income trusts puts seniors at risk
Byline: Stephen Harper
Source: National Post
Wednesday, October 26, 2005
Page: A20
On September 19, the Prime Minister acted recklessly when he ordered his Finance Minister, Ralph Goodale, to wade into the income-trust market like a proverbial bull in a china shop. On that day, investors were put on notice that their popular income trusts were going to be targeted by a Liberal government seeking higher tax revenues from companies and investors.
Martin’s reckless action has caused uncertainty over the future of income trusts, and so has wiped out billions of dollars in market capitalization from Canadian companies and tens of thousands of dollars from the retirement nest eggs of individual investors. Most notable was the damage done to Canadian seniors who may not have the time to recoup their losses.
One couple e-mailed my party to complain that the uncertainty around income trusts caused by the Liberals’ announcement trimmed $30,000 from their retirement portfolio in a single day. Another man wrote to tell us that he had lost 15% from his his portfolio.
Many seniors feel the government is putting their retirement at risk and have let Ottawa know. In a letter to the Finance Minister, the Canadian Association of Retired Persons said, “Seniors are actually enraged, frightened and panicked about potentially losing retirement savings that they count on for the essentials of daily living.”
Income trusts are popular with seniors because they provide regular payments that are used by many to cover the costs of groceries, heating bills and medicine. They also provide tax relief from a government that is addicted to taking too much money from their pockets and spending it without care, and very often without meaningful results.
So one must ask, why is the government clamping down on the retirement savings of seniors and investors?
But it gets worse. Instead of immediately moving to assure markets that income trusts are here to stay, the Liberals are justifying their actions in the coldest political terms. As one government member was quoted in the media as saying about income trust investors, “They have no constituency. They don’t count politically.”
That kind of arrogance cannot go unanswered. There is just no justification for what amounts to a Liberal government attack on investors, and especially on seniors.
The government continues to overtax Canadians and run multi-billion dollar surpluses, yet their first instinct is to attack an investment vehicle that can make the difference between bare survival and a dignified retirement for millions of Canadians.
The 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.
As my party’s finance critic, Monte Solberg, says, the success of income trusts represents a rare triumph for investors over the tax man. Let’s not be so naive as to assume that the Liberals will do the right thing to protect taxpayers. We’ll need to fight hard to keep what we have, and even harder to gain ground.
It’s time to stand up to Paul Martin and stop his attack on seniors and investors.
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Wow… what a horrid week I’ve had at work. We’re short-handed and the boss is gone on a training course. He picks me to run the show and it’s like the floodgates swung open. Every project was important and time sensitive. I’m bagged.
Geoffrey, we’ve already established that Harper and/or Flaherty revised their position on income trusts so posting a letter-to-the-editor to redemonstrate such really doesn’t serve much purpose.
I hope Trust-Only-Mulder doesn’t mind if I ask you a few questions to try to clarify this issue in my befuddled mind.
For instance, earlier you said I didn’t understand cashflow because corporation don’t pay taxes directly. Yet, in the reply letter you just posted, the author says “When corporations don’t pay their share of taxes, this burden is shifted onto
the shoulders of hardworking individuals and families.”
So which is it? Do corporations pay taxes or not? If not, is the letter’s author being deceptive?
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I know how you feel about work, I have been working overtime every day for five weeks!
I understand your confusion, Prime Minister Stephen Harper wrote both these letters that I have posted! They contradict each other. One was written in 2005 and one was written to me recently.
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Do corporations pay tax or not?
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In the context of payouts to shareholders, not really. Corporations distribute profits to shareholders in the form of corporate dividends or income trusts pay distributions. In recognition that the government is taxing these flows of capital, individual tax payers are allowed a dividend tax credit to make up for this “double taxation”. The flow of capital is taxed between the corporation and individuals receiving it and then taxed again in the hands of the individual receiving it. So money is taxed before and after the individual the individual. The corporation or income trust is not effected, since this money has already left them. In other words money sent to people is taxed. The corporations don’t really pay it, people are getting taxed. The tax system, in effect takes cuts out of people’s income.
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Here is an article entitled “Canadian Income Trusts: An Analysis of the Current Situation”
“The big losers of course are those average Canadians who own these trusts in their retirement accounts. They will have their dividends reduced by 31.5% and still be subject to ordinary income tax rates once those distributions are withdrawn from their retirement accounts.. Since most lack the additional private savings necessary to buy these trusts in their taxable accounts, they can not take advantage of the higher after-tax yields that today’s low prices have produced.”
Link is Here
by Peter Schiff, President and Chief Global Strategist for Euro Pacific Capital. He is widely acknowledged as an expert in international markets, and in global economic strategy. He is a speaker at all the major investment conferences. He is regularly featured on CNBC and Bloomerg TV , and often quoted in the Wall Street Journal, Barron’s, New York Times, the Financial Times, Investors Business Daily, and many others.
As for the tax leakage to foreign investors and that Americans don’t pay enough tax, well Harper will have to renegotiate the tax treaty!
“Article 22 of the Canada US Tax Treaty provides for a 15% withholding tax on distributions to trust beneficiaries. The proposed trust taxation rules appear to be in contravention of this treaty.” (Private Communication)
Now that the tax treaty is in question there is now talk of lowering the tax to US investors from 15% to 10% on dividends and income trust distributions!!!
So what Harper has done is add a 31.5% tax to senior Canadian accounts, thus double taxing seniors and is now contemplating lowering the tax to US investors from 15 – 10%. Could someone please explain this to me?
Concerning the taxes charged to US investors, the Globe and Mail had this to say:
“These withholding taxes are probably an impediment to investment flows,” says Finn Poschmann, director of research at the C.D. Howe Institute.”
“In the short term, Ottawa gives up some tax revenue, but in the long term, improved investment flows and better access to financing for Canadian companies make up for the loss, he argues. Access to venture capital in particular could be improved, he says, mainly because Americans would bring capital and managerial skills by taking larger stakes in Canadian companies.”
“With the United States, Canada generally levies a 15-per-cent withholding tax on dividends and a 10-per-cent tax on interest payments of various kinds. In turn, the United States taxes interest paid to Canadians at a rate of 10 per cent. Although taxpayers on both sides of the border get tax credits from their own country for tax withheld by other countries, the credits don’t come close to making up investors’ losses.”
“As a result, the withholding taxes have acted as a deterrent to Americans investing in Canada and to U.S. financiers underwriting Canadian firms and projects, analysts say.”
“Canada’s share of the world’s foreign direct investment has slowly declined over the past year, and the elimination of withholding taxes could help reverse the trend, analysts argue. The move would make it easier for Canadian companies to expand beyond Canada, and encourage foreign firms to invest here.”
link is here
So what is the point of this exercise of taxing income trusts? I will try to answer in another post.
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Geoffrey, I think the key point to your last comment is “Corporations distribute profits to shareholders”
1) They distribute profit. That profit is what is left AFTER expenses, AFTER taxes. There is, in fact, a tax paid by the corporation before we even get to that point.
2) Now since a corporation is a separate entity from the individuals who personally own shares, when that individual makes money on a share rising or a dividend being paid out, then why should that profit not be taxed? That’s just logical and normal.
Isn’t that what it all comes down to? paying tax on earned income?
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Receiving this corporate profit taxed is disincentive to investment in these companies. As I said, the government is looking into lowering the tax to US investors as an incentive for them to invest in the Canadian economy. Without investment, there is no innovation, productivity and prosperity. Don’t forget, corporations create work, pay employees, produce items for consumption (the GST consumption tax should handle this) and hopefully create useful things such as food, clothing and shelter. Taxes are the antithesis to these things in the free market economy, but why am I lecturing a Conservative about the free market economy?
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Also, unfortunately, as I have belaboured the point. The maximum tax hit for the “Tax Fairness” plan will be senior’s retirement accounts will be hit with a 31.5% tax and then taxed again at the marginal rate. Canadian taxable accounts, if you read the articles that I have presented, will actually not be taxed on these distributions due to the dividend tax credit and US investors are probably going to get their tax lowered to 10% as per International Treaty and as an incentive to invest in Canada. Does anyone not see a problem with shifting the burden of tax to senior’s retirement accounts!?
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The more that government taxes corporate profits, the less money goes to shareholders, the less incentive there is to invest and reinvest in the corporation. Capital then dries up for investment in corporations. How is that productive?
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The problem, as Harper and Flaherty are full well most likely aware of, is not that income trusts are undertaxed, it is that corporations are overtaxed. Therefore, the incentive to invest in Canadian companies is lower.
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“Not really” sounds to me like “yes but only if they’re stupid enough not to find a way to write taxes off or a loophole to hide profits… like income trusts.”
How interesting that you’ve gone from “corporations don’t pay taxes” to “the more that government taxes corporate profits” while accusing Harper of being inconsistent.
-Mac
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I’m not saying it’s a great thing that corporations are taxed. In a perfect world, corporations wouldn’t have to pay tax but neither would the citizens. User-pay government, anyone?
We’ve allowed governments to delve into areas which have nothing to do with governing. Although Trudeau wasn’t the first to introduce social programs, he was the hands-down all-time champion. Those programs, as ineffective and counterproductive as they are, cost a great deal of money. Until we, as a society, develop the wit and wisdom to dump the legacy of Trudeau and stand on our own, we’ll be paying taxes.
Since businesses take profits from Canadians and, in many cases, use and/or exploit Canadian resources, I don’t have a problem with them shouldering their portion of the tax burden.
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So now corporations are overtaxed? Wow… you’re hopping around like a fart in a mitt!!
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Trust-Only-Mulder, there seems to be a problem with your feed. I’m getting emails with updates on posts that don’t show on the blog.
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COMPARISON OF INVESTOR TAX RATES IN 2011
Current System New System
Investor FTE Large Corporation FTE Large Corporation
(Income) (Dividend) (Earnings) (Dividend)
Taxable Cdn(*)46% 46% 45.5% 45.5%
Cdn tax-expt 0% 32% 31.5% 31.5%
Tax. U.S.(**) 15% 42% 41.5% 41.5%
When I say corporate dividends are overtaxed, the above chart illustrates what I mean, investors are being overtaxed. It is investors being overtaxed. What is the problem with that you say? Jim Flaherty is now scrambling to figure out how to prevent US investors from fleeing the Canadian capital markets now that he said that their tax would be raised from 15% to 41.5% on income trust distributions. Why would they want to invest in Canada? The problem isn’t that the government isn’t collecting enough tax from investors, the problem is what incentive do we give to investors to keep investing in Canadian companies?
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I just noticed that posts are missing, I have put up a lot of supporting documentation that is missing. I am just seriously trying to help people understand how to look at this issue, thanks for the comments everyone.
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Did you read post 37 and the articles contained therein? The problem with the government is that they just took a top down approach without a proper bottom up analysis of the situation. They need to correct themselves on this situation immediately.
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Let’s face it- companies were converting to income trusts for a reason- to avoid taxation and to give greater dividends to shareholders. Flaherty talked about wanting to stop the rush of companies to change. The articles you posted suggest the income trust issue was one which needed to be addressed. Perhaps, instead of announcing a change of rules, Flaherty could have announced a moritorium on income trust conversions while they studied how best to address the problem?