So it’s a matter of trust – income trust that is. There is lots the “Gnu Government of Canada” has done that I disagree with but the phasing out of income trusts is not amongst them. This is the kind of political action and courageous hard choices we need from government.
Income trusts were getting out of hand. They force a short term and shallow definition of business success plus a narrow planning and management perspective on those businesses. They reward the here and now at the expense of the future. Research and development, productivity enhancements, new technology investment, even maintenance, anything with any immediate cash demands can tend to get deferred if they drain the pool of immediately distributable cash from the income trust. Management gets rewarded on quarterly results and effective corporate tax avoidance. Nothing wrong with that if your view of the role of business and enterprise is shallow and superficial. We were just setting our selves up to be even more non-competitive and more quickly with the BRICK countries (Brazil, Russia, India, China and Korea).
Sure it was a political promise broken. Perhaps the promise should not have been made in the first place because it was unrealistic. Income trusts were growing rapidly and part of the political drama in the last federal election. You will recall the campaign rhetoric about "leaks" from Liberal Cabinet Ministers about the future of income trusts and the “timely” intervention of the RCMP’s very public announcement of an investigation about the so-called "leaks"right in the heat of the campaign. Does anyone remember what happened or the current status of that investigation? Was it purely political?
Campaign promises have been broken before and for far lesser reasons. Trudeau beat Stanfield saying never would he institute wage and price controls and did it soon after winning. Chrétien was promising to abolish the GST…enough said. Both men won subsequent elections as I recall. I am not justifying breaking political promises. Just saying it could be worse. Look at this clip from the TV show Boston Legal about the American state of political culture and tell me if it is more of a documentary than drama.
So are political campaign promises really equivalent to Pulitzer Prize winning fiction? It really depends on the capability, conscience and character of the candidates at the end of the day. What unrealistic promises are bing made by PC candidates that will be broken once power is achieved. It is called the Catch 23 of politics. The skills necesary to become the leader are entirely different than those needed to be the leader.
An old mentor of mine once said “Sometimes you have to put away your ‘principles’ and do the right thing.” That is what happened yesterday with the Harper government and I for one, in this instance, applaud it.
Ken:
ReplyDeleteYour anonoymou friend weighing in. I can't keep up wih you, your going at a furious click.
I anticipated action on the income trust issue, but not before after the next election. The Tories surprised virtually everyone with their actions on October 31. They got guts I can tell you and I believe over the medium-term they'll be winners on this one if they spin it right.
I believe ultimately that it is good public policy and good politics. There is definitely leakage from income trusts. The Conference Report: Fiscal Prospects, 2006 estimates that based on a status quo scenario for the feds, CIT will make up only 18% of total taxation sources for the federal government by 2024/25.
Obviously, something had to be done to plug a loophole that other countries plugged back in the 1980s.
From a political standpoint they are interesting issues involved. I believe that the Tories have ameliorated the pain by phasing in the changes for existing trusts over five years, permitting income splitting by seniors, increasing the age credit amount, reducing the general CIT rate from 19% to 18.5% starting in 2011,with promises of personal income tax returns in the 2007 budget, just in time for an election. They got a $20 billion projected surplus for 2007/08, so the PIT cuts can be quick deep.
The interesting aspects of this whole situation, contained in the background documents, is that a third of the 34% income tax levy or 13% is to be collected by the feds and earmmarked by the provinces according to a formuala to be determined by the feds in negoitations with the provinces.
By all rights, Alberta is intitled to around $500 million because of their large share of corporate tax income, compared to Alberta holdings of trust units of less than 10 percent. Bit you want to make a bet that Ontario and Quebec get the lions share of the provincial leakage fund because that is were the voters are for the Tories to secure their majority. There will be hell to pay with the Alberta government, if this is the case.
Maybe the first big decision for the current front-runner Jim Dinning to deal with if he becomes Premier on December 2.
Interestingly if you read the Globe piece today, David Ebner and Deborah Yedlin, Dinning is curiously offside with his own government on this issue. I read somewhere that Alberta Government was onside with Flaherty decision, and had even mentioned the issue as a concern in its 2006 budget.
If appears that Diamond Jim is being pressured by his oilpatch donors to oppose the Flaherty decision.
So what happens if he becomes Premier, is he going to leave the money on the table and let Ontario and Quebec collect the lions share that rightfully belongs to Albertans.
An interesting conundrum for Mr. Dinning indeed.
Ken - it doesn't happen often, but I disagree with you on this issue. Actually, I only partially disagree with you on this issue.
ReplyDeleteTax issues aside, income trusts are (or at least were) a great investment tool, under the right circumstances - mature business, stable cash flow, little re-investment opportunities. A great example, and the first unit trust I purchased - is Big Rock Brewery in Calgary.
Big Rock did the right thing - management realized they couldn't reinvest the cash unproductively - they returned it to its owners (shareholders) in the form of dividends.
This is an extremely courageous action on the part of management. Rather than return money to shareholders, the temptation for many managers is to ‘reinvest’ the money in the company – driven largely by consultants and investment bankers, and fuelled by the unproven believe that more is better. Many of these ‘reinvestments’ are actually incredibly poor business decisions – we’ve seen bad strategy (Nortel), bad products launched (new Coke), bad campaigns, bad mergers (HP/Compaq, Spring/Worldcom, Chrysler / Daimler-Benz). 60-75% of mergers are deemed a failure. Collectively, these actions destroy shareholder value.
For some businesses (or with many of the stable oil and gas companies, that generate enormous cash flow, and can’t productively reinvest it all) income trusts were the responsible choice.
I agree with you, however, that this isn’t a silver bullet – the magical structure for all organizations. It is a terrible choice for Telus / BCE, since these firms need to constantly reinvest in infrastructure and technology, and would have been handcuffed by the need to make regular monthly dividends.
Although I haven’t conducted an analysis of the tax issues related to income trusts, I am surprised that there is a deficit, since the dividend income is taxed.
This is a poor policy from the conservative government. Billions of dollars of shareholder value were wiped out this week, and the PCs will pay at the polls.
--TimG from Texas.
AGREED Income trusts make sense for those "mature, stable cash flow, little reinvestment opportunities..." SUNSET operations that will be replaced by technology or fashion or just chug along like office towers or what have you (perhaps why REITS were exempt from the recent decision). Junior and Mid size O&G companies who really need reinvestment new technology for environment upgrading, reclamation and enhanced extraction, beter alnd use techniques and transition to alternatives are turning to trusts and not as able to meet the changing dynamics of their sector as a result. Just one example of where we need a better management mindset than an income trust will devolve into.
ReplyDeletePolitically we need politicians to stop overpromising and underdelivering; and misleading at campaign time and underleading as governors.