Thursday, November 23, 2006
Flaherty Makes Some Cents, But...
At first glance the Finance Minister's thought processes may have stabilized with today's announcement that the Conservative government intends to continue the tradition of previous Liberal governments by focusing on paying down the national debt. However, there is a catch. Mr. Flaherty refers to 'net' debt, not national or total debt. But, I'll get back to that later.
When you consider that the cost of servicing the national debt is about 17 - 18 cents of every tax dollar sent to Ottawa, Mr. Flaherty's decision (this time) might make more sense for every Canadian than any impact from income splitting. Paying down the national debt is fair to everyone; old, young, single, married, homosexual, or heterosexual. The best part of the plan will be realized when future generations continue to reap the benefits of low or no debt.
How did we get in this predicament? Our debt soared like a kite under Trudeau from $11.3 billion when he entered office to $128 billion and no deficits to deficits of $25 billion annually by the time he left office. Then, the Mulrooney Conservative government launched the debt into orbit to nearly $500 billion. Not until 1995 under Prime Minister Chrétien's watch and later Paul Martin's, did the debt begin to fall, and fall significantly until Martin was defeated. Now, Flaherty appears to be on the same track as his predessors.
But, Mr. Flaherty's proposal does not target national debt. Instead, he's going after 'net' debt, which is the total debt minus government's financial assets such as cash in the bank, short term investments, pension funds, and loans.
Whether it's net debt or total debt, it matters not. Focusing on paying down either is a good thing. Mr. Flaherty intends to pay down net debt at the rate of $3 billion per year. At that pace, he says the net debt will be paid off in 15 years or 2021. Assuming a 5.5% interest rate, the net debt must be slightly in excess of $30 billion. In contrast, the national debt is about $480 billion. Assuming the same interest rate and payment schedule, the national debt would be paid off sometime in the 22nd century.
In any event, we the taxpayer, will save hundreds of millions of dollars in interest savings on the net debt if the Finance Minister can maintain the same rate of success as his Liberal predecessors.
Not withstanding Mr. Flaherty's apparent good intentions, the Michael Ignatieff link stays.
When you consider that the cost of servicing the national debt is about 17 - 18 cents of every tax dollar sent to Ottawa, Mr. Flaherty's decision (this time) might make more sense for every Canadian than any impact from income splitting. Paying down the national debt is fair to everyone; old, young, single, married, homosexual, or heterosexual. The best part of the plan will be realized when future generations continue to reap the benefits of low or no debt.
How did we get in this predicament? Our debt soared like a kite under Trudeau from $11.3 billion when he entered office to $128 billion and no deficits to deficits of $25 billion annually by the time he left office. Then, the Mulrooney Conservative government launched the debt into orbit to nearly $500 billion. Not until 1995 under Prime Minister Chrétien's watch and later Paul Martin's, did the debt begin to fall, and fall significantly until Martin was defeated. Now, Flaherty appears to be on the same track as his predessors.
But, Mr. Flaherty's proposal does not target national debt. Instead, he's going after 'net' debt, which is the total debt minus government's financial assets such as cash in the bank, short term investments, pension funds, and loans.
Whether it's net debt or total debt, it matters not. Focusing on paying down either is a good thing. Mr. Flaherty intends to pay down net debt at the rate of $3 billion per year. At that pace, he says the net debt will be paid off in 15 years or 2021. Assuming a 5.5% interest rate, the net debt must be slightly in excess of $30 billion. In contrast, the national debt is about $480 billion. Assuming the same interest rate and payment schedule, the national debt would be paid off sometime in the 22nd century.
In any event, we the taxpayer, will save hundreds of millions of dollars in interest savings on the net debt if the Finance Minister can maintain the same rate of success as his Liberal predecessors.
Not withstanding Mr. Flaherty's apparent good intentions, the Michael Ignatieff link stays.
Tuesday, November 21, 2006
Flaherty's "Rithmetic".
Dumbfounded. Confounded. Unfounded. These are words that aptly describe Finance Minister Flahety's "rithmetic" lesson on taxes.
Bearly three weeks ago, Finance Minister Flaherty changed the rules governing income trusts and in doing so destroyed $20 - $34 billion of taxpayer savings in order to save $500 - $800 million in alleged lost tax revenue. In exchange for destroying so much wealth Mr. Flaherty proposed income splitting for pensioners - crumbs compared to what he took away from them after tinkering with income trusts.
Today, he is considering extending income splitting to all Canadians and for all types of income. It is reported that such a measure would cost the government about $5 BILLION in lost tax revenue.
Does this man actually know what he's doing?
One thing is now clearer than ever. There was obviously no need to destroy so much taxpayers' wealth on October 31, 2006.
But, even if the Finance Minsister's idea comes to be, why should pensioners and couples be the only people to benefit from such extensive tax reform? If Mr. Flaherty wants to make meaningful contributions to tax reform, just give us a flat tax rate and a one page tax return. Then all Canadians will benefit equally and fairly.
Bearly three weeks ago, Finance Minister Flaherty changed the rules governing income trusts and in doing so destroyed $20 - $34 billion of taxpayer savings in order to save $500 - $800 million in alleged lost tax revenue. In exchange for destroying so much wealth Mr. Flaherty proposed income splitting for pensioners - crumbs compared to what he took away from them after tinkering with income trusts.
Today, he is considering extending income splitting to all Canadians and for all types of income. It is reported that such a measure would cost the government about $5 BILLION in lost tax revenue.
Does this man actually know what he's doing?
One thing is now clearer than ever. There was obviously no need to destroy so much taxpayers' wealth on October 31, 2006.
But, even if the Finance Minsister's idea comes to be, why should pensioners and couples be the only people to benefit from such extensive tax reform? If Mr. Flaherty wants to make meaningful contributions to tax reform, just give us a flat tax rate and a one page tax return. Then all Canadians will benefit equally and fairly.
Labels: income trusts, taxes
Sunday, November 19, 2006
What's Next for Income Trusts?
Apparently, Finance Minister Flaherty is not finished wreaking havoc on income trusts, pensioners and other investors holding income trusts in their RRSP's, RRIF's and LIF's. If the Finance Minister has his way, we may suffer further losses in the coming weeks.
In addition to announcing new tax rules for income trusts effective in 2011, the Finance Minister is creating new guidelines that may place restrictions on how income trusts can finance the growth of their companies. From a lay person's perspective, such guidelines would effectively stifle growth, productivity, and competitiveness for these companies.
Is Flaherty trying to force income trusts back into a corporate structure sooner than later?
Consequently, investors may not be the only victims of Flaherty's capricious policy making. Income trusts employ over 250,000 Canadians who could also be adversely affected by the new guidelines.
This "getting things done for all of us" Conservative government is creating an unstable investing environment in this country. Personally, I think its time to take my investments and focus on more stable areas of the planet like the U.S., Europe and China. Forget about Canada.
In addition to announcing new tax rules for income trusts effective in 2011, the Finance Minister is creating new guidelines that may place restrictions on how income trusts can finance the growth of their companies. From a lay person's perspective, such guidelines would effectively stifle growth, productivity, and competitiveness for these companies.
Is Flaherty trying to force income trusts back into a corporate structure sooner than later?
Consequently, investors may not be the only victims of Flaherty's capricious policy making. Income trusts employ over 250,000 Canadians who could also be adversely affected by the new guidelines.
This "getting things done for all of us" Conservative government is creating an unstable investing environment in this country. Personally, I think its time to take my investments and focus on more stable areas of the planet like the U.S., Europe and China. Forget about Canada.
Labels: income trusts, taxes
Tuesday, November 07, 2006
The Stench Left By Income Trusts
The Conservative government’s “Tax Fairness Plan” is a phrase of contradiction when compared to the negative fallout of the government’s hasty, poorly conceived, deceptive, and thoughtless decision to destroy income and royalty trusts. This decision resulted in the vaporization of an estimated $20 - $34 billion from the personal banking and brokerage accounts of Canadians. The fallout will continue as distributions from these companies to its investors begin to decline as we get nearer to 2011. The unpropitious consequence is hardly mitigated by the government's simultaneous introduction of new tax reduction initiatives.
The government’s needless broad based destruction of so much of its constituents' personal assets is likely unprecedented in the history of Canadian governments. In hindsight, the cost of waste in the collective Chrétien and Martin governments now seems more like the passing of an unpleasant odour from a mild fart compared to the lingering stench left by the Conservative's “Tax Fairness Plan”. While this plan offers a few small plastic encapsulated toys as consolation prizes to the lower income seniors and little and no prizes to most middle income taxpayers, it is more akin to a massive tax increase for the investing public.
When Prime Minister Harper and Finance Minister Flaherty secretly met to discuss a resolution to the perceived income trust problem, they decided to use the shotgun approach that resulted in the destruction of billions of dollars in the savings of Canadians for the sake of a measly $500 million dollars in alleged lost income tax. All of this despite previous assurances from Prime Minister Harper that he would not touch income trusts.
Was there a problem brewing with income trusts? Yes, you bet. Had Telus, BCE, Encana, and potentially the big banks followed down the income trust path, billions in tax dollars might have been lost. It was the potential for future conversions to income trusts that PM Harper and finance minister should have focused their attention, not the current income trusts. A simple passage of law grandfathering income trusts effective January 1, 2007 would have more than adequately resolved the problem. Instead, PM Harper and Mr. Flaherty chose to crucify every existing and future income and royalty trust (except REITs) along with the Canadians who held them in their RRSP's, RRIF's, LIF's. Those who held them in their non-sheltered accounts will fare better as they have the option to claim capital losses.
Mr. Flaherty was well aware that corporations who had converted to trusts long before October 31, 2006 posed no threat to the country’s tax regime. That is clear from his statements in the House of Commons on November 6, when he said:
"...the information we used with respect to decision making on the income trust issue was the information that was available about the growth of income trusts, about the reality that we were seeing income trusts being chosen as an instrument of conversion by companies in the telecommunications business, that there were many more to come, and the kind of economy that we would end up having in Canada, not to mention the tax fairness issue where large telecommunications companies could avoid taxes in excess of $1 billion."*
That being the case, where is the rationale to kill existing income trusts and where is the impetus to support a future Conservative government?
Kudos to the Liberals for supporting Canadians on this issue.
*Hansard 77 (2006/11/06)
The government’s needless broad based destruction of so much of its constituents' personal assets is likely unprecedented in the history of Canadian governments. In hindsight, the cost of waste in the collective Chrétien and Martin governments now seems more like the passing of an unpleasant odour from a mild fart compared to the lingering stench left by the Conservative's “Tax Fairness Plan”. While this plan offers a few small plastic encapsulated toys as consolation prizes to the lower income seniors and little and no prizes to most middle income taxpayers, it is more akin to a massive tax increase for the investing public.
When Prime Minister Harper and Finance Minister Flaherty secretly met to discuss a resolution to the perceived income trust problem, they decided to use the shotgun approach that resulted in the destruction of billions of dollars in the savings of Canadians for the sake of a measly $500 million dollars in alleged lost income tax. All of this despite previous assurances from Prime Minister Harper that he would not touch income trusts.
Was there a problem brewing with income trusts? Yes, you bet. Had Telus, BCE, Encana, and potentially the big banks followed down the income trust path, billions in tax dollars might have been lost. It was the potential for future conversions to income trusts that PM Harper and finance minister should have focused their attention, not the current income trusts. A simple passage of law grandfathering income trusts effective January 1, 2007 would have more than adequately resolved the problem. Instead, PM Harper and Mr. Flaherty chose to crucify every existing and future income and royalty trust (except REITs) along with the Canadians who held them in their RRSP's, RRIF's, LIF's. Those who held them in their non-sheltered accounts will fare better as they have the option to claim capital losses.
Mr. Flaherty was well aware that corporations who had converted to trusts long before October 31, 2006 posed no threat to the country’s tax regime. That is clear from his statements in the House of Commons on November 6, when he said:
"...the information we used with respect to decision making on the income trust issue was the information that was available about the growth of income trusts, about the reality that we were seeing income trusts being chosen as an instrument of conversion by companies in the telecommunications business, that there were many more to come, and the kind of economy that we would end up having in Canada, not to mention the tax fairness issue where large telecommunications companies could avoid taxes in excess of $1 billion."*
That being the case, where is the rationale to kill existing income trusts and where is the impetus to support a future Conservative government?
Kudos to the Liberals for supporting Canadians on this issue.
*Hansard 77 (2006/11/06)
Labels: income trusts, taxes
