January 18, 2010
Mr. Pierre Poilievre
Member of Parliament, Nepean—Carleton
and the ONLY Canadian living, to qualify for a full pension at the age of 31
250-B Greenbank Road,
I want a “brilliant” revenue generating solution to the “welfare loss” situation caused by your government’s income trust policy , for inclusion in Budget 2010
I wanted to bring to your attention revenue generating solution to the “welfare loss” situation caused by your government’s income trust policy that I first learned about last Thursday when listening to Ottawa’s CFRA 580 Talk Radio network, where host Greg Hebert was interviewing Brent Fullard, the President of CAITI, an association which I am a member of. “Welfare loss” is the term used by TD Bank in their submission to the Public Consultation Process in 2005 held by the previous Liberal government, in which TD Bank predicted that a tax, like the one levied by your government, would result in. “Welfare loss” is a term used by policy makers and economists like Don Drummond of TD Bank to describe policies, like your income trust tax, whose outcomes socio-economic detriments outweigh the socio-economic benefits..
Whereas TD Bank’s expert opinion was only forward-looking and predictive at that time that it was, all of the adverse outcomes that they forewarned about have now come to fruition, making now the time for you to “recalibrate” this policy to avoid further inevitable “welfare loss” in the short time remaining, namely the 201o Budget which will be the last budget before these remaining trusts fall off the cliff.
My purpose in contacting you is not to complain to you, but rather to suggest to you and your government a solution to eliminate any further ”welfare loss” that will accrue to all of Canada and all Canadians taxpayers if you persist in your “do nothing” attitude to this problem. As Stephen Harper himself said, he is taking a break from the daily demands of the House being in session by proroguing Parliament to “recalibrate” your government’s policies in order to address the economic challenges of the day, the pension crisis and structural deficits being two priorities on the top of any Canadians’ list.
In that regard, I have nothing but good news for you, in resolving this “welfare loss” pandemic from your income trust policy that is going untreated, since:
- 75% of the income (think “profit sharing”) trust are still out there, and that have not been taken over by Korean National Oil Company, OMERs pension, Li Ka Shing and the like
- it addresses head on the issues of “pension crisis”, “structural deficits” and a host of other hot button issues of the day, such as government accountability and good government for all, not just some
- the Marshall Plan solution is a complete face-saving exercise for you and your government, that does not require you to recant your 31.5% income trust tax
you will get the political monkey off your back called aggrieved income trust investors, whose support was pivotal to your winning a minority government in 2006 and whose collective rage was probably one of the key reasons your party failed to win a majority mandate in 2008. It is unreasonable for your party to think that 2.5 million Canadians are ever going to forget losing $35 billion in their life savings, and for many their sole means to retirement, income as a result of your party’s broken 2006 election promise.
Therefore I am offering you a win win win proposal, that if adopted by your party in the 2010 Budget in March, will serve to absolve your party of these adverse economic and political outcome.
By the same token, failure to adopt this policy, will only make things worse for your party, as it will be clear to all, myself included as someone who campaigned on your behalf in 2006 that when presented with the opportunity to throw the drowning Canadian (i.e, me) a life saver”, you failed. Surely the compassion that Stephen Harper and your party are showing to the victims of natural disaster in Haiti, can also be brought to bear on behalf of all income trust victims/Candians taxpayers and seniors here in Canada, and the man made disaster known as your party’s income trust tax.
In that regard I am submitting to your government what we refer to as Canada’s Marshall Plan for dealing with Canada’s pension crisis.
I have broken this letter into two parts and highlighted the salient points, as follows:
Benefits to all Canadians of the Marshall Plan:
(1) It will resolve Jim Flaherty’s income trust policy fiasco of Halloween 2006 that caused self employed people like myself, and 2.5 million other Canadians, many of them seniors, to lose $35 billion of their life savings and an essential source of retirement income for the 75% of Canadians who, unlike MPs, are without pensions
(2) It will create a massive new stream of cash tax revenue for the government that is presently being “deferred” to future periods. The concept of “deferred taxes” and your treatment of them in a manner inconsistent with the Auditor General’s rules of Accrual Method Accounting are the sole source of your government’s “tax leakage” argument from income trusts. My proposal turns these deferred taxes collected in future periods into cash taxes collected in the present period. This will be a MAJOR help in dealing with Canada’s structural deficit in a manner that will be free of any taxpayer backlash or need to reduce spending programs like health care and other essential social programs that Canadians rely on
(3) This new source of revenue provides the equivalent of a 0.75% GST increase, but with no GST increase required. Think of it as found money, measured in billions of dollars per year, estimated as approximately $6.0 billion per year, since income trust distributions are taxed at an average rate of 38% (according to the Department of Finance) and there is approximately $16 billion of income trusts distributions that are paid by the remaining 169 income trusts (versus the 220 trusts that existed previously before they were taken over by foreigners and tax deferred pension funds, whose taxes aren’t otherwise collected, similar to the alleged problem with RRSPs that your income trust tax was intended to solve, but clearly did not)
(4) It will help seniors like ourselves along with the 75% of Canadians without pensions to restore an essential source of income for retirement, that is presently going to be lost when your government’s income trust tax comes into effect in one year’s time that will see all these income trusts convert to corporations and start paying taxes (in total) that are significantly less (in total) than would be paid to Revenue Canada under my proposal (in total) amounting to the difference referred to in (2) above
(5) It will avoid the continued rash of takeovers of vulnerable income trusts by foreign corporations, foreign state-owned entities and foreign private equity and the accompanying permanent additional erosion of the tax base, that will accelerate in pace now that the one year deadline is looming
(6) It will restore a level playing field between the 75% of Canadians without pensions (RRSPs) with the 25% of Canadians with pensions (eg OTPP), who are presently able to own income trusts (privately) and not pay the 31.5%, whereas I pay the 31.5% tax in my RRSP on income trust investments.
(7) It will promote saving and investment in Canada and provide corporations with a lower cost of capital and allow them to compete on a level playing field with US companies who use an identical structure to income trusts called MLPs.
(8) It will direct the vast pool of Canadians’ retirement savings into real investment in the Canadian economy, rather than into synthetic, derivative type savings products, such as Manulife’s Income Plus. As we witnessed during the Global Financial Meltdown, many of these products like Manulife’s Income Plus were not being hedged properly by those entrusted to manage them, with the result that Manulife became unstable financially and almost became “AIG north”, and therefore the Marshall Savings Plan averts a “too big to fail” taxpayer bailout in the years ahead from failed derivative investment strategies or other synthetic income investment products like Asset Backed Commercial Paper (ABCP). Canadians saving for retirement, like myslef, should not be exposed to investment products that are similarly defective and whose defects only become apparent when it's too late, putting us in the same situation as say, a Nortel pensioner or a GM pensioner, who were ultimately bailed out by taxpayers like us.
(9) The Marshall Savings Plan avoids the systemic risks to our economy from toxic investments like ABCP and Manulife’s Income Plus and whatever the next get-rich synthetic scheme might be dreamed up, thereby lowering the “country risk” assigned too Canada in the global capital markets and translating into a higher credit rating on Canada’s debt and minimizing the country’s cost of borrowing, an important consideration now that Canada has to fund some $50+ billion in deficit financing
Description of the Marshall Plan:
The Marshall’s proposal, that I call upon you to implement, is to create a new retirement savings vehicle, called the Marshall Savings Plan (MSP).
The MSP is a hybrid that will position itself between the existing RRSP and the TFSP (your government’s Tax Free Savings Plan) and borrows all of its measures from either the RRSP and/or the TFSP, and maximizes tax collection for Ottawa, while solving your government’s income trust problem by way of the following features:
- as with RRSPs, monies can be contributed to MSPs from individuals’ pretax earnings in amounts equal to the contributions that can be made to RRSPs, such that each $1,000 of a taxpayers’ contribution eligibility can be apportioned between a RRSP or an MSP
- all INCOME earned in a MSP is taxable in the hands of the holder of the account, in the year received, which means more tax dollars are collected by Ottawa relative to either RRSPs or TFSPs
- all CAPITAL GAINS earned in a MSP can be deferred under circumstances where new securities are purchased during a six month period, consistent with your party’s election promise of 2006 to provide for the rollover of capital gains, but this benefit would be restricted to MSPs only. This will raise significantly more tax dollars that the TFSP and will raise no less tax dollars than the RRSP
- for a transition period of 12 months, Canadians will be allowed to transfer their holdings of income trusts in their RRSP to a MSP, with no tax effect. As such their former RRSP holdings of income trusts that will now attract a cash tax averaging 38% (according to the Department of Finance) rather than the 31.5% tax. To facilitate the payment of these cash taxes to Ottawa, all income earned within MSPs would be available for payout to the account holder
- The cost base of such transferred income trusts will be assigned a value of zero, which is the effective cost base of these income trusts within RRSPs, for all intents and purposes. Importantly, this means Ottawa is “kept whole” on any capital gains taxes.
- as such, the existing 31.5% tax will continue come into effect for all income trusts held in RRSPs and Pension Plans, exactly as planned, although you would be well advised to remove this tax insofar as foreign investors are concerned and/or lower it substantially (given you were the ones who reduced the withholding tax on corporate interest to zero from 15%)
The effects of this policy are all beneficial and introduce no trade-offs. The Marshall Savings Plan will solve the original problem associated with your government’s alleged “tax leakage” converns of income trusts, since Ottawa will now be receiving full rates of taxation on the 38% of income trusts held in RRSP in the form of CASH since they are now held in MSPs, rather than deferring these taxes for payment in future tax years, as would be the case if these income trusts remained in RRSPs.
The Marshall Savings Plan would deal with the issue that faced your government in 2006, but in a much more elegant, inherently fair and refined manner, while restoring true tax fairness and leveling the playing field for investors while fully addressing the following policy concern that was at the heart of your government’s income trust tax, in the first place, namely:
“As Minister of Finance, I have a fiduciary obligation to the taxpayers of Canada today, not tomorrow, an obligation to pay for needed social, environmental and economic programs today, not tomorrow. I cannot, and I will not, fund today’s programs from tomorrow's revenues.” Jim Flaherty, January 30, 2007, Finance Committee Public Hearings on Income Trusts.
The Marshall Savings Plans meets that objective along with a host of other important policy objectives and for these reasons needs to come a marquis aspect part of your governments upcoming 2010 Budget, as there is no plausible reason why The Marshall Savings Plan should not be implemented to help address the economic and social challenges facing this country and the 75% of Canadians without pensions.
To provide for retirement savings and essential retirement income, Canadians need more options, not fewer. Rather than taking investment options away from Canadians, by killing income trusts, to deal with your party’s concerns about alleged tax leakage, this proposal of ours is designed to increase the number of options that Canadians are presented with for retirement, while at the same turning your party’s concerns about alleged tax leakage into a windfall source of tax revenue of $6 billion per annum. We can not conceive of a reason why this proposal would not be a key element of your government’s 2010 Budget, especially now that you have actively solicited the “grass roots” views of Canadians like ourselves.
If you have any questions please do not hesitate to contact me, or I would be happy to put you in contact with Brent Fullard, President of CAITI, the association that has been tirelessly advocating on my behalf on this issue.
Yours very truly,
cc. Greg Hebert, CFRA 580
Diane Francis, Financial Post
Brent Fullard, CAITI
Michael Ignatieff, Leader of the Liberal Party of Canada
Kevin Page, Parliamentary Budget Officer
Monday, January 18, 2010
Posted by Fillibluster at 2:11 PM