Friday, February 26, 2010

McGuinty wants to make Toronto an elite financial center, or did he say a center for the financial elite?

CBC reports: “At a $950-a-plate dinner this evening that pulled in about $2.16 million for his governing party” Dalton McGuinty said “Why couldn't we come together, industry and government, and commit ourselves to a strategy to make Toronto one of the world's elite financial centres?"

If that’s Dalton’s mission, then he better realize that making Toronto into one of the worlds “elite” financial centers is not aided by practices like taxing income trusts on fallacious arguments of tax leakage, or using blacked out documents as “proof”, that are more in keeping with third world countries than “elite” financial centers, unless he wants to emulate the secrecy of Swiss Banking via the use of blacked out documents? Furthermore, how does Dalton McGuinty expect to reach this lofty goal of making Toronto into an elite financial center if the products that are now being offered to investors fail to meet investors’ needs? The income trust tax was a case of turning Toronto into the financial sector equivalent of Detroit and making products that no-one wants to own. But then Dalton did bail out GM didn’t he, along with GM’s unfunded pension liability, while at the same time playing a role in nuking $14 billion of Ontarians retirement savings, since 40% of trust investors reside in Ontario and without the letter of support from Greg Sorbara, Jim Flaherty would have a harder time getting away with his tax leakage lie.

Does Dalton expect to build Toronto into an elite financial center by selling refrigerators to Eskimos, as the saying used to go? Or maybe Dalton is a big fan of Manulife selling more of its unhedged synthetic products and making Toronto into the world headquarters of the next AIG? Is that the kind of “elite” that Dalton has in mind, by supporting companies that engage in practices that Warren Buffetr considers “crazy”?

Dalton along with former Finance Minister Greg Sorbara played a sordid role in killing income trusts, which was one of Canada’s greatest, if not the greatest financial success stories. Faced with this success, Dalton along with Sorbara and Jim Flaherty along with Stephen Harper decided to quash the success known as income trusts in just the same way that Diefenbaker killed the Avro Arrrow. For Dalton McGuinty to give a speech about making Toronto into an elite financial center after playing a role in killing one of Canada’s greatest financial innovations, is as ludicrous as had Diefenbaker made a speech about making Malton into an elite areospace center after killing the Avro Arrow.

Making Toronto into an elite financial centers is exactly the point I made to the McGuinty government in an email dated March 15, 2007 to Arthur Lofsky who was a senior person in Sorbara’s office at the time. On the impact of the trust tax on Toronto’s status as a financial center, I refer you to items (2), (3), (4), (5), (6) and (7) of my email.

I get the impression from Dalton McGuinty’s speech tonight, that he just awakened to the reality that Toronto is heavily dependent on its economic well being on the financial sector. Where was he in March of 2007, when I was making this very point, and wonder who he is turning to for inspiration for tonight’s speech if not the very people like Ed Clark of TD Bank who had a commercial vested interest in killing income trusts? That move turned Toronto and Canada into the financial laughing stock of the world as captured by these words of internationally respected Denis Gartman of the Gartman letter who had these words of praise for Jim Flaherty, and by extension Greg Sorbara and by extension Dalton McGuinty:

“Canadian Finance Minister, Jim Flaherty, he of the idiotic “trust” taxation decision rendered last October 31st, which we still believe ranks as one of the worst decisions ever rendered by a person in a position of monetary authority”

Date: Thu, 15 Mar 2007 13:25:47 -0400


Thank you for taking the time to speak with me. Our association, CAITI directly represents over 1 million Canadian income trust investors. Our website is Our request of Minister Sorbara is that he call upon Federal Finance Minister Jim Flaherty to make the proposed federal income trust taxation a separate stand alone bill and not a part of the Federal Budget to be tabled on Monday March 19th. My understanding is that federal Liberal MP David McGuinty may be raising this same matter with Premier Dalton McGuinty, sometime today or tomorrow. I am told that Alberta will be making a similar request on the part pf the 70 income trusts that reside in Alberta. Over 150 income trusts reside in Ontario.

Making the income trust tax legislation a stand alone piece of legislation was one of the three recommendations of the Finance Committee report. The first was that the government release its data and methodology that supports the assertion of tax leakage. No reports or analyses has been provided. Requests under the Access to Information Act resulted in 18 pages of blacked out documents.

Here’s the argument that has been presented to Alberta by the Canadian Association of Income Funds (CAIF) who are an issuer association:

Brent, my apologies for the slow response to your Ontario question. The message to the provinces is that under Flaherty's plan (see table attached) they will receive no incremental tax revenue until at least 2011, and even that is uncertain. (because of accumulated tax pools it is highly unlikely that many of the energy trusts will be cash taxable for many years even after 2010, assuming they are around to convert to corporate structures and this message has also been passed to Alberta Finance ) The cost-benefit argument then is quite simple - no benefit in the short-term (and perhaps even in the long-term) and a whole raft of negative consequences in the short-term. The other point that can be made is that Ontario is the home of roughly half the trust unitholders in Canada - we know that the Province of Ontario has seen a significant rise in personal tax revenues in recent years, much of it we believe coming from the hands of these same unitholders and thus if the distributions disappear where does the Province plan to generate these lost tax revenues from? (Even if investors revert to liquidation to generate revenues as an alternative, capital gain are only 50% taxable) Finally, the Liberal plan is intended to share the 10% incremental tax revenue with the provinces immediately and should be viewed as a better deal for the provinces than what Flaherty has proposed. Call me if any of this requires further clarification. Best regards. George (403-699-7367)

(1) It is the recommendation of the Finance Committee to do so.(see text in (9) below)

(2) The committee is also calling for the release of data and methodology, without which there is no government accountability.

(3) Ontario investors represent the largest block of investors in income trusts about 40% of all investors.

(4) Toronto is the investment capital of Canada. During the last ten years Toronto based investment dealers raised over $82 billion in new capital, earning underwriting fees of 5% distributed as follows (this excludes secondary trading fees)

CIBC $1,332,250,000
RBC $948,200,000
Scotia $749,900,000
BMO $526,900,000
TD $349,500,000
National $200,600,000

Total $4,107,350,000

(5) Income trusts represented over 50% of capital raised in Canada over this period. Capital raising for the income trusts market is a market dominated by domestic dealers. No foreign dealers were involved in this activity. This is in stark contrast to other capital raising where US and foreign dealers have been steadily encroaching on Canada dealers’ turf and therefore profitability.

(6) The investment management industry is also centered in Toronto. Toronto based investment managers manage dedicated income trust portfolios for over 1.3 Million Canadian. This is an important knowledge based industry. The demise of the income trust market will mean these investors will gravitate to other markets in pursuit of high yielding income returns. Most likely the bulk of this money will gravitate to the US High Yield market, and therefore US investment managers. This will seriously undermine the captive nature of this important market for Ontario based businesses, Ontario investors, Ontario investment dealers and Ontario investment managers.

(6) Approximately 150 of the 270 income trusts are headquartered in Ontario,. These trusts represent approximately 40% of the overall $210 billion market capitalization of income trusts.

(7) The reduced market price of these companies, combined with the steady cash flow nature of these businesses make them ideal targets for private equity buyers who are ready to capture the “event driven: value disparity at which they presently trade. The $35 billion loss in value creates a value opportunity, or “value arbitrage’ of about $140 million per income trust on average. This takeover wave has begun, see attached file. These buyers will debt-leverage these companies and through extensive use of the corporate deducibility of interest will divert the pretax cashflows to foreign tax jurisdictions and avoid paying taxes in Ontario and Canada.

(8) Furthermore an important and vibrant sector of Ontario’s business base will now have their head office “command and control” shifted outside of the country and their businesses highly levered with debt financing.

(9) There are considerable socio-economic costs particularly borne by seniors as a result of losing this important investment choice and source of income in a protracted low interest rate environment. See strong comments by CARP and CRIIA and others.

"CARP notes that the severe impact of the tremendous losses of retirement income due to the Conservatives’ Income Trust policy can be eased with the Liberal proposal. Losses ranging from $10,000 to $100,000 have been reported to CARP.

Regardless of the amount, such losses can create social and health crises, especially with the reduced market value of income trusts, and in some cases, lower monthly distributions - a problem which is expected to increase as the four-year tax holiday comes to an end.

This translates into lower spending power, which, in turn, affects the economy and the country's productivity. Grandfathering current Income Trusts would, at least, ensure that investors get a better monthly distribution and the opportunity to significantly reverse their losses."

(10) Text from Committee’s report:

“The proposal to tax income trusts is of such significance and has had such a devastating effect on Canadian investors that Members of parliament deserve a clear vote to best represent the interests of their constituents. The federal government should, therefore, separate it from the other sections of the Ways and Means Motion and table it in a stand-alone piece of legislation. The pension income splitting, the 0.5% reduction in the corporate tax rate in 2011 and the increase in the age credit should proceed as quickly as possible in their own separate piece of legislation”

Thank you very much,

Brent Fullard
President and CEO
Canadian Association of Income Trust Investors

647 505-2224 (cell)


Anonymous said...

Excellent brent

The business trusts is an Ontario issue and a loss for all Ontarians

Let them not forget the business trusts are mainly headquartered here in Ontario.
Eg. CML Healthcare, Cineplex to name a few.


Anonymous said...

Or the ones that have been acquired by foreigners.......Union Energy Waterheaters, E D Smith, Canada Cartage, etc.

McGuinty is a McMoron

Dr Mike said...

I only have one question for McGuinty & Greg Sorbara , why did you forget about the trust investor , the mom & pop little guy on the street.

We got royally screwed as you made it all about those so-called tax avoiding trusts.

We lost our life savings.

We were distressed emotionally.

You guys just put us out of your minds.

For that I say shame---you are as much to blame as Jim Flaherty , Stephen Harper & Mark Carney.

Dr Mike Popovich