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The Bloc Québécois' Proposal for a 10 Year Phase In

The Canadian Association of Income Trust Investors applauds the Bloc Québécois in the Bloc's call for major changes to Flaherty's income trust policy. We believe however, that the Bloc underestimates the extent of what is truly wrong with Flaherty's policy. We believe the Bloc should challenge the Minister of Finance on some of the very basic assumptions and foundations of his policy. We therefore call upon the Bloc to, in turn, call upon the Minister of Finance to explain in a factual and public way to Parliament and to the Bloc Quebecois, the Finance Minister's assertions in the Notice of Ways and Means Motion, that his tax policy will:

  1. "ensure that taxes are not unfairly shifted onto the shoulders of Canadian taxpayers"
  2. "strengthen Canada's social security system for pensioners and seniors"

and to call upon the Minister to factually and publicly demonstrate how:

  1. income trusts are "not consistent with economic growth and competitiveness" to quote from the Notice of Ways and Means Motion.
  2. the Finance Minister has fully executed his implicit "duty of care" obligations to mitigate to the greatest extent possible the foreseeable financial harm to Canadians arising from his actions (a loss of $35 billion) that is incumbent upon a "professional" member of society.

By "factually and publicly", CAITI means that the Minister of Finance should present studies that have been written by experts and that these reports' analyses and findings be fully transparent to the public be subjected to a full "peer review" process, whereby the reasonableness and accuracy of their assumptions and methodology can be challenged and, if warranted, changed before being finalized or relied upon as the justification for major tax policy changes.

CAITI also respectfully submits to the Bloc that a change in the "phase in" period from 4 to 10 years will not achieve the effect that is intended. Many do not realize the risk to the ongoing income trust market, be it under a 4 year or 10 year phase in, represented by the inevitable takeover of Income Trusts by Foreign Private Equity and Domestic Pension Plans. Once Flaherty's legislation is passed, both of these large investor groups, whose activities concerning Income Trusts are in no way limited by the Finance Minister's new tax policy, as they are for average Canadians, will be quick to exploit the market opportunity created for them by our Minister of Finance. Basically, Canada's $200 billion income trust market has a "For Sale, 20% Discount" sign hanging on it. To quote from Dirk Lever, RBC Capital's income trusts analyst, in a report dated December 5, 2006:

"Although it may be a little time (perhaps 2-3 years), we believe that many of the core trust names could disappear from the public markets because of buy outs; buyouts backed by pension funds, private equity funds or competitors (domestic or foreign ). We are not convinced that trusts can survive for very long before they are acquired by acquisitive minded corporations."

or Boyd Erman in www.globeandmail.com in an article of December 11, 2006:

"The interest from private-equity firms is "huge" and "there's going to be a lot of U.S. money coming in" said Jamie Scarlett (partner of law firm, Tory's LLP)"

or Judy Monchuk in www.money.canoe.ca:

"Already, private equity firms have begun to move in to pick up trust assets they view as undervalued or struggling. US based Harbinger Capital Partners made an $831 million hostile bid for Calpine Power Income Trust on December 19, 2006"

on the Harbinger bid for Calpine, from Harry Levant in www.incometrustresearch.com:

"the offer is regrettable since the profits from Calpine will now flow to pay the loan arranged by Harbinger to fund the buyout and result in no taxes paid to the Canadian government"

There should be no mistaking it; income trust take-outs by foreign private equity will significantly reduce the taxes presently paid to Ottawa by Canadians on income trust distributions. Foreign private equity firms will acquire these "event driven" discounted income trusts and will then make use of the corporate deductibility of interest to shelter themselves from paying any Canadian taxes on these businesses' earnings. Taxes will only be paid in the foreign jurisdictions in which these private equity firms reside.

During 2005, it is estimated that Income Trusts paid $16 billion in distributions, all of which were previously taxed by the Canadian Government.

Harbinger Capital is very aptly named, as it's highly opportunistic activities in the Canadian Income Trust market are only a harbinger of the inevitable takeout wave that will soon be unleashed. These hostile take-outs will trigger the $35 billion loss in Canadian's hard earned savings. This $35 billion loss is a strictly "event driven" consequence, solely attributable to Mr. Flaherty's actions.

As we can sadly and visibly see from the hostile takeover of Calpine by US private equity firm Harbinger Capital, Mr. Falherty's tax policy will induce the very outcome it ostensibly seeks to avoid, namely the loss of tax revenue. Ironically, income trusts do not result in the loss of tax revenues, however the inevitable consequences of Mr. Flaherty's short sighted policy will.

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Mr. Flaherty's Duty of Care Obligation:

The legal concept of "duty of care" is so fundamental to the daily function of any civilized society, that it is not even a written law. Its existence is so fundamental to society that it is considered a given, that does not need to be enshrined in law. Mr. Flaherty's so called Tax Fairness Plan was structured by him in such a way as to totally disregard his "duty of care" obligations to mitigate the damage associated with his actions. The damage in question is the $35 billion loss in Canadians hard earned savings that occurred as a sole result of Mr. Flaherty's actions. His policy can be best characterized as "blunt force trauma".

Mr. Flaherty as a lawyer, might argue that politicians are above the law, however since "duty of care" is not actually a law per se but rather a fundamental code of personal conduct in all walks of life, this is a hollow defense. Duty of care is even more basic than written laws, and holds that:

"Duty of care is a legal obligation imposed on an individual requiring that they exercise a reasonable standard of care while performing any acts that could foreseeable harm others.
Duty of care may be considered a formalization of the implicit responsibilities held by an individual towards another individual within society. It is not a requirement that a duty of care be defined by law, though it will often develop through the jurisprudence of common law.
Individuals who are considered to be professionals within society are often held to a higher standard of care than those who are not. For example, Engineers and doctors will be held to reasonable standards for members of their profession, rather than those of the general public in cases related to their fields"

How has Mr. Flaherty fulfilled his duty of care obligation in his conduct as Minister of Finance? He is presumed to be a professional in the eyes of the law, thereby heightening his obligation to exercise duty of care in his role as Canada's Minister of Finance. What actions were taken by Mr. Flaherty to mitigate the foreseeable damages to others? The negative consequences of his actions were totally foreseeable. Even Mr. Flaherty admitted that much himself.

What duty of care do Canadians expect to be implicit in the conduct of our Minister of Finance? Is a $35 billion loss in Canadians hard earned savings an acceptable consequence, in the normal course of policy formation? Is this an acceptable consequence for a policy that the Minister has not analytically justified on any level and therefore is of dubious purpose and intent?

The policy foundations of Mr. Flaherty's assertion of tax leakage are a discernable truth, why has he offered no analysis to aid in the discerning of these "truths"? Does his duty of care at least not extend to this very rudimentary level?

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MPs Margin of Victory Analysis: 2006 Federal Election

It is highly probable that there will be a federal election in 2007. The income trust issue promises to feature prominently in this election, just as it did in the 2006 election where the Liberals were rocked by the RCMP announcement into the Income Trust "tipping/insider trading" investigation and the Conservative's politically opportunistic (as it turns out) promise not to tax trusts helped garner a large number of swing votes.

The 2006 election is only a mere 12 months from the present, and therefore provides as good as any insight into the political "state of play" in Canada's 308 federal ridings.

We have sourced voting information from Elections Canada for the 2006 election and sorted it by the Margin of Victory in each riding. First by the number of votes and also by the percentage margin of victory. We then rank the MPs by their "vulnerability ranking". It is very interesting to note that 25% of all ridings in 2006 were won on average by 1500 votes. 23 ridings were determined by 1000 votes or less. Many of these vulnerable ridings were a contest between Liberal and Conservative candidates. Of the lowest quartile (25%) Margin of Victory ridings, 38 were a contest between Conservative candidates and Liberal candidates. This is quite revealing, since the Conservatives only presently outnumber the Liberals in parliament by 24 seats

Every seat lost by a Conservative to a Liberal candidate would reduce their seat disparity by two seats. Every seat lost by a Conservative to a Bloc or NDP candidate would reduce the Conservative seat count by one. The following are the current seat count , including two members elected as Liberals who defected to Conservative party ( David Emerson and Wajid Khan) and one who left the Conservative party (Garth Turner):


Conservatives:125 seats
Liberals:101 seats
Bloc Québécois:51 seats
NDP:29 seats
Independent:2 seats
Total:308 seats

This narrow balance of power and the underlying vulnerability rankings in many ridings will provide significant leverage in the upcoming election to the estimated 2.5 million Canadians who presently own income trusts, either directly or indirectly through mutual funds. Furthermore, once the 70% of Canadians who are not members of defined benefit plans realize that they will lose an important investment choice previously available to them as a sole result of Flaherty's income trust policy, the outcome of the election will very much turn on each party's position on the income trust issue.

Please click on any of the following files:

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Retirement Taxes:

Retirement taxes are the second largest source of personal taxes collected by Ottawa. During 2004, the latest year for which data is available, Canadians reported retirement income of $52 billion according to the Canada Customs and Revenue Agency. To see for yourself, please click here and go to page 8 of the file entitled Basic Table 2 (CCRA site)

Retirement income is second only to income from employment as a source of taxable income to Ottawa. During 2004, Canadians reported $52 billion in retirement income consisting of $44 billion from pension income and $8 billion from RRSP withdrawals. It is estimated that this resulted in the payment of $9 billion in retirement taxes, based on the blended average personal tax rate of 16.5% for 2004 ($133 billion in total taxes divided by $808 in total taxable income).

In Mr. Flaherty's analysis that underpins his so called "tax Fairness Plan", he totally ignores the retirement taxes paid on income trusts held in retirement accounts. He considers retirement accounts to be "tax exempt", which is both incorrect and in stark contradiction to the $9 billion paid in retirement taxes in 2004. By ignoring the payment of retirement taxes, Mr. Flaherty makes matters worse by devising policies that are most harmful to those who actually pay retirement taxes. Mr. Flaherty's so called tax fairness plan is regressive to Canadian seniors and those saving for retirement. This is nothing more than "circular logic" gone awry, and results in what can only be described as "circular injustice".

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Income Splitting for Seniors:

In an attempt to "buy" support for his so called Tax Fairness Plan, Mr. Flaherty proposes to offer Canadian Seniors the opportunity to split income for tax purposes between spouses. The issue itself may be "income splitting", however the political tactic Mr Flaherty is using is referred to as "issue splitting".

To better understand income splitting itself, it is worthwhile to look at an "average" Canadian retired couple. Take the Flaherty household for example. The Flaherty's have an imbalance in retirement income arising from the fact that Mr. Flaherty and his wife have three fully indexed government backed pension plans between them. Mr. Flaherty will have his pension from the federal government for his time as Minister of Finance and he will also have his pension from the Ontario government as Minister of Finance. Mr. Flaherty's wife will also receive a pension from the Ontario government as the MPP who filled Mr. Flaherty's vacated provincial seat.

By splitting the larger amount of pension income Mr. Flaherty will receive from his two government pension plans with the lesser amount that his wife will receive from her single government pension plan, the Flaherty's will be able to reduce their overall tax burden to assist them in their retirement years.

One major drawback to Mr. Flaherty's income splitting proposal is that it only conveys tax relief for seniors based on marital status and the ongoing existence of a spouse with whom to split income. If Mr. Flaherty is serious about providing tax relief to seniors, he should do it in a way that is free of "social engineering" and the heightened financial risk that will be associated with the inevitable loss of one's spouse. An overall reduced level of taxation for Canadians over the age of 65 on the first, say, $35,000 of income would be a vastly more equitable and efficient way to spread the benefits of his estimated $5 billion income splitting proposal.

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