Income trust dogfight



Shunpiking Online is posting a three-part analysis by K.C. Adams for the information of our readers concerning the significance of the about-face by the Harper Government on the question of changing the tax status of income trusts.


Part One: Harper election coup

UNFORTUNATELY many Canadians through their savings or pension plans have become embroiled in the dogfight over income trusts. The marketing of income trusts has recently been intense, especially directed at older Canadians and their pension plans. Marketing was heightened after the last federal election on the basis of a solemn promise of the Harper Conservatives not to change the tax regime regarding income trusts. Now, the Party in power has broken that promise resulting in significant losses for those who have invested or put their savings into the roughly 250 income trust companies and the newly announced conversions at Telus and BCE.

Canadians will recall the RCMP election coup de grace administered last December to the Martin Liberals at a crucial moment in the campaign. A very public RCMP announcement of an investigation into the office of the Liberal finance minister Ralph Goodale contributed to handing an election victory to Harper and his Conservative Party. The RCMP alleges that insiders within the Liberal Finance Minister's office leaked information of coming tax changes governing income trusts. Almost a year since the initial RCMP public statement, little more has been said and nothing concrete has been presented in court much less proven.

The rumours and charges were made more believable because it is common knowledge that speculators and investment management companies make big scores on the stock, bond and commodity markets through insider information from company or government informants and co-conspirators. Following the spectacular RCMP announcement and the denials of any wrongdoing by the scandal-ridden Martin Liberals, Harper jumped in and promised Canadians that if they elected the Conservative Party to power, it would not change the tax status of income trusts.

With the election coup consummated in a Harper Conservative minority government, the money and investment marketers went to business selling the favourable tax status of income trusts and the regular payments per unit as government guaranteed for as long as the Conservative Party remained in office. This meant that the price of most income trust units rose considerably reflecting the stability and premium of a government guarantee. Many pension funds and individuals with RRSPs put their savings into income trusts and more recently after the announced conversions of Telus and BCE, into their stock in anticipation of the change.

Some analysts report that $20 billion worth of income trust unit value has been lost since the Party in power's decree
Secretly and without discussion in Parliament or broad consultation with the public on how to deal with the problem of corporate tax and foreign ownership in a calm manner that would not harm the public good, the Harper Conservatives reneged on their promise and introduced a bill to change the tax status of income trusts. Predictably, the premium price attached to income trust units has fallen considerably. Some analysts report that $20 billion worth of income trust unit value has been lost since the Party in power's decree. That loss in value for certain income trusts will become permanent with their predicted takeover by private equity firms that will buy all outstanding units at the lower price. For the income trusts that do not change their business status to a public corporation issuing uncertain dividends, other losses for unit owners will result from reduced regular payments starting in 2011, when a tax on distributions from publicly traded income trusts and limited partnerships begins. The remaining trusts may also have difficulty raising money from the stock market and may borrow heavily further reducing per unit payments. For BCE and Telus, they will simply call off the conversion.

Canadians may well wonder: where is the RCMP investigation of this new intrusion into the marketing of income trusts? Did some insiders and speculators make millions by dumping income trust units before the conservative announcement, and are now poised to use the proceeds to buy them back at the lower price? Judy Wasylycia-Leis, the NDP's finance critic was reportedly the MP who pushed hardest for an RCMP investigation during the last election, which resulted in the Conservative coup. This time she is praising the Conservative Party in power and its change of the corporate tax regime. A CTV News item November 1, reports she rejects "the idea these changes were an attack on seniors. Not every senior has a stockbroker, and some of these provisions will help all seniors. Also, many seniors were losing their savings because in fact income trusts were not reporting their true value. Some will lose, yes, but in the long run, Canadians will win." What information is she basing herself on? Where is the public deliberation?

Yet this time, no calls for an investigation have come from the NDP although the measure clearly caused havoc in the stock markets
The measures proposed by Liberal Finance Minister Goodale last year just before the election were also moving towards taxing income trusts. However, even the suggestion of tampering with income trusts caused an uproar, especially in Alberta among the many energy trusts and in U.S. investor circles who benefit greatly from lower taxes compared with owning common shares. But during the last federal election the NDP chose not to concentrate on what it now considers a positive initiative from which in the long run, Canadians will win. No. The Liberal Party attempt to change the tax regime for income trusts was met with NDP derision during the election and an electoral coup that declared the Conservatives "an alternative" to Liberal corruption and propelled the Conservative Party into power. Yet this time, no calls for an investigation have come from the NDP although the measure clearly caused havoc in the stock markets. No Member of Parliament has suggested compensating those who have suffered losses directly from this sudden government decree, even though that decision reneges on a solemn election promise. The ruling Conservative party in power and Wasylycia-Leis tried to deflect criticism by lumping the broken promise on income trusts together with popular measures to allow income splitting for pensioner couples and raising the Age Credit Amount by $1000, and by breast-beating about creating fairness in corporate taxation.

The last election coup and now the Conservative Party about-face on the matter of taxing income trusts, show the reckless and unprincipled nature of the capitalist political parties and an electoral system dominated and manipulated by political parties. Problems are not taken up for solution in a way that guarantees the rights of the people and their well-being. Problems of the monopoly capitalist system such as individual versus corporate taxation are manipulated to serve the electoral fortunes of this or that party and kowtow to the most powerful monopolies and the rich.

The income trust dogfight forms part of monopoly competition over places to invest, the control of companies and struggles over claims on realized added-value by the rich and governments. Contradictions over places to invest and how the society funds itself are just some of the many insolvable conflicts that create instability and constant crises in the capitalist system and prove its transitory nature.

The capitalist system created the integrated socialized economy but retained private ownership of the means of production and circulation. This means that the working class and salaried employees, who work on the socialized means of production and circulation and produce all the wealth, are in constant conflict with those who own and control the wealth because of the archaic relations of production. The Canadian working class and salaried employees are learning gradually to view all economic, social and political problems from their own point of view and defend themselves from the dogfights that constantly erupt among the monopolies and the rich. The people are grasping from their direct experience and modern theory that they must not side with this or that competing section of the finance capitalists but rather unite in defence of their own interests and fight for a government that guarantees their rights and ensures the well-being of the people.

Part Two: Conservative Party's taxation "fairness" fraud

The authority to tax resides in the Canadian state and its constitution. A series of laws issued by Parliament and the Legislatures decree how the state claims taxes and how the proceeds are distributed. Governments expend the collected tax money according to statutes and laws, which are broadly outlined in budgets.

Existing tax law regulates governments' claim on the wealth produced by the working class and salaried employees from naturally occurring raw materials. If the government and political parties want to change the existing tax law, they are obligated by the democratic rights of the polity to inform the people beforehand and thoroughly discuss the proposed changes, their underlying political and economic considerations and gain the people's approval. Only in such a manner can such important changes reflect the popular will.

The Conservative Party bill to change the income tax law was a sneak attack without any prior public information or discussion in Parliament or the mass media. Quite to the contrary, a Harper pledge during the last election campaign gave Canadians the impression and assurance that the Conservative Party would not change the tax rules governing income trusts. With the sudden attack October 31, the Conservative Party in power has completely marginalized the people from the equation, effectively eliminating the polity as a factor in the discussion and changes. As a result, a significant tax law is being pushed through Parliament without discussion and preparation of Canadian public opinion and without gaining the people's approval.

Finance Minister Flaherty and his Conservative Party in introducing the Bill reduced the issue of tax law to one of "fairness." The October 31 statement of the Finance Ministry said:

"The Honourable Jim Flaherty, Minister of Finance, today announced a Tax Fairness Plan for Canadians. The plan will restore balance and fairness to the federal tax system by creating a level playing field between income trusts and corporations."

The Conservative Party asserts that the tax system was balanced, fair and a level playing field before but has become unbalanced and unfair. The Party in power's proposed Bill would restore the tax system's original fairness and balance by creating "a level playing field between income trusts and corporations."

The operative words appear to be "balance, fairness and level playing field." Canadians may wonder if the Conservative Party is talking about the rules for playing hockey, as this drivel has nothing to do with taxation law.

The state must make a claim on Canada's social product if it is to exist, if Canada is to have a modern society. The social product originates in the collective work of Canadians transforming naturally occurring material. By definition workers and salaried employees do not own or control any social product. They claim social product, as wages and salaries, in return for their voluntary servitude. Their wages and salaries come from realized Canadian social product produced by them but owned and controlled by corporations. The main source of tax for the state is likewise a claim on the social product produced by Canadian workers and salaried employees but owned and controlled by corporations.

the basic problem: the state's refusal to make its claim directly from the corporations that own and control all new and accumulated social wealth
The problem confronting Canadian tax law, which needs to be taken up for solution, is not found in an unfair, unbalanced lack of "a level playing field between income trusts and corporations." No. Such banal words are a diversion from the basic problem: the state's refusal to make its claim directly from the corporations that own and control all new and accumulated social wealth. Instead, contrary to all logic the state for the most part makes its claim on the claims of individuals. The many and sizeable tax claims on the claims of individuals are the root of the problems of the taxation system. The state deducts the claims of individuals at the workplace through personal income tax and premiums for employment insurance, workers' compensation and social security. The state deducts the claims of individuals through sales taxes and user fees for public services. Government claims on the people's claims must stop. Governments must make their claims directly on new wealth owned and controlled by corporations.

The government refuses to lead discussion on how to modernize the taxation system to bring it into harmony with collective socialized production. In an integrated socialized economy where the vast majority of the people acquire their living by selling their voluntary servitude to companies or the government, the state must make its claim directly on added-value at the point of production. This could only be done successfully if the government controlled wholesale trade. With control of wholesale trade, the government could successfully make its claim at the point of production, control the market price of commodities so that the monopolies do not simply pass on the government claim in higher prices, and in this way know exactly how much corporate retailers are paying for commodities and how much they should contribute to the government's claim. The control of wholesale trade would also enable the government to ensure companies importing goods also make their contribution to the overall state claim. To enforce participation of the financial sector in taxation would require the government to claim a certain percentage of all commercial interest and regulate the amount. The total state claim of all levels of government should be based on what is required by the society to guarantee the rights of all Canadians, ensure their well-being and strengthen the integrated socialized economy.

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Part Three: A question for Finance Minister Flaherty

What is the difference between owners of income trust units claiming realized added-value from a corporation before the state makes its claim, and owners of debt claiming realized added-value as interest before the state makes its claim? How does that fit into Flaherty's babble of "fairness, balance and a level playing field" within the taxation system? A modern tax system recognizes the claims of workers and salaried employees as having first priority and the claims of government next. The claims of owners of capital of all varieties come third. The three main claims of working people, governments and owners of capital should be kept distinct. The amount of the governments' claims should not be based on the capital-centred financial reports of corporations. The amount should be based on guaranteeing the rights of the people and their well-being and the level of the productive forces.

The Canadian taxation system is in contradiction with a modern definition. The tax system and capital-centred accounting do not even recognize the claims of workers, salaried employees or governments as legitimate but insults them as "costs" to the owners of capital. To lessen the taxes on owners of capital and transfer the burden to individuals, Canadian accounting separates owners of capital into categories, including debt, equity, executive management and rent. Each category, apart from equity, becomes a cost against the other and greatly determines a reported "bottom line" and a corporation's taxable income. The claims of owners of debt, executive management and ground rent are turned into "costs," which effectively lowers corporate taxes for all monopolies. Accounting has even coined special terms to embrace its capital-centred prejudice such as "Earnings Before Interest, Taxes, Depreciation and Amortisation" (EBITDA). This accounting distorts and confuses the central issue of the source of added-value and how it is distributed among the many claimants. Owners of equity capital and owners of debt in a modern monopoly compete with workers, salaried employees, owners of land, executive managers and governments for a portion of realized added-value.

Added-value is equal to the amount of social product created at the enterprise by the working people minus the costs of production. The social product must be sold in the marketplace to realize the added-value otherwise it is wasted. (See endnote on retained earnings) By falsely labelling the claims of owners of debt, executive managers and rent, as costs of production, the monopolies effectively reduce the claims of government on realized added-value that they must hand over directly.

The tax system with respect to income trusts reduced the claims of governments even further by allowing virtually all remaining realized added-value, after the claims of workers, salaried employees, executive managers and owners of debt and land had been distributed, to be handed over to owners of equity, in this case called income trust units. Through this over twenty-year-old tax measure for income trusts, which will remain in effect for existing income trusts until 2011, governments' claim on realized added-value directly from corporations is reduced by around $800 million per year. The $800 million goes to owners of income trust units. In addition, the government loses any chance of claiming personal income tax on the 22 per cent of that $800 million owned outside Canada mainly in the United States. Foreign owners of income trust units only pay a 15 per cent withholding tax. Another twist is the revelation by Statistics Canada that many of the wealthier Canadian owners of income trust units and other securities have opened holding companies in "tax havens" abroad in which they are stuffing growing amounts of money that do not show up as Canadian income. Statscan reports that the amount wealthy Canadians hold abroad in tax havens has grown to $88 billion.

Flaherty's removal of the tax exemption for income trusts may very well increase corporate tax exemptions
Flaherty's removal of the tax exemption for income trusts may very well increase corporate tax exemptions regarding interest payments, which already far outreaches the $800 million awarded income trusts. Many argue that a powerful section of monopoly capital, a segment connected with big pools of private equity capital, pressured the Conservative Party to remove the income trust tax exemption because it was restricting places to invest, and draining pooled capital away from other ventures, in particular private equity buyouts, mergers and acquisitions, which are all heavily leveraged and carry lucrative service charges. Monopoly capital requires the pooled savings of workers and salaried employees, mainly savings accounts and pension and mutual funds, as "partners" in investment. This feature is another indication of the socialized nature of the modern economy, which is still languishing under private ownership and control.

Stelco and corporate tax deductions for interest payments

Monopoly capital very effectively uses to its advantage the practice in financial reporting of deducting interest payments and other claims of capital, as a cost of production. Government claims on realized added-value that come directly from corporations are reduced in this manner by billions of dollars. At Stelco Inc. for example much of the ownership of debt and equity is held by the same monopoly, Brookfield Asset Management Inc. Also, executive managers are significant owners of share equity and possibly debt as well. For purposes of financial reporting and corporate taxation, the claims of owners of capital are broken up into separate portions: equity, debt, payment for services (i.e. brokers and restructuring agents), rent, and executive salaries including other compensation such as stock options. These different portions are mostly declared "costs" by one or the other and used to reduce the government's claim on realized added-value (corporate tax). Corporate taxation is based on the taxable "bottom line" earnings. The taxable bottom line usually represents only the claim of equity ownership.

Using the capital-centred tax system to manipulate Stelco's 3rd quarter (2006) financial accounts, Brookfield deducted $19 million for interest payments and service charges reducing its taxable income by that amount. With wicked irony much of that claim for interest and services went to Brookfield itself. Claims by executive managers, other capitalist agents and for rent were also deducted by an undisclosed amount. Using just the interest payments of $19 million, this manoeuvre reduced Stelco's taxable corporate income (taxable bottom line) from $32 million for the 3rd quarter to $13 million. The federal and provincial governments' claim on Stelco's realized added-value was thus reduced from $10,880,000 to $4,420,000. The governments' lost claim on realized added-value amounted to $6,460,000. Available realized added-value to be claimed by owners of Stelco equity should have been around $2,120,000 not the higher amount of $8,580,000. (Estimates are based on a corporate income tax rate of 34 per cent, of which 21 per cent is federal and 13 per cent provincial.) But in the end, Stelco used items left over from its bankruptcy restructuring to turn the $8 million claim by owners of equity into a magical "loss" of $25 million. Its reported bottom line became a minus $25 million.

The point of this argument is that corporate tax has become incoherent and the preponderant burden of taxation has been shifted to individuals. How can the government make a rational scientific assessment of its claim on realized added-value when owners of capital are allowed to thoroughly confuse the source of wealth, its actual amount and then manipulate financial reports to negate the government's claim? Brookfield and other owners of debt and executive managers may pay some corporate or individual tax down the road but the capital-centred tax system offers them numerous opportunities to avoid much of the government's claim to Stelco's realized added-value. The state instead has turned to workers and salaried employees to make its claim. This has become another factor feeding the regressive trend of the rich getting richer and poor poorer.

Brookfield has already been identified as knocking on the door of Westshore Terminals and Halterm ... They are both involved in shipping and ports, which may mean some connection with a Brookfield secret agenda for Stelco's harbour facilities and widening of the St. Lawrence Seaway
Brookfield used the state to engineer its takeover of Stelco Inc. through the Companies' Creditors Arrangement Act and the Ontario Superior Court. It borrowed money from itself and others as leverage to organize a big score. Many commentators have named Brookfield as one of those monopolies that was pushing hard for a change in the income trust tax rules. It can now move in and purchase certain income trusts at a low price and make a big score in a few years. Brookfield has already been identified as knocking on the door of Westshore Terminals and Halterm. The market value of those income trusts has now fallen considerably. They are both involved in shipping and ports, which may mean some connection with a Brookfield secret agenda for Stelco's harbour facilities and widening of the St. Lawrence Seaway.

Other examples of rapidly cheapened income trust assets up for grabs appeared in the Globe and Mail including Abitibi Consolidated Inc.'s hydro power assets. This example is particularly galling for forestry communities in Northern Ontario that are suffering from Abitibi's destruction of milling while it profits from selling hydro electricity into the deregulated and partially privatized Ontario electrical grid. This private asset should be a public one and mobilized to serve the forestry communities and their production facilities. The Globe writes: "Abitibi-Consolidated Inc.'s power assets -- Price tag: Estimated at $300-million. Why it's attractive: Abitibi's Ontario dams provide steady cash flow, with the price for electricity likely to rise. And cash-strapped Abitibi is a motivated seller. Potential buyers: Brookfield Asset Management Inc., pension funds."

For an illustration of private equity and leverage read the following example that appeared in the Globe and Mail:

"How do leveraged buyout firms make millions, and avoid paying taxes on their holdings? Here's a simple case study:


"1. ACME Private Equity buys beaten-down Orphan Income Trust for $100-million.

"2. ACME puts up $25-million of its own money, and borrows the remaining $75-million, at a 10% interest rate.

"3. The $7.5-million in interest that Orphan pays each year neatly offsets the company's earnings, so Orphan pays no tax.

"4. After several years of expansion and vicious cost cutting, along with an upturn in markets, ACME sells Orphan to a larger rival for $200-million.

"5. After paying down $75-million in debt, ACME pops the cork on a $100-million profit from its $25-million investment."



Stop taxing individuals; increase spending on social programs

Under the capital-centred tax system, governments at all levels seek their claims to realized added-value more and more from individuals and less and less from corporations. The amount collected from corporations in 2005 was $33 billion only slightly more than the amount received from the GST, which is mostly paid by individuals regardless of their incomes. The vast majority of governments' claims come from individual income tax. Statscan states "in 1961, corporate tax as a percentage of personal tax was 63 per cent. By last year, it had fallen to 32 per cent. In other words, the relative tax burden on the individual has doubled."

Finance Minister Flaherty said to a Parliamentary finance committee, "The alternative [to removing the tax exemption for income trusts] would have been to impose a heavier tax burden on individual Canadians and their families, and that's not fair."

Mr. Flaherty, the burden has already been shifted onto individual Canadians and it must be reversed. The situation has degenerated well beyond your incoherent babble of "fairness, balance and a level playing field."

it is self-defeating if the tax system is reformed but expenditures are still geared to pay the rich and finance aggressive wars and occupation
A full discussion of the tax system needs to take place amongst the polity. The working class and salaried employees are beginning to demand that the current capital-centred tax system be changed radically to reflect properly the integrated socialized economy and modern human rights. Any discussion of government revenue, its source and necessary amount must include discussion of government expenditures. For the people it is self-defeating if the tax system is reformed but expenditures are still geared to pay the rich and finance aggressive wars and occupation such as the Canadian military invasion of Afghanistan. Democratic reform of taxation marches in lock step with increased spending for social programs and the elimination of funding for aggressive and predatory wars of empire-building.

A modern society must have the financial and other resources necessary to guarantee the rights of all and the well-being of the people. Those necessary resources are found in the added-value produced and circulated collectively by hardworking Canadians. Governments should make their claims not from individuals but directly from the centres of production, distribution and financing.

Endnote

The discussion leaves aside the issue of retained earnings that may go into expansion of production or purchase of equipment to improve productivity. Modern monopolies retain very little of their realized added-value other than exceptional circumstances resulting from a big score or windfall claims from high market prices (i.e. oil monopolies recently). To finance expansion, productivity, mergers or acquisitions monopolies prefer to borrow capital or raise it from selling new shares. The advantage of borrowing stems partly from incoherence in the tax system that allows deduction of interest payments, as a "cost of production," while in truth they are claims of owners of capital on realized added-value. An electronics' monopoly may borrow money for research and development. It can then deduct from its taxable bottom line the actual cost of the R&D plus the interest payments on the borrowed capital. The issue of extended reproduction and how to support it goes to the heart of who controls the integrated socialized economy. Under private control, extended reproduction of socialized production is focused narrowly on defending and enlarging privately owned accumulated-value (capital). In contrast, the working class and salaried employees have a broad vision that makes extended reproduction of socialized production an issue for extensive public discussion and planning necessarily examining the whole modern gamut of social and natural considerations.



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Source: "Part One: Harper Election Coup" and "Part Two: Conservative Party's Taxation 'Fairness'" Fraud were published in TML Daily, November 13, 2006 - No. 174. Part Three: A Question for Finance Minister Flaherty was published in TML Daily, November 20, 2006 - No. 179




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