Wednesday, January 31, 2007

The taxing politics of income trusts

As I’m still dealing with student loan debt and trying to furnish my apartment (traded in the fouton for a mattress and boxspring from Sears Monday, very comfy, but weird sleeping so high off the ground again) I have to say I’m not too familiar with the stock market or income trusts. I am somewhat familiar with politics though, and it’s being played fast and furious here.

And politics, as usual, isn’t helping to bring any clarity to things. I caught a bit of Jim Flaherty’s performance before the Commons finance committee yesterday, and specifically Flaherty’s tete a tete with Liberal critic John McCallum. The contempt wasn’t even a bit veiled between those too. I thought they were going to hurl their slide rules at each other.

As I said I don’t know much about income trusts, but I think clearly the government had to take action. Things were spiraling out of control, the tax burden balance between corporations and individuals couldn’t be allowed to continue to tilt in the direction it was going. So, last October Flaherty made the right call.

That’s the policy. Then we get into the politics. The Conservatives promised quite explicitly in the last election campaign they would protect income trusts, into which Canadians, including, as Steve was careful to point out, seniors, were heavily investing their retirement savings. Canadians couldn’t trust the Liberals, Steve said, but they could trust him. You may have seen the video.

When the Conservatives decided to flip-flop on that promise last fall the seniors weren’t mentioned, it was all about making corporations pay their fair share now. While we might not all get as turned-on by that sort of rhetoric as NDPers do, everyone can generally agree with it. But the collateral damage here was not just to corporations, but also to average Canadians, and yes, to Steve’s seniors, who have lost billions.

All sides agree that the trust decision had to be made, but it’s those average Canadian investors that we’re talking about now. And you can’t just say they invested in a risky investment vehicle and took their chances. You could, were it not for the fact Harper promised them he’d keep that vehicle safe, and it was his actions that crashed it into a wall. Their fault for trusting him I guess.

That’s what McCallum and Flaherty sparred about, those regular Canadians that lost their shirts. And it’s here Flaherty’s messaging got confused. You see, he’s trying to both explain away the campaign promise flip-flop AND blame the Liberals for not acting at the same time. He’s having to do somersaults to get the twofer though, and it’s not working.

He blamed the Liberals for not acting on income trusts when we were in government. I think there’s a kernel of truth there, I think politics trumped policy on that one. Hearing that attack from Flaherty though begs the question, why’d the Cons promise not to act on trusts in the campaign if he’s saying the Liberals should have acted on trusts at that time? Isn’t that, as the kids say, the opposite? Were the Cons playing politics too?

Well, he replied the situation was different then, the Cons didn’t anticipate the increase in conversions to trusts until last summer, once they were in government. Things had changed. But then, how can he blame the Liberals for not acting on trusts at a time when he said things hadn’t changed yet, at a time the Conservatives not only didn’t think it was necessary to act, and were promising not to act, but also were promising to stop us from acting? (Have a headache yet?) You can’t have it both ways Jimmy.

It’s the same as their new messaging on the environment really, (falsely) blame the Liberals for doing nothing at a time they were fighting against our doing anything. Heck, Harper even fundraised to stall or stop any environmental progress. Coincidentally, same thing on the Arar settlement. Blame the Liberals when at the time Harper, Stock and friends were attacking the Liberals for trying to help a “suspected terrorist”.

Anyone see a pattern developing here? Perhaps we should be flattered. In a sense the Conservatives are saying on all these issues and more the Liberals should have known how wrong they were all the time, and that we, and Canadians, should have just ignored them.

But back to trusts. I don’t know enough to know what the opposition proposals for extensions really mean. If it would mean some help for those average Canadian investors that got suckered in by Harper, and not for the corporations, I'd probably be for that. And who knows how the politics of this will all shake out.

But there’s one thing Brian Mulroney and I both know, and Steve may well learn this come election time: it never pays to piss off the seniors. And from what I hear, they're plenty pissed off.

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Karen said...

Things had changed. But then, how can he blame the Liberals for not acting on trusts at a time when he said things hadn’t changed yet, at a time the Conservatives not only didn’t think it was necessary to act, and were promising not to act, but also were promising to stop us from acting?

Isn't it amazing what you can uncover when you apply a little logic to Conservative claims? lol

Geoffrey Laxton said...

Well folks, Derek DeCloet of the Globe and Mail is starting to see Flaherty’s true stripes:

“Forget the tax numbers, ideology drives Flaherty on trusts.”

Although, Mr. DeCloet still sides with Flaherty, he does say the following regarding Flaherty’s estimate of the estimate of tax leakage from income trusts, an important argument that Flaherty is using:

“The minister would like you to focus on the word “conservative.” But the key word is “estimate.” In defending his trust measure, Mr. Flaherty finally released the calculations Finance manarins used to come up with the $500-million in tax loss. The paper is a masterpiece of assumptions piled on top of assumptions. So much guesswork is involved as to render the “tax leakage” figure highly questionable (though not meaningless).”

As Mr. Flaherty essentially admits that the source of any supposed tax leakage is RRSP and RRIF accounts by saying the following:

“I have a fiduciary obligation to the taxpayers of today, not tomorrow . . . . I cannot and will not fund today’s programs from tomorrow’s revenues.”

His argument is obviously and ideological one.

Again, Mr. DeCloet:

“A bigger flaw is that the government makes no attempt to put a value on the higher taxes it might get down the road, through capital gains and larger pension withdrawals, if it were to leave trusts untouched. In Ottawa’s eyes, a dollar of tax lost today is a dollar lost forever.”

Reading both the Globe and Mail and Financial Post today, it is always interesting to put articles together in one’s mind.

Combining Mr. DeCloet’s article and the following makes food for thought:

“Improving Canadians’ financial literacy.”

Charles Coffey and Peter Nares
National Post
Wednesday, January 31, 2007
p. A16

In this article it is stated:

“A recent Scotiabank study suggests that a third of those who contribute to their retirement savings will withdraw funds from their RRSPs prematurely, taking out an average of $18,000 to help pay for a home, pay down debt or cover day-to-day expenses.”


“Nearly half (48%) of Canadians who retire and then go back to work do so because they need the money.”

“72% of Canadians say they have no financial plan.”

“The need for change is obvious. We know that one in five Canadians lacks confidence in their financial skills and decisions, and that two-thirds aren’t properly equipped for tasks like investing and financial planning.”

How about this article:

“Good bet for almost everyone: Many fail to take advantage of RRSPs”
Malcolm Morrison, Canadian Press

TORONTO — The annual ritual is set to begin: thousands of Canadians will flock to financial institutions to set up or top up their registered retirement savings plans by March 1.

At the same time, many others will completely fail to take advantage of RRSPs — one of the few government giveaways.
Analysts say both these groups are mistaken in their approach.

First, they point out that you really don’t want to rely on the government — or anyone or anything for that matter — to finance your retirement. Right now, the maximum you can collect per month from the Canada Pension Plan at age 65 is $863.75.

The big attraction of an RRSP is that you can deduct your contribution from your taxable income — and your gains accrue tax free.

“Why would you not use it to get the tax savings?” asked Judy Thomson, director of BMO Mutual Funds. “You’re saving taxes today — yes, you will have to eventually pay taxes on it, but by then hopefully your income stream is a lot less because you are into retirement.”

She also points out that people are living longer — and that means you will live with the consequences of not saving for retirement for years.
“Back in the ’80s, the average person who went into retirement was looking at seven years of retirement,” she said.”The changes in life expectancy (improvements in health care, etc.) now mean that if you retire today, our research shows that you can expect to live 20 to 30 years in retirement (based on retiring between 60 and 65).”

This isn’t to say registered retirement savings plans are for everybody — they aren’t.

“Generally there is a small percentage of people out there for whom an RRSP probably doesn’t make sense,” said David Gunn, investment representative with Edward Jones in Calgary.

“And really, in the simplest form, it would be if your income is going to be a fair amount higher in retirement.”
This scenario could see, for example, a couple who can look forward to a comfortable retirement with corporate pensions and the near certainty of inheriting a large sum.

Both Gunn and Thomson say that deciding to set up an RRSP and contribute on a regular basis is just part of the equation.
Gunn said he’s amazed by some people’s perception of just what an RRSP is.

“There’s a misunderstanding in many cases of what an RRSP is,” said Gunn.
“I still have it today where I’ll meet with clients and they will ask me ‘what is your RRSP paying?’ ”

The problem is far too many people dash off to their financial institution at deadline time — when financial advisers are at their busiest — and toss the money into something like a money-market fund which pays minimal returns.

“And then the client will often get upset about it because it’s not growing and ask: ‘Why do I have one?’ ” said Gunn.

Fact is, having an RRSP means having to play the market — and that means investing heavily in potentially volatile equities, through either mutual funds or actual company shares, because returns from fixed-income investments are anemic — and likely to remain so for the foreseeable future.
“In the current environment, the only way you can get a guaranteed return is going to be three or four per cent a year — and when you do a retirement projection, you need to save a lot of money at those low rates,” said Gunn.

“We would recommend a 50 to 60 per cent holdings in equities depending on their individual risk tolerance.”

© Canadian Press 2007

Following Jim Flaherty’s logic, RRSPs are a tax leakage to him and the NDP finance critic, and following their logic the Registered Retirement Savings Plan will soon be history, after they get rid of income trusts, because Canadians are obviously to financially ignorant and sheepish to understand them or fight for them. This is what the income trust fight is ultimately about. This also shows that Canadians who plan for retirement by contributing to Registered Retirement Savings Plans and Canadians who need retirement income now in their Registered Retirement Income Plans can look forward to working until they drop.

Geoffrey Laxton

Anonymous said...

I think the biggest issue is in the manner that they flip-flopped. Its certain that they knew as a minority they'd have to spend like Liberals, winning over popularity in the process. I am certain Harpor was aiming to force a spring election on the newly minted Dion -- if the numbers were as they should be for a generous, straight-shooting leader and his gov't. Unfortunately, they never expected to pay out a hundred million for emergency evacuations (and having a staff photo op photog at the ready) or the rising costs in Afghanistan. People didn't go gaga over their frugal offerings, and started smelling the neo-con and theo-con themes behind the 'Canada's New Government' mantra. And they likely wished to get to the writ before having to reveal how much money they've been spending. But to just jump out on halloween and say Boo! to Income trusts, after campaigning against (which you show seems to be a style of theirs) was not the way to do it. Goodale and Martin were prepared to call for committee to discuss and peel the layers off that onion, which would have allowed the seniors and various interests to prepare for the change. But some people prefer shock treatment -- and it will cost them votes, how many I don't know. Not enuf to change an election, but certainly enuf to make some ridings very close.

S.K. said...

I'm still sleeping on a futon. It's so sad. When I grow up I want a real bed from Santa. Is that mutually exclusive?