For people with money, last week was like a blow to the stomach. When Finance Minister Jim Flaherty came out late Tuesday afternoon and said he was going to tax income trusts, everybody knew what would happen the next day. The market for income trusts crashed taking away $36 billion in stock value over two days.
It was a particularly tough day for seniors. Yes, people with money were affected but for seniors income trusts had come to mean much more. Income trusts is a business structure where corporations can deflect all or parts of their profits to shareholders or unit holders who in turn pay the tax. Generally income trusts give handsome returns especially in this era of low interest rates. For seniors on fixed incomes from trusts, Flaherty’s move really hurt.
The Harper government had promised not to touch income trusts during the last election campaign. So it was a stunning reversal. Many Conservatives feel betrayed. I even read one media report from Montreal where a local Conservative organizer said he’d never vote Conservative again. So it is what it is.
However, we shouldn’t take much from this. Political reversals are regular in Canadian circles. Just before the last election campaign in January you might remember then Liberal finance minister Ralph Goodale decided not to tax income trusts. The particulars around that decision led to a RCMP investigation concerning any apparent leaks. It did Goodale and the Liberals no good. However, he bypassed the tough unpopular decision to Flaherty. Needless to say the police investigation from that earlier episode is still on going.
The move toward converting corporations into “income trusts” was about to turn into a cascade. Telus and BCE had just announced that they were converting to the income trust model. Others particularly in the energy sector were set to follow. Even the big Canadian banks were set to go. It had the potential to starve the federal government of corporate tax revenue it had grown to expect.
This is the way; Dianne Ablonczy Parliamentary Secretary to the Minister of Finance put it in the National Post.
“Informally we knew that EnCana and some of the other big oil and gas companies, one of the major banks a lot of others were seriously, seriously under pressure to do this, which would have been huge because that has a domino effect.
So what happens now? Well, hold your horses. We are still in a minority parliament and an election is in our near future. This may not be changed in the near future but the political winds on this issue will blow again. In the next few years investors looking toward future trust vehicles will have to be vigilant. However, this “income trust” thing might be over for now, but it definitely is coming back at us in the future. No politicians will be able to resist it.
The good thing about income trusts for seniors had to do with the monthly income from trusts. Digging deeper though this reality had come to fruition even though the “risks” inherent in such a strategy were very real. Political risks associated with investment vehicles always lurk in the background. Everybody needs to consider that when making investments. Flaherty’s move last Tuesday came out of nowhere, something that surely will happen again.
The political aftermath had Conservatives falling all over themselves saying they had too. Clearly though I don’t think it makes any difference whether it would be the Liberals or Conservatives in power. Former Federal Finance minister Ralph Goodale in retrospective delayed his trust decision for purely political means. It would have been just as bad politically then as it is now. His problem was leaks of his non-decision might have gotten out, which as I said earlier is under police investigation.
It all makes for an interesting 30 days in politics. A month from now we’ll know who is the new Liberal leader. The income trust decision will have spread out a mile wide and an inch deep. The Liberals will surely get a “bump” from their new leader. That will foam the insatiable Liberal appetite for power to levels not seen since 2000. Looking at the minority numbers in this parliament, the band will start playing “Dance band on the Titanic.” The “Titanic” in this case being our present parliament.