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Reason of the day to not vote Conservative: Income trusts?

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You know, I wasn’t going to do this one.

Yes, it was a broken promise. The Conservatives promised not to tax income trusts, and then they did it anyway, basically rendering them extinct by 2011.

But see, I’m not against politicians second-guessing themselves once out of the election heat, really researching the issue, getting advice from experts. And if they determine that their promise really isn’t in the country’s best interest — that it could actually be harmful — then I’m all for them breaking it.

And I actually thought this was one of those cases.

An article by the quite conservative Al Coates, in the KW Record, of all places, had caused me to reconsider this.

The rational for banning income trusts — the reason I thought it might have been wise — was to avoid two problems:

  1. Tax leakage, because the trusts pay no corporate tax — all profit go directly to investors.
  2. The “hollowing-out” of corporate Canada — great Canadians corporations being converted into trusts.

But as with so many of the Conservative actions, the decision was a complete surprise to the investors and companies involved. Investors were hurt financially (famously, a lot of seniors), and companies counting on funding from them were left vulnerable.

And Coates argues that the widespread, unintended effect of the decision was this:

Many of those trusts have become takeover targets by giant private-equity players. They are being taken off the map and the radar, folded internally into big pension plans, never again to be seen as income-producing opportunities for Canadians.

He gives the example of BCE, one I’m very familiar with, having relatives living through the nightmare of BCE’s takeover by the Teacher’s Pension Plan.

The buyout will be financed through borrowing and BCE will be taken private, dismantled, chopped into pieces and perhaps sold off in parts. Already, thousands of BCE mid-level jobs have been whacked and there will be more to come. [It’s so true!]

BCE is a cash-flow machine and its free cash will be used to finance the debt. The new owners of BCE — teachers and its American partners — will pay no corporate tax because, in the first place, pension plans don’t pay tax, and for the other buyout partners, there also are offsetting cash-flow and debt-service factors at work. Ottawa will be lucky to see a wooden nickel in ongoing corporate tax proceeds.

I’m so far from an expert in this stuff, it’s not funny. But it sounds like, just maybe, this is not a case of “tough but necessary” decision-making, based on sober second thought and analysis; it could be yet another hasty and myopic decision that will only weaken Canada’s economy in the long run.

And that’s a lot worse than just a broken promise.

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