CANADA stabs investors in the back!!!

Melensdad · Nov 2, 2006

I'm not sure how many of you guys (and ladies) invest in the stock market, but yesterday the US markets plunged. Today they are sliding again. Take a look to your the north and blame Canada for this. :moon:

After bringing in billions upon billions of dollars into the capital markets and the economy of Canada, the government--led by the Canadian Finance Minister Jim Flaherty--is wreaking havoc on investments.

It’s like inviting folks to a pot luck dinner only to have us drop off our dishes and then show us the door. Canada established some tax laws that made it very favorable for foreigners to invest in Canadian trusts. I have 3 of them in my portfolio. We did the work, brought our capital that helped turn around the Canadian economy and then, just as the government has gotten what it wants, we get screwed. Many of the people hurt by this are retirees who invested in the Canadian trusts.

Only a couple of weeks ago, Jim Flaherty rolled out his compliments to the trust market for bringing so much to the Canadian economy as well as helping capitalize the resource, energy, consumer, industrial, real estate and utility segments of the nation. After this speech that was well received by investors in- and outside Canada, I became even more optimistic that the Tory-led government was going to continue to keep the trust market and work on reforming some of the ill-fated tax and accounting changes implemented by the Liberals just before their ouster in the last general election. So I bought more shares in another Canadian trust.

The new Canadian Tax Fairness Plan goes like this:

First, there will be a Distribution Tax on dividend distributions from publicly traded income trusts and limited partnerships. This means that trusts are taxed on the dividend flows, which creates the disincentive to payout bigger dividends.
Second, there will be a reduction in the general corporate income tax rate of a half percentage point as of Jan. 1, 2011. Gee, thanks. This means that the effective tax rate that trusts have to pay on distributions will start at 34 percent, to mirror federal and provincial taxes on companies, and will drop to 31.5 per cent by 2011.
Third, there will be an increase in the Age Credit Amount by CD1,000 from CD4,066 to CD5,066 effective Jan. 1, 2007. This will somehow ease the pain of pensioners in Canada who just had their retirement account whacked. And for those of us outside the nation, nothing.
Fourth, overall, the cut in corporate tax rates by that massive half of one percent, along with the credits and some accounting easements for the elderly in Canada, are meant to reduce taxes by around a billion Canadian dollars annually for Canadian taxpayers. The plan itself erased tens of billions of dollars from the investment and retirement savings of Canadian taxpayers.
Last, for income trusts that begin trading after this week, the plan measures will apply beginning with their 2007 taxation year. For existing income trusts and limited partnerships, the government is proposing a four-year transition period. They won’t be subject to the new measures until their 2011 taxation year. However, the markets won’t wait--investors and traders discount everything, so not only have all the Canadian trusts tanked, the world markets are going down too.

For more information directly from the Canadian Dept of Finance, go to its Web site at www.fin.gc.ca. And if you’d like to get any more good news from the Department, it’s happy to send you e-mails automatically of all news releases. To receive these e-mails, go to www.fin.gc.ca/scripts/register_e.asp.

In case you’d like to vent, contact Dan Miles, the Director of Communications Office of the Minister of Finance, at 613-996-7861 or his assistant David Gamble at 613-996-8080.

If you have a broker handle your investments you might want to see if you are invested in any of these money losers. I invest directly so I know how much I've lost

Thanks CANADA :flagcan:

XeVfTEUtaAqJHTqq · Nov 2, 2006

Waaa Waaaa - Basically, the Conservative government had to plug the loophole in order to keep all major corporations from converting to Income Trusts and no one paying corporate taxes anymore.

The previous liberal government elite was milking these income trusts for their own personal gain.

You only invested in them because you thought you could get in on the scam while it was still being run.

I'm not really "pro-tax" but I could tell these Income Trusts were a bad thing (as in too good to be true) ages ago.

Sorry for your loss Bob. I would avoid relying on anything in Canada, it's stock markets are wrought with corruption.

Dutch-NJ · Nov 2, 2006

B_Skurka said:
The new Canadian Tax Fairness Plan goes like this:

Sounds like a twisted form of “Pump & Dump” legalized by Canadian law.

B_Skurka said:
We did the work, brought our capital that helped turn around the Canadian economy and then, just as the government has gotten what it wants, we get screwed.

Your term, “Screwed” may be very accurate, but it doesn’t sound quite civil.

Junkman · Nov 2, 2006

I think that we should just cut them off at the border. Tell all those Canadians that work in the US that the jobs are gone. Shut down the border and make it very difficult to get into the US from Canada. Hell, that alone would take the Canadians months to figure out what to do. What do we get from Canada that we couldn't get elsewhere?????? Hockey Players.... What does Canada get from us??? A whole lot, starting with military security. If the US as a nation pulls out of Canada, there economy won't tank, there won't be any economy left. Too our Canadian visitors on this site..... Sorry, but I call them the way that I see them. Nothing personal... Junk....

thcri · Nov 2, 2006

Junkman said:
I think that we should just cut them off at the border. Tell all those Canadians that work in the US that the jobs are gone. Shut down the border and make it very difficult to get into the US from Canada. Hell, that alone would take the Canadians months to figure out what to do. What do we get from Canada that we couldn't get elsewhere?????? Hockey Players.... What does Canada get from us??? A whole lot, starting with military security. If the US as a nation pulls out of Canada, there economy won't tank, there won't be any economy left. Too our Canadian visitors on this site..... Sorry, but I call them the way that I see them. Nothing personal... Junk....

But Junk, they have the best health care system in the world.

signed

Melensdad · Nov 2, 2006

PBinWA said:
Waaa Waaaa - Basically, the Conservative government had to plug the loophole in order to keep all major corporations from converting to Income Trusts and no one paying corporate taxes anymore.

No actually Canada was incapable of attacting investment and needed to do something to attract foreign money to prop up its economy. The Conservative government lauded these programs as one of the best things Canada ever did to help its economy. Then they pull the plug weeks late.

My losses are irrelevant compared to what they did to the world markets. Canada basically attracted all sorts of retirement money, institutional money and mutual fund investments and they screwed those investors. Inviting money in and then changing the rules is going to end up costing Canada a lot of investment long term. How many money managers do you think will now recommend Canadian investments? How many institutions will ever trust their money in Canadian holdings? Not just from US sources, but from all over the world. What seems to be missing is the fact that Canada screwed itself because foreign investment is going to seek better places.

DutchNJ said:
Your term, “Screwed” may be very accurate, but it doesn’t sound quite civil.

Dutch, our civility rules relate to how we treat each other, you clearly were trying to insult another member when I warned you (and others) in another thread. This would be your last warning from me. You are obviously trying to upset people with your rhetoric and are simply upset that someone slapped your hand when crossed the line.

XeVfTEUtaAqJHTqq · Nov 3, 2006

Hi Bob,

Here's some more reading on the subject:

Again, I am sorry you lost money but from what I can tell it was necessary.

Junkman · Nov 3, 2006

PBinWA said:
.............Again, I am sorry you lost money but from what I can tell it was necessary.

That is like telling someone that is in mourning, better their loved one than yours. :hide:

Melensdad · Nov 3, 2006

Again the point is the long term affects on outside investments into Canada not the fact that my daughter's last year of college will have to be in state school instead of private school due to my losses.

While Canadians may view this as necessary there were other options that they could have chosen, including to freeze the existing trusts under a grandfather clause and simply not permit new trusts to form.

Further, while it seems like these trusts pay no taxes, in fact they do, but they get favorable treatment and that was the lure to bring in BILLIONS AND BILLIONS of foreign dollars that Canada desperately needed to prop up its economy. So while the Canadian press is suggesting that Canada was losing tax money, in fact it was getting taxes but at lower rates. Further, it was collecting taxes on far greater distributions than it otherwise would have gotten, so if they had not allowed the favorable status for these trusts they would have collected a LARGE % of VERY LITTLE instead of a SMALL % of A LOT.

Again, this also affected the WORLD stock markets and the US, London and Asian stock markets fell the day Canada pulled this little trick. So its more than just the Canadain trusts that lost value. The S&P, NASDAQ, etc all went down too. And Canada has forever tarnished itself in the eyes of investors and money managers. I don't think you will see foreign investors flocking to Canada in the future and that will cost Canada dearly over the long term.

XeVfTEUtaAqJHTqq · Nov 3, 2006

You are probably right Bob.

The whole income trust thing has been poorly done from the beginning. The last government leadership was reported to have heavily profited from the advanced notification (insider trading) that corporations had to give prior to converting to an income trust. That's why you see that the press is mentioning the surprise that no one leaked the details of this change. They are almost more surprised that a government can operate with the appearance of morals and scruples than the economic impact.

In the future I would recommend more diversification in your investment portfolio so nothing like this has such an impact on your child's education.

Perhaps you could sell some of your toys so she can spend that fourth year in a private school! If you want, I'll adopt her and we can get her into a Canadian University at a nice Canadian tax payer funded rate!

Melensdad · Nov 3, 2006

PBinWA said:
I would recommend more diversification in your investment portfolio. . . Perhaps you could sell some of your toys . . .

I have about 5% of my portfolio in Canadian investments, or more correctly I had about 5% of my portfolio there

But regardless of my situation, I still contend that the ripple effect of this is going to be a far bigger problem LONG TERM for Canada than the way they chose to 'cure' the situation.

Melensdad · Nov 3, 2006

PBinWA said:
Waaa Waaaa - Basically, the Conservative government had to plug the loophole in order to keep all major corporations from converting to Income Trusts and no one paying corporate taxes anymore.

The previous liberal government elite was milking these income trusts for their own personal gain.

You only invested in them because you thought you could get in on the scam while it was still being run.

I'm not really "pro-tax" but I could tell these Income Trusts were a bad thing (as in too good to be true) ages ago.

Sorry for your loss Bob. I would avoid relying on anything in Canada, it's stock markets are wrought with corruption.

I just received an email from one of my advisors on the Canadian situation. Here is his take on the whole thing. It is very similar to my take, in that Canada basically screwed itself. I highlighted some of the best points. And it sounds like many people who sold off may have been a bit premature in doing so. I own the trusts in TAXABLE holdings, so while I have lost value, it may not be as bad as it seems after the US tax consequences are factored in. And while I have been saying all along that CANADA bascially screwed itself, my advisor seems to be driving that point even stronger than I did.

The tax changes from the Tory-led government of Steve Harper
and Jim Flaherty has sent shockwaves through billions upon
billions of dollars in the capital markets and pension funds
of Canada just to generate a fraction more in net tax revenues
for the country.

But their actions have done and will do more harm than good for the
Canadian government if left unchecked.

So the Tories want to tax trusts? Fine. There are a few things
they may have overlooked in their headlong plunge into this
matter.

First, let's go through the tax changes and what it means for
both taxable and non-taxable investors in Canada and the US.

For those in Canada, the new tax on distributions means
virtually nothing changes. In fact, if the trusts continue to
operate as they have been, the net result might well be a tax
cut, not a tax hike.

Right now, Canadians face a tax rate of 46 percent on dividend
income. That means whether paid at the source or upon receipt,
the new rate of 45.5 percent is a tax cut on the net cash
flowing into their accounts.

It's actually the non-taxable Canadians that are going to be
hurt--again, all this is assuming some rational member of
Canada's government doesn't stop this lunacy.

Right now, the tax liability for non-taxable or tax-deferred
Canadian pension or retirement accounts is nil. And with the
new changes, the result will be a net rate of 31.5 percent.
This means the Ottawa government is hiking taxes on retirees
in their own country (including union members and other tough
voter groups) by that 31.5 percent.

This, in turn, means that the public-sector pension funds will
have to be topped off by Ottawa one way or another, given the
trillion-dollar shortfall in current liabilities. Trusts were
closing that gap helping to reduce the cost to the government
of that trillion dollars, which, if the tax law stays, will
now have to be paid.

So they take away some cash now, only to have to return it in
the pending years to come. That's not too smart.

But let's be selfish and look at the proposed new tax law on
trusts from a US investor standpoint.

If you continue to own the trusts in a non-taxable or
qualified tax-deferred account, the tax rate goes from 15
percent to 41.5 percent. This isn't good. And if the law
stands, the trusts won't work any more for non-taxable or
qualified retirement or pension accounts in the US.

The Canadians won't get the tax with the elimination of
non-taxable retirement investors in the US. Right now, 15
percent is bad but not an insurmountable burden for retirement
account investors in the US. But at 41.5 percent, it becomes a
deal breaker. US investment leaves the Great White North and
doesn't even pay the 15 percent any more.

For taxable US investors, the current deal has 15 percent
withheld, which is recoverable by Uncle Sam with a mostly
dollar-for-dollar credit against US tax liabilities, thanks to
the tax treaty between the US and Canada.

The pending legislation brings the net taxes to 41.5 percent,
which, if the trusts continue to operate as currently
structured, Uncle Sam will simply funnel the liability back to
the Canadians with the same tax credit on our IRS forms.

This means that potentially, if the trusts work their
distributions the right way, i.e., for taxable account
investors in the US, we just might have a zero impact on our
net after-tax cash flows from Canadian trust investments. And
the Canadian Dept of Finance won't get one extra net dime from
US taxpayers.

But beyond the net impact on tax liabilities, there's more
happening in the Canadian market for trusts.

With the massive selloff in trust share prices, many of the
quality companies, particularly those with quality assets and
revenue streams (which include all of our petrol and business
trusts inside the Portfolios of Personal Finance), will be
ripe for takeover.

Most of the trusts have little voting control over the net
companies, as most of the shares are trading in the public
markets. This means both publicly traded US and overseas
companies can grab some very nice companies at a discount to
their recent market valuations.

But forget about just the public companies grabbing trusts;
think private equity.

US and offshore private equity investors and funds will pick
off trust shares and pull them into their stables of big
cash-generating businesses. And with the revenues running
against leveraged debt costs, it will be quite easy to not
only take over control of Canadian companies by private equity
firms but also to run the books to cut out the Canadian Dept
of Finance from taxable profit streams.

XeVfTEUtaAqJHTqq · Nov 3, 2006

Stephen Harper is an economist and a pretty smart guy. I'm sure he didn't do this if he didn't have to.

I think there were other issues involved in the decision other than just taxes. One of these issues was something similar to: the conversion to an Income Trust usually means that funds that might have been spent on Research and Development would instead be directed to dividend benefits.

While I know some people will groan at this statement, I haven't seen Stephen Harper do too many really "bad" decisions yet. Given his economist background I'm prepared to give him the benefit of the doubt.

Of course, I didn't lose any money either.

Given it's geographical size, Canada is really a small country. There are entrenched "power" families that run a lot of the behind the scenes action in Canada. While I say that I would like to give current government the benefit of the doubt, I am never surprised by the levels of nepotism and corruption in Ottawa (Canada's capital).

PB

DingoTango · Nov 6, 2006

Wow --- I just heard about this issue today on NPR and they didn't go into it very deeply but it's pretty complex, eh? (that "eh" is for any Canadians on the board.)

The only thing I have to say about it is that retroactive policies are unfair and new taxation policies should be implemented on a gradual basis in order to minimize the impact on markets and investors. For example, I favor a very high tax on gasoline, but it should be implemented slowly in order to give people time to find alternatives to gas-guzzlers and other forms of dependence on oil. Sudden changes usually cause sudden problems.

Junkman · Nov 6, 2006

I spoke to my stock broker today, and he minimized the amount of damage that has been done to the market and to Canada itself. His view was that it was good for Canada to take this position. It all makes me wonder... Junk.

Melensdad · Nov 8, 2006

Junkman said:
I spoke to my stock broker today . . .His view was that it was good for Canada to take this position

Why?

I'm really curious why it would be good for Canada.

Here is what I now see. There are several different types of trusts that Canada allowed. I only own energy trusts. They are perhaps a bit different that some of the other types.

One of my trusts is ARC Energy, which is working to get a host of concessions claiming that, without them, the new tax law will crush them.

I don't think they will be crushed. But I do think the trust will vanish, and with it, the taxation that Canada planned on grabbing will also vanish.

The more likely outcome is that ARC Energy will be purchased either by private or public equity companies and the trust dissolved. The petrol assets of Alberta are older fields that are just cash-cow-type facilities, which have been perfect for trusts. But now they’re also perfect for other companies to grab them and keep the cash coming.

And jobs will stay and all the rest. But the government's hope of more tax revenues won't be realized and more of Canada's natural resources will be owned by others beyond Alberta by this process.

At this point I am down but the value is slowing coming back and the 3 petrol/energy trusts I hold are slowing rising again seeing the bump up in prices as my 3 holdings represent (what I believe are) the cream of the crop of petrol trusts--ripe for deals. I purchased 2 petrol trusts and one that is primarily natural gas, all 3 are conservative trusts with sound financials. So now I am actually thinking of buying some more shares in these trusts and speculating that they will be purchased and the trusts collapsed. If that does happen, it will be a direct result of Canada's misplaced greed and their lack of understanding of their own tax system. :yum:

But a broker who would suggest it was a good thing for Canada would scare the living crap out of me! So I am very curious if he actually understands what is happening?

Melensdad · Nov 13, 2006

I thought this was interesting:

Citizen's group files complaint over income trusts

By MURRAY BREWSTER

2006-11-10 17:00:00

Finance minister Jim Flaherty defends his decision on the taxation of income trusts, during Question Period in the House of Commons in Ottawa Monday Nov 6, 2006. (CP PHOTO/Tom Hanson)
OTTAWA (CP)

- Saying that politicians should have to undergo lie-detector tests during election campaigns, a citizen's watchdog group has filed a complaint with the federal ethics commissioner over taxing income trusts.

The Conservative government clearly broke a campaign promise when it proceeded to tax the lucrative trusts Oct. 31, Duff Conacher, co-ordinator of Democracy Watch, told a news conference Friday.

"There is a clear rule in federal ethics rules that says all politicians must act with honesty," he said.
"Prime Minister Stephen Harper and Finance Minister Jim Flaherty are both guilty of being dishonest, in violation of federal ethics rules."

During last winter's election, the Tories pledged not to tax income trusts as a way to earn the vote of seniors, who have increasingly turned to the financial vehicle as a way to hold on to more of their life savings. The promise prompted an embarrassing retreat and forced Flaherty to apologize to Canadians this week.

Given what he considers the ethics commissioner's poor track record at holding politicians accountable, Conacher says he doubts there will be serious action.
If that's the case, he says his group is ready to fight the matter in court.

There should be some kind of fine for politicians who lie and failing that, Conacher suggested a more basic, if somewhat unrealistic, solution: "In future, we could switch to a lie detector for all political leaders during election campaigns."

In the Commons, Liberal John McCallum described the flip-flop as the "mother of all broken promises" and said the decision has cost investors nearly $20 billion in paper losses.

"How can Canadians believe anything this government says?" he asked during question period.

And here is another article. All of these things, in one way or another, seem to agree with my assessment. I can find very little evidence that Canada made a smart LONG TERM decision.

Energy Trust Losses Could Affect Canadian Oil Exploration

Dow Jones Newswires Friday, November 03, 2006

[FONT=MS Sans Serif,Arial,Helvetica] CALGARY, Nov 3, 2006 (Dow Jones Newswires from the Canadian Press) Exploration money for Canada's oilpatch could be the main casualty as energy trusts spiraled downward Thursday, piling up more than $17 billion in losses since the Harper government announced plans to tax income trusts, Canadian Press reported.

"There's been a big 'for sale' sign put on a lot of these enterprises," said John Brussa, a tax lawyer with Burnet Duckworth & Palmer who helped create income trusts in 1984, the Canadian Press article. "It looks like the market prices are diving below intrinsic value."

But most potential buyers could be wary of what they would be getting, which will make acquisitions few and far between in the short run. "I'd say it has to put a damper on things because the access to capital markets right now with trusts is gone," said William Lacey of FirstEnergy Capital. "At least for the next six months until there's greater clarity as to the operating future of trusts and how they're going to re-tool themselves."

While the energy industry tries to sort out the ramifications of the income trust decision announced late Tuesday, one business expert believes trusts will be forced to become more like the initial production companies they were designed to complement, Canadian Press reported.

"It's going to harder for larger companies to take their mature properties and sell those to energy trusts, then take the cash for that and go do exploration," said Bill Schulz, who teaches strategic management at Calgary's Haskayne School of Business.

"And their people mix doesn't match up with what the new strategy is going to be," he said. "They've got four years to figure it out, but in Calgary these days, (hiring) a geologist or a geophysicist is pretty hard to do."

Meanwhile, brokerage Canaccord Adams called the trust tax proposal a "knee jerk reaction" and said it would have significant negative unintended consequences, in a report that included phone numbers and email addresses for all MPs, Canadian Press reported.
"If the tax proposal is enacted as presented, we believe that Canada will lose control of its energy sector and investment activity will decline in conventional oil and gas production," the capital markets unit of investment firm Canaccord Capital said in a report Thursday, Canadian Press reported.

"This tax proposal puts a 'for sale' sign on Canadian energy resources by removing a competitive cost of capital advantage - a wave of foreign takeovers is likely to emerge. As a result, Canadian energy decisions will eventually be made outside of our borders."

Canaccord suggested the government has effectively increased the cost of capital for the Canadian oil and gas sector.

"Investors should be concerned that this proposed tax policy will reshape the energy industry and slow the growth of conventional oil and gas development," the firm said.

Schulz said that while the trust taxing plan won't inflict a body blow to the oilpatch on the scale of the National Energy Program of the early 1980s, it will impact sustainability in what has always been a boom and bust industry, Canadian Press reported.

"The people in Ottawa (who) looked at trusts were looking percent payout on distributable cash, but they forgot about capital expenditures," said Schulz in the Canadian Press article.
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CANADA stabs investors in the back!!!

Melensdad

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