Trusts to be Taxed - Tory Halloween Bombshell

[Wookie]

Originally Posted by FireFly

Yeah, but the goal is to have it at $65 for Christmas so I'll clear $4000 on my gifted shares... that'll pay for my trip to Spain next year.

$3000 is close though.

Well it went $.60 over your target today, too bad you didn't have some sell orders in place. That said I'm down about $14,278 from one company because I couldn't take my own advice

It's a fun game full of valuable lessons

[RougeUnderoos]

Originally Posted by Flames in 07

It was part of the PC platform, and given their record of executing promises it shouldn't be that much of a shockwave.

Hmm. I'm not familiar with all this complicated business, but CTV has a few quotes on the reaction to this...

William Holland, CEO of mutual fund company CI Financial Income Fund, blasted the government in remarks to The Canadian Press.
He said the government had said the rules on trusts wouldn't be changed.
"They shouldn't make any changes. They said they were going to leave income trusts alone. Well, they're not leaving them alone. That's the problem.


and


Don Drummond, chief economist of the TD Bank Financial Group, told CTV Newsnet that this was a huge announcement.
"It's a surprise. The expectation had been that given some of the ambiguities surround income trusts, and particularly given the vulnerable political situation, that there wouldn't be anything announced.


and

Interim Liberal Leader Bill Graham called the move a flip-flop. "All I can remember is that during the election, Mr. Flaherty and the prime minister said under no condition would they touch income trusts," he said.


That last one is a Liberal of course, so I'm sure if this was actually in the election platform they will dig it out to prove him wrong.


Flaherty said this on the matter. It sounds to me like something a Liberal or even NDPer would say:


"Left unchecked, such corporate decisions would result in billions of dollars in less revenue for the federal government to invest in the priorities of Canadians,'' he said.

[Shazam]

Originally Posted by Wookie

Well it's not just the corps losing their cushy tax strucutre, I do feel bad for a lot of the retired people who have bought into these trusts as a income earning investment vehicle. Not only have a lot of the O&G trusts got killed in the last little while, but now this.. `

There's some very minor changes for seniors:

http://www.theglobeandmail.com/servl.../Business/home

The senior-targeted tax relief, which goes into effect in 2007, takes two forms. Ottawa will allow senior couples to split their pension income and thereby reduce their income tax bill. It's also boosting a tax credit for low-and middle-income seniors called the Age Credit Amount by $1,000, to $5,066.

On the other hand, you'd have to be an idiot to think the guvment wouldn't do something about this tax loophole so big you could drive a truck full of money through.

[Wookie]

Originally Posted by Shazam

There's some very minor changes for seniors:

http://www.theglobeandmail.com/servl.../Business/home



On the other hand, you'd have to be an idiot to think the guvment wouldn't do something about this tax loophole so big you could drive a truck full of money through.

Yeah saw that senior specific part.. Still will affect some retiree's or semi retiree's that might not have been seniors

definitly had to see it coming though. The financial markets have been shaped by tax avoidance, then changes in taxation, then more avoidance, then changes in taxation.. It's a never ending strategy.

[Wookie]

Market's reaction will be ugly
ROB CARRICK
From Wednesday's Globe and Mail

Beginning in 2011, trusts will be taxed more like corporations. Experts were still deciphering the government's announcement last night, but the net effect seems to be that paying taxes will leave trusts with less money to dole out to their investors. In turn, this will undermine the rationale under which scores of seniors and others have bought these investments — at a time when bonds and guaranteed investment certificates pay barely 4 per cent, trusts offered returns of 5 to 10 per cent or more through their monthly or quarterly cash distributions.

And from a different article (wow a third)

Canada energy trust bosses warn output will suffer
Tue Oct 31, 2006 9:47 PM EST
By Jeffrey Jones and Scott Haggett
CALGARY, Alberta (Reuters) - Canadian oil executives said they were blindsided by Ottawa's plan to start taxing income trusts and warned the move threatens the country's ability to maintain oil and gas output.
The energy sector has been by far the most fertile ground for income funds over the past decade, and companies that have converted to the trust structure now account for as much as a third of Canadian crude oil and natural gas output

It's worth recalling that when the Liberals announced a review of their trust policy a little more than a year ago, the resulting uncertainty cost the trust market about $23-billion in value.

Regarding pensioners

Income-splitting for pensioners will provide more than $1-billion in tax relief per year, according to the federal Finance Department. Will that take the edge off the chaos to come in the trust market? No chance. Trusts are found in mutual funds, pension funds, individual investment accounts and registered retirement accounts. All kinds of investors are going to be hurt, and the pain will be unavoidable as the stock markets adjust to the uncertain new future for trusts. Better brace yourself.

[Wookie]

Last post on the subject, it'll be interesting to see how the prices of non-trust O&G companies do. CNQ, ECA, PCA, Husky, Shell, A lot of people just loved the income some of the trusts were giving them... Where will they put thier money? Or what's left of it?

[FireFly]

Originally Posted by Wookie

Well it went $.60 over your target today, too bad you didn't have some sell orders in place. That said I'm down about $14,278 from one company because I couldn't take my own advice

It's a fun game full of valuable lessons

Can't cash them until December 9th. I anxiously await that date to see what happens until then.

Here's a question... could Telus now announce they've changed their mind and aren't going to become an income trust? What would that do?

[Wookie]

Originally Posted by FireFly

Can't cash them until December 9th. I anxiously await that date to see what happens until then.

Here's a question... could Telus now announce they've changed their mind and aren't going to become an income trust? What would that do?

Sorry, forgot about that detail.. Guess I'm the loner with the greedy heart haha

ummm.. oh yeah, they easily could, but a lot of the increase in value was people who were interested in the trust structure, or speculators trying to cash in on the interest in the trust structure. So if telus doesn't go through with it it'll tank, and if they do the change in the rules will make it tank anyway. They're screwed for the short term, well they're not, but anyone who bought during this run-up are. However that shouldn't always effect your decision. It's a good company, they have been a good growth story and were doing well.. Nothing has changed, once this fiasco is settled, things could continue on their merry way and Telus could be back doing well in a few months or a year or so.

[Wookie]

Originally Posted by FireFly

Yeah, but the goal is to have it at $65 for Christmas so I'll clear $4000 on my gifted shares... that'll pay for my trip to Spain next year.

$3000 is close though.

Well if you believe in your company, and you work there and can see a succesfull enviroment, with hard working people and managment you believe in then you don't need to sell in December, wait and see what happens.. If Telus is a good company people will still buy if they continue to grow their business and a lot of these trust have been managed poorly and were due to fail anyway. That will be move evident now as people won't want to hold onto a badly managed trust that isn't going to be able to pay out as much as it was before. This money will flow to well managed growing companies. Maybe Telus...

[FireFly]

Oh for sure... I don't need to sell in December. I am however broke ass and that money is actually supposed to pay off my credit cards so that I have more time without those massive payments every month, which I will then put into savings. I also have other shares which they tell me will be converted that I don't plan on selling yet, but will closer to my trip which would be spending money. (I have a financial plan to make my broke ass not seem so broke... and fast!) It'll all work out in the end. I just need more patience than I seem to have right now.

Student debt sucks. It's a good thing I have a solid plan to get me out of it.

[Wookie]

Well looks at bids this AM things seem to be looking like most of the relevant trusts are going to take a 10% hit.

Telus the ask is at $54.00, lots of bids for that $54.00 too.. might change before open

[Lurch]

Not that I disagree with the decision at all, but for those earlier that suggested the Conservatives had made this an election promise, the exact opposite is true. Conservatives campaigned on a promise to not touch income trusts. Quote below from G&M.

Prompted by fear that Canada's banks and other major corporations might be tempted to convert to income trusts, Prime Minister Stephen Harper's government swallowed hard Tuesday and broke the first key promise of its short mandate by slapping new taxes on the corporations.
That bit of contradiction alone gives the opposition a substantial club with which to beat the government in the current legislative session.

[nfotiu]

Originally Posted by Red Mile Style

awwwwwwwww, boo fricken who! Multi-billion dollar corporations are going to have to pay their taxes too!

Oh, the humanity! Why can't they just tax the middle or lower classes like true neo-cons?!?!

waaaa!

I never understand the logic behind comments like this. Who do you think corporations are? They are all mostly owned by pension plans/etc. Any money a corporation makes, gets re-invested, or paid out to stock holders and employees. Anyone who makes money from a corporation has to pay their taxes. Why should corporations even pay taxes at all?

[SeeGeeWhy]

Originally Posted by Wookie

Well a lot of the loss will be from people pulling their money out of these trusts. However that money will flow somewhere else. Some equities that have been less favourable because of trusts will be the recipients of some of these funds, which will drive up share prices. As well some people have been expecting this and have shorted some of the trusts. I emailed some friends when I heard about it to see how they felt in their respective businesses, I guess a lot of them expected it so I'd assume some people will have been prepared.

A few other I know have commented on some of the house buying (some, not a lot, not all, just some) in Calgary being related to unwarranted appreciation in valuations of O&G companies, options, trust units etc.

[...]

Regardless I never got into the trusts.. So I think it's funny, well not funny, but, interesting, the same way people find hurricanes interesting.... Sorry to anyone who takes a hit. Hopefully it won't be too painful.

Trusts are attractive to a number of different types of investors. The group that is pointed to the most as potential unit holders are those of the retirement age - nice investment for distribution income. I've never seen the age demographics for those who actually invest in trusts, but if that is true, I wonder what implications this has for our senior population. In that case, it really isn't all that funny, wookie.

Hopefully a majority of the trusts can maintain their distribution level, despite having 20% of their market value erased.

As for the housing market being related to overvaluation of O&G companies.. maybe in a round about way. O&G is over valued because commodity prices are high. Because commodity prices are high, companies are rushing to make a profit and spending captial like crazy. You need employees to do that, which is driving up the value of real estate. That's the connection I see.

[Agamemnon]

Originally Posted by nfotiu

I never understand the logic behind comments like this. Who do you think corporations are? They are all mostly owned by pension plans/etc. Any money a corporation makes, gets re-invested, or paid out to stock holders and employees. Anyone who makes money from a corporation has to pay their taxes. Why should corporations even pay taxes at all?

So... people should pay taxes, but not corporations? How does that make any sense? Its not like a company is divided equally amongst thousands of shareholders, quite often a very few people are the main shareholders and reap most of the benefits. Do they deserve this due to their hard work and intelligence, probably. But I don't see why they shouldn't be taxed just like everyone else.

If anything personal taxes should be reduced to compensate for increased Trust taxes (and they are for seniors).

[Lurch]

I never understand the logic behind comments like this. Who do you think corporations are? They are all mostly owned by pension plans/etc. Any money a corporation makes, gets re-invested, or paid out to stock holders and employees. Anyone who makes money from a corporation has to pay their taxes. Why should corporations even pay taxes at all?

You may want to ease your position just a little on this - as put, it's simply silly. There are a multitude of reasons corporations should be taxed, but I'll throw out just a few.

1. With no corporate tax, a corporate shell becomes an indefinite tax shelter. Anyone with money and brains could effectively avoid tax permanently, shifting tax burden onto middle and lower class.
2. Foreign held corporations would pay no tax to Canada. They benefit from the infrastructure, legal system, free health care for workers, etc yet would pay no tax.
3. As a legal entity, corporations are no different than a person. Why should they have special standing wrt to taxation? For example, if I'm self-employed why should I pay any tax?
4. Why should retained earnings be given indefinite tax-free status? Without corporate tax, corporate earnings would accrue tax free until paid out as dividends.

[mykalberta]

You had to know that Bell going to the Trust was the last straw, its one thing when little resource plays or small non growth businesses do it, that doesnt really affect anything or embarrase the government.

When Bell announces their intentions, thats a direct slap at the government and if I was running things I would take it as a definatge embarrasement.

Heck what would stop every company in Canada from moving to a Trust format.

Also this adds another issue for the Libs to debate durring the leadership race and also takes the "Torries are for Big Business not the Little Guy" rant off the table.

MYK

[I-Hate-Hulse]

Sweet Jeebus... just like I thought, 10-15% down on the majority of trusts.

Well, I know Ottawa was looking for a way to chill the Alberta economy while maintaining everyone else's - looks like they found one. The devaluation of 10-15% of trusts plus the impact on the oil and gas sector is going to put a sizeable dent in the Alberta Economy. Housing prices will certainly recede further.

I have to laugh at the double standard some people levy - when the Liberals said they were going to "do a review" there was bloody murder being hurled from the streets of Calgary at Ottawa. Now that a homeboy from Calgary's in the big seat, I haven't seen nearly as much teeth gnashing. Do they just take it this time? Don't get me wrong, I understand why the Tories had to make this move, but I'm just laughing at the difference in reaction this time.

In typical government style, the finer points have yet to be released, so perhaps the final mechanism by which they'll tax Trusts won't be as onerous or as much as thought. Not holding my breath though.

Here's a quote from a Telus press release:
As a result of the announcement by the Federal Minister of Finance, there can be no assurance at this time that TELUS will proceed with its proposed income trust conversion.

And the result...
T.TO - down 8.47 (-13.04%)

[Lurch]

Also this adds another issue for the Libs to debate durring the leadership race and also takes the "Torries are for Big Business not the Little Guy" rant off the table.

Does it really? Just my take, but it is the little guy that is probably most angry at this decision. Around the office, I've pretty much heard "Who the ** am I supposed to vote for now?" as a lot of people just lost 20% of their wealth as a direct result of a broken election promise. Meet the new boss, same as the old boss is pretty much the theme.

[nfotiu]

Originally Posted by Lurch

1. With no corporate tax, a corporate shell becomes an indefinite tax shelter. Anyone with money and brains could effectively avoid tax permanently, shifting tax burden onto middle and lower class..

They could shelter their earnings indefinitely, but never spend them. What would be motivation to doing this? If you can only take money out of the corporation as a salary or a dividend, those should both be taxed. If they are using their corporation to buy them things they want like cars, and planes that aren't actually legitimate business expenses, that should be illegal anyway, and they should be cracked down.

Money in a corporation is usually re-invested, and this is generally a good thing for society. I trust the government to spend this money beneficially less than I'd trust most companies.

Originally Posted by Lurch

2. Foreign held corporations would pay no tax to Canada. They benefit from the infrastructure, legal system, free health care for workers, etc yet would pay no tax.

There are many benefits to the local economy of having a foreign owned company start up a plant as well. Why discourage this? Why should the local government benefit? The company pays the local citizens wages which are taxed, which help pay for health care/etc., so they are paying for these benefits anyway.

Originally Posted by Lurch

3. As a legal entity, corporations are no different than a person. Why should they have special standing wrt to taxation? For example, if I'm self-employed why should I pay any tax?

A self-employed sole proprietor should not pay any more or less taxes than a corporation. It seems the reason that many consultant type people make themselves corporations is to purchase things like cars in their company name, avoiding income tax on that money. If they are both taking the same money out of the company for personal use, they should both be paying the same taxes.

Originally Posted by Lurch

4. Why should retained earnings be given indefinite tax-free status? Without corporate tax, corporate earnings would accrue tax free until paid out as dividends.

Again, profits should be re-invested in other things therefore increasing employment. The more corporations have their earnings taxes, the less they have to put back into the economy. Why should governments be trusted to better disperse this money? Companies rarely hoard their cash without re-investing, or paying it out to their shareholders. Tax rates for corporations are lower than income tax rates currently, yet companies don't exhibit this behaviour.