VICTORIA - You can be angry at the Conservatives for breaking their promise not to plug the income trust tax loophole - especially if you lost money because you believed them.
But it’s a good move that will help average taxpayers and encourage a stronger Canadian economy.
And if you’re looking for the real bad guys in all this, turn your gaze to the former Liberal government, which chose to ignore the destructive effects of a flawed tax rules.
People tend to turn the page when they hit a column about tax policy. But this one is pretty straightforward, and important.
Corporations spotted a great tax loophole in income trusts about six years ago and proceeded to jump through it in ever-increasing numbers. The less they paid in taxes, the more the rest of us had to cough up. Eventually - way too late - the government decided to act.
It’s a simple enough proposition. Corporations pay taxes on their profits, including the money they send out to shareholders as dividends.
But their clever tax lawyers realized companies could avoid paying most of those taxes. All they had to do was create income trusts and register them. Profits paid to the trust, and then distributed to taxpayers, weren’t taxable. The company had more money left to hand out, so its value rose.
Nothing actually changed for the better in the business - it doesn’t make more widgets or improve in any way. But it was worth a lot more.
A few companies made the switch. The Liberal government did nothing. So more jumped at the chance to cut taxes and boost their value.
The Conservatives promised they would leave the loophole open, so some of Canada’s biggest companies decided to become income trusts. The trickle of trust conversions became a wave. One estimate put the net lost revenue to government - recognizing that individuals would pay taxes on their gains - at $1.1 billion a year and growing.
So Finance Minister Jim Flaherty delivered his Halloween scare for investors. The tax loophole is closed immediately for companies that haven’t converted, bad news for corporations like Telus that were expected to make the change. Its share price fell 13 per cent on the first day after the announcement. Companies that have already made the shift will keep the tax break until 2011. Their values fell too.
Flaherty did the right thing.
It isn’t just that the corporate efforts to avoid taxes shifted the burden on to the rest of us. Regular corporations can take a look at their financial statements and decide what to with profits - pay dividends, reduce debt or invest in new technology or expansion. But income trusts commit to sending a fixed amount to unit holders each year. There’s a risk that investment in the future suffers.
The big lesson here is that government dithering can be expensive.
The income trust issue didn’t catch government by surprise. Australia and the U.S. went through similar experiences almost two decades ago and decided to close the tax loopholes.
And six years ago, as companies started looking at the income trust option, Canada could have taken the same step with little negative impact.
The Liberal government didn’t. Big corporations liked the chance to pay less tax. With each passing month of government inaction, more people had a stake in the trusts and would be angry at any change. The Liberals and the Conservatives let it slide, until now.
Investors aren’t the only losers as a result. Companies spent hundreds of millions of dollars converting to income trusts and developing new business plans. They developed new long-range business plans.
And then government changed the rules and made their investment worthless.
It’s a sorry tale. A responsible, effective government would have never let the whole trust spree get this far. The result has been lost government revenue, scary times for some investors and wasted time and money in the corporate sector.
Footnote: Trusts, with their regular payment schedules, were popular with seniors. The change hurt them. Flaherty offered an offsetting benefit. Couples can now split one person’s pension income for tax purposes, shifting them into a lower tax bracket. The change will be most significant for those with a high pension income.
Wednesday, November 01, 2006
Tuesday, October 31, 2006
First treaty offers big hope for progress
VICTORIA - The Leheidli T'enneh is only a small First Nation, with barely 300 members in the Prince George area.
But the treaty deal just reached with the federal and provincial governments and could mark some very big progress in the long effort to resolve First Nations land claims in B.C.
After 13 years and hundreds of millions of dollars this is the first final agreement reached under the B.C. treaty process. That's important in itself. One of the problems in any set of multiple linked negotiations - like the treaty talks with more than 50 bands around the province - is that no one wants to sign that first agreement.
All the parties know that the first deal will inevitably set some benchmarks for every agreement to follow. As the people at one negotiating table get closer to a deal they grow increasingly worried about the long-term implications of the concessions and compromises they are making.
First Nations negotiators have another concern. They worry about getting yelled at by members if they sign a treaty agreement now and some other band manages to do better down the road. It's safer to wait.
The Leheidli T'enneh and governments worked through those barriers to reach the agreement signed in Prince George last weekend.
There's more reason for optimism. The treaty doesn't involve a huge amount of money or land. The Leheidli T'enneh have about 677 hectares in their current reserves. They will get another 3,650 hectares, including land within the City of Prince George. Even with the additional land, their holdings will still only be about 10 times the size of Stanley Park. The band will also get about $20 million in one-time payments and $400,000 a year for 50 years in guaranteed revenue-sharing money.
Those will undoubtedly be useful benchmarks for the parties at other negotiating tables.
But much more importantly, the deal tackles some of the critical non-monetary issues and comes up with pragmatic solutions that could be applied in other talks.
Prime Minister Stephen Harper, for example, has made much of his opposition to "race-based fisheries." But the federal government has accepted this deal, which guarantees the Lheidli T'enneh - subject to conservation concerns - a share of the Fraser River sockeye run for a commercial fishery. At other treaty tables the question of whether First Nations will be required to accept Agricultural Land Reserve restrictions on development has been a concern for neighbouring municipalities. This proposed treaty deals with the problem, setting out a negotiated agreement on which lands will continue to be considered within the reserve.
Another issue, particularly in the Lower Mainland, has been how - or whether - First Nations would work with neighbouring communities. Municipalities fear uncontrolled development or extreme tax policies that would threaten their management efforts. The settlement commits the Lheidli T'enneh to work with Prince George and the district to develop a harmonized tax structure and regional plan.
And the treaty resolves the issue of certainty, one of the big stumbling blocks in negotiations. First Nations fear the impact of signing away all future claims; governments want treaties to end uncertainty about land ownership and use. The agreement includes language that both sides accept as a reasonable solution, defining the treaty as a final resolution of land claims while allowing for an arbitration process if new issues rise.
First Nations have been insistent that there can be no province-wide template. The issues and solutions are different at treaty tables around the province, they have maintained, and agreements must reflect those differences.
But the reality is that negotiators will be able to build on this agreement, particularly in resolving issues like fisheries and certainty.
A lot could still go wrong. The provincial and federal governments now have to ratify the deal, a formality. But Lheidli T'enneh members also must vote on it and the band has set a 70-per-cent approval threshold.
But this deal remains the most promising road on the long path to treaties.
Footnote: The deal is timely. The weekend saw another meeting of representatives of more than 40 native communities who warned of mounting frustration and the risk of protest over the governments' position on key treaty issues. The Lheidli T'enneh agreement shows progress is possible.
But the treaty deal just reached with the federal and provincial governments and could mark some very big progress in the long effort to resolve First Nations land claims in B.C.
After 13 years and hundreds of millions of dollars this is the first final agreement reached under the B.C. treaty process. That's important in itself. One of the problems in any set of multiple linked negotiations - like the treaty talks with more than 50 bands around the province - is that no one wants to sign that first agreement.
All the parties know that the first deal will inevitably set some benchmarks for every agreement to follow. As the people at one negotiating table get closer to a deal they grow increasingly worried about the long-term implications of the concessions and compromises they are making.
First Nations negotiators have another concern. They worry about getting yelled at by members if they sign a treaty agreement now and some other band manages to do better down the road. It's safer to wait.
The Leheidli T'enneh and governments worked through those barriers to reach the agreement signed in Prince George last weekend.
There's more reason for optimism. The treaty doesn't involve a huge amount of money or land. The Leheidli T'enneh have about 677 hectares in their current reserves. They will get another 3,650 hectares, including land within the City of Prince George. Even with the additional land, their holdings will still only be about 10 times the size of Stanley Park. The band will also get about $20 million in one-time payments and $400,000 a year for 50 years in guaranteed revenue-sharing money.
Those will undoubtedly be useful benchmarks for the parties at other negotiating tables.
But much more importantly, the deal tackles some of the critical non-monetary issues and comes up with pragmatic solutions that could be applied in other talks.
Prime Minister Stephen Harper, for example, has made much of his opposition to "race-based fisheries." But the federal government has accepted this deal, which guarantees the Lheidli T'enneh - subject to conservation concerns - a share of the Fraser River sockeye run for a commercial fishery. At other treaty tables the question of whether First Nations will be required to accept Agricultural Land Reserve restrictions on development has been a concern for neighbouring municipalities. This proposed treaty deals with the problem, setting out a negotiated agreement on which lands will continue to be considered within the reserve.
Another issue, particularly in the Lower Mainland, has been how - or whether - First Nations would work with neighbouring communities. Municipalities fear uncontrolled development or extreme tax policies that would threaten their management efforts. The settlement commits the Lheidli T'enneh to work with Prince George and the district to develop a harmonized tax structure and regional plan.
And the treaty resolves the issue of certainty, one of the big stumbling blocks in negotiations. First Nations fear the impact of signing away all future claims; governments want treaties to end uncertainty about land ownership and use. The agreement includes language that both sides accept as a reasonable solution, defining the treaty as a final resolution of land claims while allowing for an arbitration process if new issues rise.
First Nations have been insistent that there can be no province-wide template. The issues and solutions are different at treaty tables around the province, they have maintained, and agreements must reflect those differences.
But the reality is that negotiators will be able to build on this agreement, particularly in resolving issues like fisheries and certainty.
A lot could still go wrong. The provincial and federal governments now have to ratify the deal, a formality. But Lheidli T'enneh members also must vote on it and the band has set a 70-per-cent approval threshold.
But this deal remains the most promising road on the long path to treaties.
Footnote: The deal is timely. The weekend saw another meeting of representatives of more than 40 native communities who warned of mounting frustration and the risk of protest over the governments' position on key treaty issues. The Lheidli T'enneh agreement shows progress is possible.
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