But, I do know a good warning when I see one and the Globe and Mail offers up a beauty for those that will be looking at the early morning paper on Wednesday.
Market’s reaction will be ugly. That the interpretation of the Globe and Mail into the moves by Finance Minister Jim Flaherty to move against the income trust industry, a wild west of a financial vehicle that was providing for some nice little returns for their investors protected as they were from the taxman. Wednesday's headline in the financial section says Flaherty drops a bomb on income trusts, which isn't the thing of stability one would think.
With the changes planned by Ottawa and set to come into effect in 2011 a massive leak from the federal treasury will be fixed, but a much treasured investment project will change forever.
The Conservatives originally had campaigned on a platform of not touching the Trusts, so there will be some political fall out from their core group of supporters over the change of direction. On the other side of the fiscal equation, the NDP are congratulating them on their vision on the impending doom for the nations finances had the trust system been allowed to carry on as it had.
Regardless of who is talking or listening, one thing seems certain the first day of November is going to be a rough ride for many sectors of the Toronto Stock Exchange. Of particular interest will be the state of stocks for Telus and BCE (Bell Canada Enterprises) both of which had hoped to turn into Income Trusts but now will be denied the opportunity to benefit fully from the tax benefits of the former trust system.
Many will be watching that TSE ticker with interest on Wednesday, looking for a sign that the money people are looking for a safe haven for their cash. We’re advised to brace ourselves. Those that have money in the stock market should take heed and keep a careful eye, for those of us who just play the voyeur; there could be some nervous faces to watch over the next few weeks.
Market's reaction will be ugly
From Wednesday's Globe and Mail
November 1, 2006
Brace yourself, because this is going to be ugly.
Starting Wednesday, the federal government's move against income trusts is likely to cause an extended period of turmoil for both the stock markets and the investment portfolios of everyone who owns trusts. Trusts are held by even the most mainstream mutual funds, so few investors are going to be spared.
Trusts will survive — don't worry about that. Also, the government has tried to blunt the impact of its new trust policy on seniors by announcing a pair of new tax breaks designed especially for them. Still, investors have to be asking themselves now whether trusts are going to be worth owning in four years, when Ottawa's new anti-trust tax measures take hold. Given how the stock market hates uncertainty, you can bet trusts will fall when the stock markets open today.
Income trusts are businesses that pay little or no corporate tax. Instead, they distribute their earnings to investors, who in turn pay taxes on this income.
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.
Give the Conservatives credit for decisive, if cold-blooded, action. It's not hard to imagine that the previous Liberal government had something similar in mind for trusts last fall, before a decision was made to leave them alone while trying to quell the trust market by making dividend stocks more attractive to investors.
Decisive or not, yesterday's announcement is going to feel like a stab in the back to small investors, especially those who recall the Conservatives saying during the last election campaign that they would not tax trusts.
Let's start an assessment of the damage to come with a look at shares of two corporate giants owned by scores of investors, BCE Inc. and Telus Corp. Shares in BCE and Telus jumped in value recently on anticipation that the two companies would convert to income trusts.
Yesterday, Finance Minister Jim Flaherty said the companies will not be able to enjoy the full tax benefits of trusts because they have not yet completed their conversions. Expect both shares to fall hard when the stock markets open today.
Next, there are the many income trusts now trading on the Toronto Stock Exchange. They'll operate under the status quo until 2011, but big institutional investors, such as hedge funds, could start dumping them right away.
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.
In a tacit acknowledgment of the importance of trusts to seniors, Mr. Flaherty announced a pair of tax measures yesterday to lighten the tax burden on those aged 65 and older. The age credit amount, a tax credit that helps reduce the income-tax burden for lower- to middle-income people, will rise by $1,000 to $5,066, effective for the current tax year.
Also, the government will permit income splitting for pensioners starting in 2007. When spouses have unequal pension income, one can end up paying far more in taxes than the other. With income splitting, both spouses have equal income and the overall tax load can fall.
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.
Flaherty drops bomb on income trusts
Surprise move breaks major Conservative campaign promise to avoid taxing trusts
From Wednesday's Globe and Mail
November 1, 2006
OTTAWA — The federal government slapped a levy Tuesday on income trusts — which pay little or no corporate tax — to stem a growing revenue bleed and curb the growth of a vehicle it says threatens Canada's economy.
The surprise move breaks a major Conservative campaign promise to avoid taxing trusts.
Finance Minister Jim Flaherty said he had no choice because he feared that increasing numbers of corporations were preparing to convert to trusts — a trend he said threatened Ottawa's tax base.
"Quite frankly, things changed a great deal this year and we're faced with a situation where Canada was moving to an income trust economy," Mr. Flaherty said, noting that in 2006 alone, the market value of companies converting to trusts was approaching $70-billion.
"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."
Federal officials said they were also concerned about the prospect of financial institutions such as banks — or portions of bank assets — converting to trusts.
Income trusts pay little or no corporate tax, instead shovelling out the bulk of earnings to investors, who are taxed individually. Critics said Ottawa and the provinces never recouped all the lost revenue and ended up losing hundreds of millions of dollars in revenue each year.
Mr. Flaherty announced that Ottawa will start taxing trusts in the same manner as corporations, effective immediately for new trusts and starting in the 2011 tax year for existing trusts.
He acknowledged this will force Telus and BCE to reconsider their plans to convert to trusts that would have ranked as the largest in Canadian history.
The measure is expected to roil markets today, driving down the unit prices of most trusts and hammering the shares of Telus and BCE.
Tax expert Jack Mintz, with the University of Toronto's Rotman School of Management, predicted that Ottawa's actions will spell the end of conversion plans for both companies.
"I would not expect the trust conversions to go ahead. That's for sure," he said.
The tax rate on trust distributions will start at 34 per cent — to mirror federal and provincial taxes on companies — and will drop to 31.5 per cent by 2011. Ottawa will remit to the provinces a 13-percentage-point share of the revenue.
This effectively ends any tax advantages for investors in trusts over corporations.
Finance watchers said they expect the measure to stop almost all corporate conversions to trusts — and may encourage some that have already converted to rethink the move.
"Perhaps over the next four years, some who have already converted may go back to a corporate structure," Toronto Dominion Bank chief economist Don Drummond said.
Mr. Flaherty said this will restrain a wave of conversions that he said threatens corporate productivity, because pressure on trusts to distribute all profits cramps Canadian productivity by eroding trusts' ability to reinvest and innovate.
The trust tax is certain to hammer the retirement savings of millions of Canadians who've come to rely on trusts for hefty returns, including many seniors, whom the Tories consider a key voting group.
The Conservatives tried to cushion the blow of the trust tax by unveiling more than $1-billion in annual tax breaks for seniors and enacting a half-percentage-point rate cut in the general corporate tax rate, to take place in 2011.
The corporate tax cut will "ensure there will not be more government revenue generated from the corporate sector," Mr. Flaherty said.
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.
Concern over income trusts spiked in mid-October when Mr. Mintz estimated that Ottawa and the provinces stood to collectively lose $1.1-billion in annual revenue after Telus and BCE converted.
Yesterday, Mr. Flaherty said federal government losses alone were about $500-million annually and would have climbed to $800-million after Telus and BCE converted.
The Tories are tackling what the Liberals left unfinished last year. The Liberals considered everything from a trust tax to lightening the tax burden on corporations. They eventually decided to cut the effective rate of tax on corporate dividends. This reduced the tax advantages of trusts, but critics considered it a half measure.
Liberal finance critic John McCallum accused the Conservative Party yesterday of hurting Canadians' retirement savings by breaking their campaign pledge.
"I think Canadians who invested in income trusts secure in the belief that the government will keep its word will have a real shock," Mr. McCallum said. "There's absolutely no doubt there's going to be some big losers out there as a consequence of this broken promise."
The New Democrats, however, praised the Tories for closing the tax gap between income trusts and corporations.
With reports from Simon Tuck and Alex Dobrota