Tuesday, November 29, 2005

More Income Trust Fallout

Ok here is some more evidence of ponzi nature of the Income Trusts and why they are dangerous for Canadian business as well as Canadian workers and even investors, but good for owners and market managers.

While the Liberals talk about defending Canadian soveriegnty they did nothing to stop the sell off one of Canada's major Oil Field supply companies, Precision Drilling. Which in Alberta should have been as big a scandal as the Terasen sell off in B.C. which the NDP slammed the Feds for. But the silence has been deafing. When Alberta is dominated by Conservatives what did you expect. Whats good for America is good for Alberta......

When Precision Drilling converted to a trust, it spelled the demise of a great Canadian world player
Here's what Weatherford boss Bernard Duroc-Danner said about Precision when he bought it: "Frankly, we could not duplicate what they did, and we need it."
At that point, Goodale and his senior policy wonks cringed, though they made their concerns known only privately at the time. Here was one of Canada's few global champions, led by one of the industry's most respected entrepreneurs, shredding its growth playbook and unloading many in the team of senior executives who had helped build the company—for no other reason than to avoid paying tax. That much was known. Shortly after the Weatherford sale, Swartout said he had no choice but to convert "because the multiple of the trust is so overwhelming," even though he admitted the trust proliferation "is not the best thing for Canada."
The truth is that Canada's most successful companies, and the ones that attract the best and the brightest professionals—Manulife, Bombardier, Scotiabank, Magna and Alcan, among them—have one thing in common: They're players on the international stage. Canada needs more of them. When ambitious companies like Precision suddenly call it quits to exploit a tax loophole, you know you've got a problem.

Labour-sponsored love lost

With tax breaks disappearing, the cliff is fast approaching for labour-sponsored investment funds
And another victim of the Income Trust Tax Break that Goodale has introduced is the union based Labour Funds. Bad enough McGuinty in Ontario was reducing the tax credits avaiable for these funds, now with the tax credit from Goodale for corporate investment and no tax on the Income Trusts, that is the final nail in the coffin of these funds. While they gained little in investment dividends for their investors who are all average working stiffs they gave the average person a very real annual tax break with higher tax credits than a regular RRSP investment.
And they were as easy to buy as an RRSP for the average person, with a 25-50% tax break. And now they too will go the way of the dodo while the rich get tax breaks on thier high end RRSP investments and their coupon clipping corporate investments.


Reg said...

Labour sponsored funds have been a joke from the start. Those that have actually invested their proceeds from sales have quickly blown apart investor's portfolios with huge losses and staggering MER's. Others have been so ineffective at marketing their product that simple administration costs have forced the breakup of the funds. With the eight year restriction on withdrawls, small investors are stuck in a situation where they either watch their capital vanish or pay back the tax credits.

These funds need to be taken out back and put down period.

eugene plawiuk said...

So if LSIF's are so wonky expalin this a major Ottawa venture capital fundin merging with one of the largest LSIF's in English Canada. Let alone the success of the Solidarity Fund in Quebec. While the eight year investment term is excessive the idea was to keep the money in place to stop the invest and run on the funds. You could do worse in a mutual fund, and NOT get the tax credit. It always amazes me that you right wingers want tax breaks for investors and tax credits for the rich but despise tax credits for the little guy. Which is why Alberta does not have Labour Sponosred Funds not because they were not a good investment, but because they would have cost the government tax credits to the average joe.

Reg said...

Nice try. The issue I have with these shit funds is that they hang the tax credit carrot in front of unsophisticated investors who don't realize they are investing their retirement funds into mutuals that are on a risk level with venture captial funds. In other words, completely inappropriate for average joe.

eugene plawiuk said...

You and I are going to continue to disagree but the point is moot, LSIF's are doomed thanks to McGuinty killing the Ontario tax credit and Goodale giving a tax holiday to regular investment dividents. So I will challenge you to tell me what kind of secure average jane or joe investment fund could we create. I suggest using the following capital base; union pension funds (these aremostly private sector unions with their own membership funded pensions), plus public sector pensions, done through credit unions and invested in ethical funds. With the same tax credit for the average investor as LSIF but with the security of the credit unions deposit insurance on the ethical investment funds. What say you?

Reg said...

Its the underlying investments that are the issue. LSIF's were set up to direct money to venture capital. The tax credit is there to offset the increased risk. Sadly with the performance of these funds, after 2-3 years the tax benefit is gone and you're stuck holding a dog for another five years. I am in my 4th year of holding a Growthworks (the company that took over the Ottawa firm you alluded to in your ealier post) fund purchased at $17 which is has been hovering around $10 for the past two years (ouch...).

The problem with your suggestion is the investment itself. Why would the government agree to offer tax credits to simply invest in companies (via ethical funds) that are already funded?

The question that needs to be answered is where can average joe/jane invest their own money that has a demand for new money that is not being supplied more readily elsewhere without being exposed to undue increased risk.

It's something one would have to think about but perhaps looking at areas where labour would truly benefit. I'm thinking investments in companies that require equipment upgrades to stay on top of market trends (ie pulp mills) or the like that are higher risk (obviously or the banks would be financing them) but at least there are assets to protect the investment.

Good question...you've got me thinking now.

eugene plawiuk said...

Good cause I agree with you about LSIF being dogs, except in Quebec...and lets continue this profitable discussion about an alternative investment economics for the working class, because our money should be productive capital not just coupon clipping dividend capital. Which is why so many companies make a profit but do not reinvest. Also we need to look at shareholder control over investments, and again I look at credit unions and say how could we reform their investment structures to reflect increased investor democracy.
As well as putting workers and investors on the boards of companies....a new model of peoples capitalism ala Prodhoun.