Yesterday, the Conservative government moved against income trusts and thereby broke its first promise - to preserve this corporate tax haven. Arguing that the proliferation of income trusts is not only reducing the government’s revenue stream but also damaging the nation’s corporate sector by reducing the cash available for reinvestment, research and development. The situation has been of concern for at least a year, and speculation was rampant shortly before the Liberal government’s defeat in 2005, that the former administration would reduce or eliminate the tax break. The Liberals decided to maintain the status quo and, during the 2006 federal campaign, the Conservatives pledged to retain the trusts.
The finance minister’s action was needed and overdue as the trend to income traits conversion has run out-of-control in the past few weeks. Bell Canada announced its intention to convert early in October and Telus, which had vowed to resist the trend, announced just hours before the Treasurer’s media conference. If ever there were companies that needed to preserve cash for R&D and reinvestment, it is the telecommunications giants but even they preferred lowering their taxes over building strong companies for the future. I’m fully supportive of the government’s move.
Nevertheless, it’s significant when a government first breaks a promise; and when the promise broken is one made to Bay Street it’s much more significant. Mutual funds, pension funds and thousands of investors are suffering today and they won’t soon forget it was a Conservative government that wiped-out billions of capital assets in the income trusts. Liberals will be hoping those memories last at least until the next federal election. My guess is that they will last much longer. [update: by markets close, the Conservative's action had wiped $26 billion from Canadians' portfolios]
Was this just good luck for the Liberals, or did the financial strategists (Paul Martin and Ralph Goodale) know they were leaving a trap for the Conservatives? When Goodale announced last fall he would not move against income trusts the likely future of the government was clear (defeat in the next election) and little harm would be done by leaving it to the incoming government to fix the problem, a fix that they knew would be unpopular on Bay Street. Deliberate or accidental, the Liberals have a gold-mine opportunity to exploit next time Canadians head to the polls.
The finance minister’s action was needed and overdue as the trend to income traits conversion has run out-of-control in the past few weeks. Bell Canada announced its intention to convert early in October and Telus, which had vowed to resist the trend, announced just hours before the Treasurer’s media conference. If ever there were companies that needed to preserve cash for R&D and reinvestment, it is the telecommunications giants but even they preferred lowering their taxes over building strong companies for the future. I’m fully supportive of the government’s move.
Nevertheless, it’s significant when a government first breaks a promise; and when the promise broken is one made to Bay Street it’s much more significant. Mutual funds, pension funds and thousands of investors are suffering today and they won’t soon forget it was a Conservative government that wiped-out billions of capital assets in the income trusts. Liberals will be hoping those memories last at least until the next federal election. My guess is that they will last much longer. [update: by markets close, the Conservative's action had wiped $26 billion from Canadians' portfolios]
Was this just good luck for the Liberals, or did the financial strategists (Paul Martin and Ralph Goodale) know they were leaving a trap for the Conservatives? When Goodale announced last fall he would not move against income trusts the likely future of the government was clear (defeat in the next election) and little harm would be done by leaving it to the incoming government to fix the problem, a fix that they knew would be unpopular on Bay Street. Deliberate or accidental, the Liberals have a gold-mine opportunity to exploit next time Canadians head to the polls.
