Saturday, November 18, 2006

When will you say enough is enough ?

Some people are glad that income trusts tax got changed because now their investments are doing a little better as income trust investors are fleeing for safety. This view is VERY VERY SHORTSIGHTED.

This government interference in the public markets is the type of move that is impossible for the government to make right. Its not like simply telling an us individual tax payers that we have to pay additional taxes in June or July or when ever, that can be discussed , reacted to and even reversed without implication.

However the way the tax change and the type of change made to income trusts (public traded companies) causes an instant reaction in the perceived value and the trading of these trusts as soon as the market opens. The loss in this case to investors was about 30 billion $ over a few days.

Even if the government now reversed their approach to this change in taxation, it is now totally impossible for the folks that have taken the loss by selling some or all of these trusts (which many had to do in order to protect their savings) to recover their losses.

It is also impossible for the government to make it right to them by compensating then for their losses because the government never received any of that 30 billions $ lost.

That is the guts of the issue, a promise to keep one corporate entity in place caused people to invest and make investment decisions, the breaking of that promise casued people to lose in some cases 100,000 or more of their lifetime savings.

Oh we can all say so what they must be rich, but these are not business tycoons, these are Mom and pop investors. People that paid their mortgage off, then downsized the home when they retired and put the money into income trusts or some folks that have a run a small buisness ther whole like like a gas bar or a convience store and have no pensions except what they have saved.

Why did they invest in income trusts ? Because these companies were the type of investments that did not need additional capital, so the profits that they made were paid directly to the investors. The investors then paid full tax on this income just like it was interest earned.

When they invsted in other companies like bombardier or Bell Canada thes companies made profits and paid taxes on these profits, but they chose what they would pay to investors and how much they would keep. When dividends were paid out , the income the investor recieives is not tax as regular income as tax was paid by the corporation.

Here's is a simple example.

Income trust makes 100,000 $ , the investor receives his share of this say 1000.00, The invetor pays taxes on that income just like earned income . Lets say 45 % so the tax paid in total on the 100,000 was 45,000 $ (So total tax to gov here is 45,000.00)

Corporation makes 100,000 $ , it pay taxes on this profit of (combined federal & prov) of about 31 % = 31000.00, say it pays the rest out to shareholders as a dividend thats 50,000 to pay out to investors, the tax rate paid by investors is only about 20 - 23 % on the funds received as dividends , so that would be 10,000.00 (So total tax to gov here is 41,000.00)

So there is no real loss of tax to the government. There is some potential to defer some tax by individuals if they are getting this trust income in RRSP, but this is totally recovered when funds are drawn out of your RRSP. (just like your current investmenst and gains defer tax in your RRSP.

The real issue here is pleasing the big corporations who want control of your money. The real issue for Canadians is when something like this can be done by your government, what is next , who is next, and when do we stand up and say enough is enough !!!

It is like I heard in commentray on a radio show discussing the income trust issue, he related it to what may have happened in Germany.

Heres the Cdn version.
1. When they taxed the income trusts, I did nothing as I owned no trusts.
2. When the cancelled RRSP's and wound then down over 4 years I did nothing as I had no RRSP's .
3. When they put in the tax 3 % tax per year on the value of mortgage free homes , I did nothing as I was not a home owner.
4. When I tried to buy a home and there was no more capital available for mortgages. I asked for help but there was no investment capital left.

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