November 14, 2006
Kamloops Daily News

There is no doubt that the federal Conservatives did the
right thing when they closed the tax loophole on income
trusts. The political price they will pay for offending
their corporate supporters still remains an open question.
The moguls of Calgary's energy sector are threatening to
take their votes elsewhere but that's as likely as Quebec
separatists voting Liberal.

This was a case where fiscal caution trumped election
promises. Sure, the Tories promised not to tax income
trusts but that was before Canada's largest corporations
started to jump aboard the gravy train.

Conservative finance minister Jim Flaherty was left with the
unenviable task of doing what former finance ministers
didn't have the nerve to do. If they had clamped down
earlier, the mad rush to income trusts could have been
avoided and less painful market adjustments would have taken
place.

Corporations claim that they were changing their structure
to income trusts because of Tory election promises but I
doubt that. Business decisions are based on the bottom line
not political promises. That bottom line does not include
protecting the tax base of the nation or being a good
corporate citizen.

Canada is one of the last countries to close this tax
loophole. When the Australian government was faced with the
same dilemma in 1985, they shut the door to income trusts.
All trusts were given 3 years to find an exit strategy. The
Tories have given 4 years.

But Canadian governments dithered. Former Liberal finance
minister Ralph Goodale backed down on taxing income trusts
after being barraged by corporate protesters. But even the
mention of change was enough to throw the market into a
tizzy and stocks dropped $23 billion before rebounding
later.

Flaherty's surprise move created similar panic but it is
unlikely to cause any long-term major damage to the economy.
This market correction illustrates the neurotic nature of
the stock market. Panic, fear and greed are guiding
instincts of the stock market.

Despite the one-day drop in the value of income trusts,
investors who bought them early made money even after the
drop. Some investors even made money on the same day that
income trusts plummeted. They bought shares early in the
day as prices dropped and sold them later for a profit as
prices recovered.

Beyond the potential damage to the nation's tax base, there
are some sobering lessons to be learned in the income trust
fiasco. First, if any stock is doing better than average,
it's because it carries an associated risk. The higher the
return, the greater the risk. Secondly, prudent investors
balance their portfolios so as not to be overexposed to
risk.

Thirdly, wise investors don't base investments on the
promises of politicians, junk emails, or rumours from some
guy who got a good tip from an insider. The rule on
get-rich investments and unsolicited phone calls that
promise millions is: if something seems too good to be true
it probably is.

The politics of the income trust debacle are as interesting
as the financial implications. Liberal finance critic John
McCallum's reaction was predictably over the top: "it's a
nuclear bomb; it's turned into the Wild West; investors have
been cut off at the knees."

The Liberals can bluster all they want knowing that in their
heart of hearts that it had to be done and they know that
the legislation will pass without their vote. However, they
can take no comfort in knowing that the Conservatives had
the courage to do what they should have done years ago.

I'm pleased to see our prime minister do the right thing
rather than the politically expedient. It's a good first
step. Now, if he would only do the right thing with the
environment and Afghanistan he might win the confidence of
Canadians.

Jack Layton and the NDP stand to gain the most by voting
with the Conservatives to tax income trusts. Unlike the
Conservatives, the NDP has always campaigned for fair
taxation based on ability to pay. Wealthy Canadians and big
corporations have the ability to pay their fair share.
Layton is in the enviable position of upholding his party's
principles while keeping government honest.

What's more, Layton's efforts in making this minority
government work will be appreciated by voters. Canadians
will continue to vote for minority governments as long as
they don't have confidence in any one party.

Politicians better get used to making minority governments
work.


David Charbonneau is the owner of Trio Technical.
He can be reached at dcharbonneau13@shaw.ca

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