Ho-ho-hold that trust tax!
If a week is a long time in politics, a day or two is more than enough for Ralph Goodale to change his mind. Several times. When it comes to fiscal matters, our Finance Minister has the flexibility of a yogi.
Liberal policy can be summed up this way: We're cutting corporate taxes. No, wait, we're not. Yes, we are. We're clamping down on pension funds that own income trusts. No, we're not. We're taxing trusts instead. Yes, we are. Wait, no, we're not. Judging by the performance of the honourable member from Regina, flip-flopping will soon surpass curling as the No. 1 Prairie winter pastime.
But who can blame the minister for his jellyfish-like disposition, what with Stephen Harper casting the Liberals in a Conservative remake of The Godfather? This short-lived and much-unlamented Parliament will be finished next week, then the election will be on -- and thus, it's time for the Grits to be nice, not naughty. So in place of a new trust tax, His Ralphness pulled out a dinner napkin and scribbled down a different policy, an increase to the dividend tax credit.
The result was a new five-year high of 11,146 for the S&P/TSX composite and a festive week for investors, especially the ones who got wind of Mr. Goodale's about-face and bought stocks and trusts before Wednesday evening's announcement. For corporate managers, it's more ambiguous. The new dividend tax policy, while welcome, also presents a quandary. Now that the Liberals -- the Liberals, of all people! -- have decided to withdraw their hands a bit from shareholders' pockets, CEOs will be under pressure to do the same.
Any company with a surfeit of cash has three options: spend it on expansion or acquisitions, buy back shares or pay dividends. And too often, executives have viewed them in that order of preference, arguing that dividends were the least desirable from a tax point of view. Under the old tax regime, about 54 cents of every dollar paid to taxable shareholders ended up in the taxman's hands. (Need we add that share buybacks, not dividends, are a faster route to boosting the value of those management stock options? Not that such trifles would ever enter any CEO's mind.)
So why bother?
The only trouble with this parsimony is it ignores how critical dividends are to the shareholder's well-being. If you had invested $100,000 in the TSX composite 20 years ago, you'd have had $384,000 at the start of this week. But reinvesting the dividends would have increased your nest egg to $621,000, assuming you could have sheltered those payouts in your registered retirement plan. It's not that stock buybacks are a bad thing; it's just that they don't reward long-term owners of a company the way dividends do. And dividends, as we've seen time and again this fall, are proving to be far more sacrosanct than income trust distributions, which can disappear quickly when business turns rough.
Mr. Goodale, having shorn executives of their handiest excuse for not giving back the cash, may have done the market a favour that will last long after the election campaign. Dividends, rather than slowing down growth, might actually improve it. Academic research suggests that higher payout ratios might actually mean higher profit growth in the long run. Why? Here's a theory: They focus management's mind and cut the risk of poor capital investments.
But we'd be reluctant to say the Grits should be rewarded with enough votes to bring a majority government. For nearly two years, the Liberals have governed under the threat of losing power, and it's hard to argue that's been a bad situation for equity markets. Our pension funds, once ridiculously tethered to Canadian assets under antiquated foreign-content rules, are now free to invest as much as they want outside the country. Dividend taxes are coming down, as are corporate taxes. The income trust bonanza is back on after a two-month break. Bring on another minority government, we say, with an ornery opposition that tries to bring it down every fortnight. Voters may not much like jellyfish, but investors? We love them.
© The Globe and Mail
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