Finance Minister Ralph Goodale, overlord of what may be the government's leakiest department, has gained the love and loyalty of Paul Martin. Mr. Goodale will not be forced to resign or get demoted to the Department of Corner Stores; he probably will keep his job if the Liberals win the election. But why reward the man who has botched the income trust file?
The trust announcement of Nov. 23, a Wednesday, was merely one sin among many and may prove a relatively minor blip in the Goodale-trust continuum. There is no doubt the timing of the announcement was leaked. Some Bay Street traders and media types had a pretty good idea on Tuesday that Mr. Goodale would pronounce on the topic before an election was called (The Globe and Mail said as much in a story that appeared that Wednesday morning).
The RCMP want to know whether the contents of the announcement were leaked too. The prices of trusts, among them Yellow Pages, shot upward about two hours before Mr. Goodale delivered the news that trusts would not be taxed and that taxes paid on dividends would be reduced. Insider trading? Traders simply may have guessed right. They knew an announcement was coming and might have assumed His Ralphness would not be foolhardy enough to whack the trusts, adored by investors and pensioners everywhere, ahead of an election.
Still, Mr. Goodale scored no points on the credibility front. This should come as no surprise -- his stance on the trusts has been a series of misadventures since he landed the Finance job 25 months ago.
At the time, the trust market was heating up but was still short of a phenomenon. If there were an opportune time to rein in the trusts, it was then. But no. Mr. Goodale left them untouched even as prominent economists, such as the C.D. Howe Institute's Jack Mintz, warned the trust stampede was creating tax distortions that were damaging the efficiency of the capital markets.
Trusts are structured to avoid paying taxes (the shareholders pay tax on their cash distributions). Almost every civilized country that faced a trust proliferation problem, including Britain, Australia and the United States, found a way to keep them at bay. Australia was brutal: Alarmed at the loss of tax revenue, it effectively banned them by eliminating their tax-free status.
Mr. Goodale was uneasy with the trust mania too. So when did he make his move? Try this past autumn, by which time 200-plus trusts, collectively worth about $170-billion, were sloshing around the Toronto Stock Exchange. The Bay Street underwriters and the pension funds were drunk on income trust brew, ensuring that any effort to tame the trusts would be met by a formidable political backlash.
That's exactly what happened. The Nov. 23 announcement showed the Liberals had no stomach to turn off the trust spigot. Instead, they left trusts untouched and made a feeble attempt to level the playing field between trusts and corporations by increasing the dividend tax credit. You could argue the ploy, marred somewhat by the inconvenient RCMP probe, was politicking at its cynical best. Backing down on the threat to tax trusts was treated as a gift by pensioners. Votes for the Liberals will no doubt follow. Was that the plan from day one?
The Liberals have declared the trust file closed. It is not, and cannot be, for the simple reason that Nov. 23 changed nothing other than to make dividend-loving investors (not the poor, that is) a little bit wealthier. The trust initial public offering and conversion market is in a lull but will probably come back with a vengeance after the Jan. 23 election.
Why? Because trusts' fundamental attraction has not been altered. If you are a corporation and want to bump up your value, all you have to do is hit the trust button and gain instant tax-free status. Mr. Mintz says businesses can increase their value by a third this way.
So what has Mr. Goodale really accomplished? Not a lot, other than to make dividends slightly more attractive. He didn't even do the easy stuff, notably plugging the transborder tax leakage. Non-residents who own trusts get hit with a 15-per-cent withholding tax on distributions. That's half to two-thirds less than the tax they would pay if they were living in Canada.
The Liberals have created a monster they are unwilling to tame. If there were 200 trusts on the market last year, there could be 400 next year and 800 few years later. Tax leakage could go from a trickle to a flood. Less and less tax would be paid by regular corporations (because there would be fewer of them), meaning that, by definition, individual taxpayers would have to take up the slack.
At a certain point, the playing field will have to be truly levelled. That would mean making investors indifferent to the merits of trusts and corporations. Taxing trusts is an option and becomes more likely every year.
Mr. Goodale has done a masterful job in procrastinating. Not dealing with the problem can only make fixing it harder for the next finance minister (which may be him). In other governments, he might have been sacked or reassigned for promoting a system that artificially benefits one part of the capital markets over another. In this government, he gets to keep his job.
© The Globe and Mail
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