Drip, drip, drip

I was glad to see that Eric Reguly see link has joined the ranks of those of us who are concerned about income trust tax leakage. It wasn’t that long ago that Prof. Jack Mintz see link was in a tiny minority.

I was invited to give a presentation in February 2003 at the Langdon Hall Securities Practitioners’ Conference on trends in the capital markets, and made the point then that an unpaid corporate tax dollar can only come from one of two places: individual taxpayers or – to use the caustic example – our health care system. I used Mintz’s estimate of just under $1B in tax leakage at the time.

Now that Telus and BCE have made their moves, I hope this debate is rekindled; even if the horse has long since left the barn. In 2004/05, Telus’s income statement shows about $655MM in income taxes (cash taxes paid look to have been about $204MM). But BCE is a true tax goldmine, with $893MM in tax on last year’s income statement (representing the cost of three new hospitals?) and about $2.66B over the past three years ($1.12B appears on the cashflow statement under “Future Income Taxes” over the three year period, however, so the current cash taxes aren’t as large). Almost $6B over the past five years. To the best of my recollection, those combined figures represent about 10% of the federal budget surpluses during the same timeframe. The entire New Brunswick provincial government budget is less than $6B a year. Remarkable. These are real dollars.

For a time, you would hear an argument that there was little leakage, as the distributions paid into RRSPs were ultimately taxed upon redemption. The fact that the argument ignored the reality of time-value-of-money seemed irrelevant, or at least inconvenient, to those defending income trusts on this basis. One Trust CEO actually claimed that they “were neutral to positive to federal coffers.”

BCE CEO Michael Sabia is one of the most intelligent people I’ve ever had the pleasure to work with (we both served in the Langevin Block under former PM Brian Mulroney); and one of the most pragmatic, as well. One cannot blame him for serving his shareholders within the confines of the current tax laws.

With one simple vote, BCE shareholders will see their annual payout double relative to what they would have received in dividends under the old corporate model. Great for them, as well as the hedgies who bought at $29 in anticipation of the conversion (and will now sell at $33).

As the newly flush unit holders walk to the bank to cash their monthly distribution cheques, on the way to a delayed MRI scan (5-6 month waiting list?), a specialist referral for a hip replacement (9-12 months?) or to visit an autistic grandchild awaiting treatment funding (possibly in vain), at least they’ll know who to blame.

Innovation and sustainable economic growth requires capital, but income trust distributions don’t appear to seed any start-ups that I’ve come across.