Talk about a total collapse! Ralph Goodale’s admission of defeat on the income trusts issue has to be one of the biggest political routs in recent years. The only good news to come out of this whole debacle is a lower tax rate on dividends.
Mr. Goodale mishandled this file from the get-go, disrupting the financial markets in the process, knocking more than $20 billion off the capitalization of income trusts, and causing great angst to hundreds of thousands of seniors across the country. Even if the Liberals win the next election, this man should not be returned as Finance Minister. This mess has cost him his credibility. He needs to go!
Looking back, there was nothing wrong with the idea of seeking public input on the issue of flow-through entities (FTEs), which includes income trusts. It might have sparked a healthy discussion which could have led to some badly-needed reforms in accounting practices, trust governance, and conversion rules.
When Finance released its discussion paper on September 8, no one was terribly fussed. It was only on September 19, when Mr. Goodale announced that he was suspending advance tax rulings on trust conversions, that the muck hithe fan. It turned out to be a blunder of the first order and led directly to the greatest outpouring of public outrage over a financial markets issue that I have ever seen.
Mr. Goodale was on the defensive almost immediately. First, he tried to bluster his way through by telling the House of Commons that most of the representations received by his office were in favour of his position. It would be unseemly to accuse a minister of the Crown of lying so let me simply suggest that he was probably exaggerating a tad. Next he tried to claim that the plunge in the trust market wasn’t his fault but was due more to the effect of higher interest rates and lower oil prices. No one bought that bucket of baloney for a moment. His next ploy was to announce that he understood the urgency of the situation and would make an announcement shortly after the consultation period ended on December 31. Finance asked interested parties to get their submissions in by November 30 to accelerate the process.
And now this! Faced with an election call, the Finance Minister retreated faster than the Iraqi army in the first Gulf War. A trust tax that had apparently been in the works was dropped. The dividend tax credit is to be beefed up. The FTE consultation has come to a screeching halt. That’s it. Crisis over! Let’s more on.
Clearly, the Liberals hope this will put the issue to rest. Perhaps it will, although I suspect there are a lot of angry people out there who won’t forgive and forget before election day. Mr. Goodale’s blunder may contribute to one final casualty — the ousting of the Liberals from power.
If that should happen, then what? Would a Conservative government reopen the income trusts issue? Probably not. Just prior to Mr. Goodale’s sudden about-face, I had a lengthy conversation with Monte Solberg, the Alberta MP who is the Tory Finance critic. He told me categorically that his party would make no move against the trust sector – “We will maintain the status quo,” were his words.
His solution to the problem was the same one that Mr. Goodale finally chose. “We need to end double taxation on dividends,” Mr. Solberg said. He added that his party had not decided precisely how to achieve that, but the final objective was clear.
“Companies should not be forced to shoehorn themselves into trusts purely for tax reasons,” he said. “The market itself should decide which companies are best suited for the trust model.”
So there you have it. The Liberals and the Conservatives now appear to be singing from the same song sheet on this issue. To bad we had to go through such trauma to arrive here.
This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder member: http://www.buildingwealth.ca/promotion/50plusproducts.htm