By Goodwin Ginger
There really is no end to the logic of corporate social irresponsibility no matter who the shareholders are. Bell Canada enjoyed for the longest time a state granted monopoly for which it had to submit to the arduous condition that state regulators guaranteed its owners a positive ROI. When competition was finally allowed Bell continued its ownership over the infrastructure which it in turn then leased to its own competitors. Again the terms of the leases were policed by the state to ensure that Bell shareholders received a guaranteed ROI.
Today Bell announced that it will be converting into an income trust. Why you ask? Corporate taxes. Currently Bell has a state granted tax shelter which expires in 2007. Bell’s corporate taxes would have increased from 250 million to 800 million in 2008. The conversion will save them (shareholders) 800 million dollars in taxes that would have gone into government coffers. This is a net transfer from Canadians to the shareholders of Bell of 800 million dollars.
To be clear Canadians will be deprived of around 800 million dollars a year that could have gone to health care education, debt repayment, tax relief for workers or transfers to the impoverished among the elderly. That works out to 8 billion over ten years not including interest. One does not have to be an economist to figure out which way redistribution works in the current era: from the least wealthy to the most wealthy.
Next time you meet an Ontario teacher be sure to thank them for their greed. What a teacher you say? Well yes the OTPF is the teachers pension fund and it has been at the forefront of the shareholder value movement since the 1990s. The teachers pension fund has been demanding value for its stake: causing in train downsizing, contracting out of union jobs and now conversion to an income trust. Sure makes it hard for us to want to stand in sympathy on their strike line. Solidarity forever eh?
October 11, 2006 at 9:27 pm
Wow…either you know nothing about economics or you are deliberatly skewing facts for your own partisan
masturbatorypurposes.The vast majority of that $800 million will be recouped by the government through Income Taxes. Will there be leakage? Maybe a little. But nowhere near the $800Million you purport the Government will lose.
October 11, 2006 at 10:27 pm
Dan, we will not speak to your competence or motives: But if you read the globe article you will see that the 800 million will go in large part towards a near doubling of the current dividend payout (under trusts called a cash distribution). Even in the case where all shares are owned by individuals and not institutional investors this falls under about a 33% taxation regime. Recall that the 800 billion being talked about is a tax payment and not 800 million in profits to be taxed. As such the conversion means, even if all shareholders are individuals and none have tax shelters themselves, 33% of 800 million. Back of the envelope calculation says 270 million in tax as opposed to 800 million. And once you consider that many of the large shareholders are pension funds which are tax exempt then you get a figure much smaller.
Now consider that only 87% of cash distributions are taxable so be a brave man and do the calculation. Set up an ultra conservative estimate, and average and worst case scenario and get beack to us. We would do it for you but hey you are the expert.
October 12, 2006 at 1:55 pm
Without a doubt, BCE and Telus will force a reassessment of our corporate tax system. But Dan is correct in that the leakage will be considerably less than the $800 million that you suggest.
I’m not sure what Bell’s tax rate will be, but let’s say it is about 40%. That would put its projected income at about $2 billion in 2008. That income will now be passed on to investors without the taxman first taking a cut, but it will still be taxable. Some of it will be taxed in the hands of individual investors at prevailing marginal rates (which I suspect is higher than the 33% you suggest). This dividend income will no longer be adjusted by the dividend tax credit, which was used to partly offset double taxation of corporate income. Individuals will pay the full shot.
Some of the tax on the income will also be deferred if it is earned in RRSPs or pension funds. Tax will be paid eventually, but the present value of future taxes will likely be less than if those taxes were paid immediately, depending on future tax rates.
Finally, income distributions to foreign investors will only be subject to a withholding tax of 15% (not sure if that is right). The actual amount of tax collected will depend on tax treaties with other countries. It seems to me that this will be the main point of leakage which will need to be addressed.
So in the end, the overall tax paid will be less than what Bell would otherwise pay, otherwise there would be little point in creating an income trust. But the leakage will be considerably less than $800 million per year. Remember also that Bell is a less-than-nimble dinosaur. They are putting an optimistic spin on their projections to sell the deal to investors. I strongly suspect that they will fall well short of their guidance over the longer term. It is not a very good company IMO.
October 12, 2006 at 4:23 pm
We keep seeing the claim “considerably less” and no attempt to model it. Recall that 800 million in tax was after they had already paid out $1.32 per share. Hence the 800 million was tax after that dividend payout. Once the conversion kicks in it becomes 33% of 88% of 800 million excluding the 33% of $1.32 the government would have already been collecting on the dividend payout. Moreover, the Canadian Chamber of Commerce has been crying for some time that cash payouts from trusts should be effectively treated as capital gains i.e., they should be taxed at that rate. Like we said give us a compelling model to disprove our claim.
October 12, 2006 at 7:21 pm
The Department of Finance has definitely modeled this. They are concerned. You can probably still dig up their discussion paper on their site.
Given that BCE shares have gone up by about 20% since Telus announced its conversion into an income trust, I would estimate that the BCE conversion will result in an effective tax decrease, discounting the impact of deferred taxes and other leakage, of a similar amount. The market has effectively capitalized the projected tax savings into the price. The tax loss is not peanuts, but less than the numbers you are throwing around.
The question then becomes one of what the government will do about it. It makes little sense to encourage business to adopt different legal structures simply to avoid taxes. The income trust structure may be suitable for businesses with stable, predictable cash flows and minimal capital investment requirements, but it seems of questionable relevance here given the accelerating pace of technological change in the telecommunications industry. Ultimately, such a corporate structure may impair the ability of Bell to adapt to these changes.
I suspect that some sort of corporate tax reductions are in store as the government seeks to discourage more conversions by levelling the playing field. Of course, the potential loss to government revenues has implications for government spending and reduces the likelihood of personal tax reductions in the future.
October 13, 2006 at 12:26 am
Steve et al.,
Please see our rejoinder. We actually took the time and trouble to run the model as per Finances assumptions. Please see our update on the Trust Calculation Debate.
http://canadianobserver.wordpress.com/2006/10/12/bce-trust-conversion-calculation-debate/
October 13, 2006 at 6:36 am
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