canadian income trusts to be taxed

Discussion in 'Wall St. News' started by vladn, Nov 1, 2006.

  1. Rule # 344.7 of the Idiots Guide to Everything states:

    It's not a loophole if everyone knows about it, it's a target on your booty.

    #11     Nov 1, 2006
  2. This is an emotional issue for me. I thought long and hard on Canadian Investment Trusts before I invested in them. I know the social tax and spend liberal nature of Canada and did not trust CA politicians in the long run to leave a very good program alone. But the prospects of long term fat dividend yield checks coming in finally convinced me to go for it and lock in some yield since the price was going up as demand increased. My thinking was that it would be absolutely self defeating for Canadians to tax and disincentivize a good program that was helping not only their own fixed income citizens but also was bringing in a lot of foreign money and helping their own capital markets. I trusted in good judgement and common sense to prevail and assumed they would be intelligent enough to leave the trusts alone.

    The timing is just amazingly bad for me personally. I bought a huge block of trusts recently and now because of the tax threat I am hammered. Some are down over 15% and will never be able to recover principal unless I hold them for a reduced effective yield (after triple taxation) for many years. I am expecting a large sell off to continue.

    This decision convinces me that all politicians irrespective of nationality are in general utterly self serving, stupid and greedy. Canada has more revenues coming in than ever and now big government wants to tax and spend more and grow itself even larger to burden its people even more. The amazing economic opportunity that Canada was about to reap over the next decade is now going to be blown all to hell by a bunch of greedy politicians that will expand government to consume every penny of tax it can levy and create co-dependencies that will doom economic expansion. While Canada goes down the ruinous path of even more social programs she will get what she deserves. That is - more and more social programs, low quality, shortages, and less and less incentive for people to be productive. Economic growth will start to retract. It's amazing to me that they did not take that lesson from the miserably failed US social programs in the 60s-90's and avoid all this.

    I hate to see what was emerging as a great country make decisions that will make it look like just another European social disaster. In the end Canadians will suffer before they regain their common sense. My only hope personally is to trust that this is all political pandering to the "have not" crowd and when the real political face off comes face to face with the money brokers in Canada they will retract their insane tax or reduce it way back.

    God save the Queen or whoever is running the place these days. Eventually CA will get around to figuring out its destined to becoming another territory or state of the US. :p

    #12     Nov 1, 2006
  3. I was aware of these investments but I distrust things I don't fully understand (which eliminates about 99% of all investments).

    Was there any talk in advance of this debacle that the decision was a possibility?

    These trusts seemed like a too good to be true/last thing, but I can see where even conservative investors would not have considered this action. Black Swans , they swim fast.
    #13     Nov 1, 2006
  4. taodr


    Apparently 27 billion with a B of canadians dollars were wiped out today. A lot more to be wiped out in the future. It constantly amazes me how governments destroy their populations wealth " for the good of the masses" !!!!!
    #14     Nov 1, 2006
    #15     Nov 1, 2006

  6. I knew that much, but it was a huge 'tax dodge' and the govt didn't like it. All those new, huge co's trying to join in on the party spooked em.

    Lasted a nice long time but all good things.
    #16     Nov 1, 2006
  7. The 'wealth destruction' effect that occurred today is somewhat impressive. At some point, someone smarter than me will compare the 15% foreign tax withholding pre and post the massive capital outflows vs. the tax revenue obtained by the loss of favorable taxation status. I'll bet its probably a loser situation for the canadian government, but that's my opinion. I'm sure that plenty of canadians as well as other investors got hammered. Count me in with that - I wasn't long size, but 13% drop in PGH today sure hurts.

    Might be interesting to see if there is any sort of retraction or 'clarification' next few days out of the canadian finance minister. May give rise to a nice DCB (dead cat bounce) too. Nice short term trading opportunity, IMHO.

    Wild ride, if nothing else. Too bad, since these were one of my favorite dividend producing vehicles. Maybe the games not over on them, but who knows with the political vagaries being what they are.
    #17     Nov 1, 2006
  8. The issue has been talked about for quite a while here in Canada, most prominently just before the election about a year ago. The Liberal finance minister back then quashed the taxation issue and some suspected it was an election ploy (and there was also a nice 10 % bounce on income trusts just before that announcement, which prompted RCMP investigation and pro-Liberals wondered if there was a right wing agenda behind that).

    Newspapers have been talking about the risks of these Income Trusts losing 30-40 percent of their value not for months, but for years now. Some of the issues that have been raised are, of course, taxation, and the fact that sometimes these distributions are merely return of capital, which should eat up the book value of the Trusts but the market seemed to be ignoring it, valuing them higher and higher. Some were concerned to see businesses that had no business turning themselves into income trusts redressing their shares with the fancy gimmick, and the market blindly threw money at them for doing so. Well, we've had bre-x, Nortel, and I suppose now this. We all knew it was a bubble, many of us knew it would eventually pop though it lasted heck of a lot longer than most skeptics thought.

    Personally I disagree with the idea floating around here that the Canadian government somehow just killed the goose that lay golden eggs. Also, the Canadian dollar has been too strong to the possible detriment of our economy (the part that actually produces stuff) because of the capital glut.
    #18     Nov 1, 2006
  9. Wetton


    The issues are a little more complex than most think. Long term, the decision today was a good one. It took a lot of balls for the government to make this change. The previous Liberal government wanted to do this but lacked the political will.

    I don't think there is any way this decision is going to be reversed. The damage is done. The Liberals are drooling over themselves with glee that they won't have to address this problem if they get re-elected. Sorry to see so many people lose money but it was definitely a problem that needed to be resolved.
    #19     Nov 1, 2006
  10. Well all I know for certain is Canada essentially just declared war on a good part of average Americans who trusted generally "friendly" foreigners with a good part of their wealth. This will anger many Americans and damage relationships. The US gov will be forced to get involved politically behind closed doors to balance it out with trade agreements or something. Just watch. This will sour some political relations as well. With Canada already swinging major oil deals with China rather than its natural trading partner (the US) and now this Robin Hood thievery Canada just intentionally alienated itself from many Americans. Previously good relations could now become socially and politically very hostile or at least tepid. That will also have an economic cost.

    I was planning to go take a few extended holiday vacations in Canada. But now, after this, right now I am in NO mood to spend much money on my next Canadian ski trip (coming up soon). In fact if it was not already paid for I'd cancel just out of general principal and outrage.

    Government's need to understand that when they are unfair to people and do not permit a grandfathering of prior agreements/understandings or a way to phase out programs due to policy change that the effected parties will always find some way to "get even". People who's trust has been betrayed will think in terms of how family wealth was stolen by a foreign government. My prediction is this foreign tax will backfire with severe, at least 300%, negative economic consequence in some way or another over the next 10 years.

    #20     Nov 1, 2006