Vive Le Canada

Income Trust Fraud
Date: Wednesday, February 14 2007

Dianne Urquhart speaking before the Commons Finance Committee investigating Income Trusts on Tuesday, January 30, 2007,in answer to a question from NDP member Judy Wasylycia-Leis said that indeed according to both Canadian Securities law as well as American securities law that there may have been unethical sales of Income Trusts to seniors based on false promises and could be investigated by the RCMP as fraud.

Judy Wasylycia-Leis was making the point that even with the change in taxation status the Trusts themselves operate in a fashion that current accounting practices would be considered illegal. A point neither the Liberals or Conservatives have bothered to deal with.

"Mrs. Dianne Urquhart (Independent Consulting Analyst, As an Individual):

Thank you.

I support the income trust tax plan, with no increase in grandfathering beyond four years. I strongly urge that the income trust tax plan be enhanced by the addition of prescribed conditions to the Income Tax Act to stop income trusts from reporting deceptive, non-gap financial measures. Cash distribution must be defined as income distribution and return of capital distributions. The cash yield calculation should be restricted unless there is an equally prominent income yield calculation.

The federal government should not be giving tax incentives for an investment targeted to seniors where the product is an unsuitable investment based on the investment objective of secure retirement income and preservation of retirement capital. The high-risk design of income trusts and their deficient investor protection legal framework makes them unsuitable for seniors.

Making matters worse, the tax incentive is promoting the purchase of an investment where there is considerable malfeasance in the financial reporting and marketing material, which I'll speak about in a moment.

I have found that two out of three business income trusts pay distributions well in excess of their incomes. The average amount that the cash distributions are above income is 60%. The sources of the extra money are borrowed money, reserves from prior financing, and not retaining cash to replace plant, machinery, equipment, and software. This financial engineering, without proper transparency, is causing the return of capital to be capitalized as income. This is causing excessive pricing in the market.

In my research “Heads I Win, Tails You Lose”, I found that the business income trust market was trading at a premium of 55% relative to the TSX/S&P60, which comprises sixty of Canada's largest public corporations and a few income trusts. I also compared it to a sample of Canada's non-cyclical public corporations, which comprise the banks, the telcos, the utilities, and the power companies. On that basis, Canadian business income trusts were trading at a 55% premium. Even when I looked at the cashflow from operations, I found that income trusts were trading at a 40% premium. I believe the tax advantages in income trusts contributed 16% of the 55% premiums.

I conclude that the income trust tax plan with a four-year grandfathering period has a 10% negative impact on prices. My calculations differ from the calculations Mr. McKay asked about earlier with respect to what the investment losses have been since October 31 and the announcement of the plan. Business income trusts and energy income trusts, based on a roll-up of each of the individual trusts, are down 13%—up to about two to three days ago—for a loss of $23 billion.

On the basis of my detailed analysis of the tax advantages and the elimination of the premium associated with the tax advantages, it's my opinion that the income tax loss associated with the decision to introduce the income tax plan is $17 billion. This damage is a necessary consequence of a government closing a tax loophole that is not achieving benefits for the economy and is promoting the purchase of an investment by seniors for which this investment is unsuitable.

For a properly diversified portfolio with less than 20% invested in income trusts, the new tax damage is 2%. This is clearly capable of being absorbed by Canadians who invested in this security. Those who have higher losses than this have seen them occur as a result of improper diversification, or perhaps they have suffered the losses as a result of the malfeasance with respect to the improper marketing of income trusts to seniors.

I want to note that on May 3, 2006, the Canadian Accounting Standards Board said that the failure to distinguish clearly between returns on capital and returns of capital is inaccurate and potentially misleading, particularly when terms such as “yield” are used to describe the amount distributed.

Ms. Judy Wasylycia-Leis:
Thank you, Mr. Chairperson.

I just wanted to say that I didn't hear Dianne Urquhart condoning Enron. What I heard Dianne Urquhart saying was that we need to be vigilant at all times, and whenever there is the possibility of unethical practice or even criminal undertakings, we should be ready to crack down on it.

I want to ask Dianne, since I'm just getting up to date on this Prudential Securities issue, are you saying that what is common practice in Canada would be considered criminal in the more tightly regulated U.S. environment?

Mrs. Dianne Urquhart:
I would say that the RCMP and provincial and municipal police forces have the tools within section 380 of the Criminal Code today to call the deceptive cash has been said by the chairman of the Canadian Accounting Standards Board and by Paul Hayward, OSC senior legal counsel, who said in a tax journal in 2002 that an investigation could be conducted and fraud could be found. I'm not making that allegation specifically, but the wording concerns the Canadian Accounting Standards Board and Paul Hayward, OSC senior legal counsel. The actual criminal charges in the United States suggest that the misconduct of the limited partnerships of the eighties and early nineties was similar to that which has occurred in the Canadian income trust market, and it could be considered criminal in Canada upon investigation.

Ms. Judy Wasylycia-Leis:
Thank you.

I have one more question for Dianne Urquhart and then one for Mr. Teasdale.

Dianne, as you and others know, I have publicly stated that I support measures to shut down income trusts used as a way to avoid paying taxes, and I accept the statistics we've now had from a number of jurisdictions and a number of years, which are consistent with what you and others are saying.

My question to you, Dianne, is given the fact that the ways and means motion is likely to go through, based on the previous vote in Parliament.... And I've been working on this issue you've raised about the undervaluing—or overvaluing, sorry.

Ms. Judy Wasylycia-Leis:
No, it's clearly overvaluing.

It's a serious issue to change the Income Tax Act to deal with this. Is it still worth my while to do this, given the fact that, hopefully, we'll see over the grandparenting period the end of income trusts? Is it still important for consumers that we do it?

Mrs. Dianne Urquhart:
Yes, there is still $200 billion of current income trusts in the market, and 288 of the trusts are, I believe, in non-bifurcated markets--full transparency. I don't want those who know that their income trusts are overvalued having the opportunity to sell them to unsophisticated players. I believe we should have immediate requirements; the sooner we can get this into the Income Tax Act the better. The sooner we get transparency on the return on capital and the distributions, then we can have a market that's honest and not one in which sophisticated players dump trusts onto those who do believe the return on capital is there for their household expenses. It's just not there, because there is a limit on access to the amount of cash that's on the balance sheets and on the financial markets paying it.

A further hit on income trusts came when Seniors, those folks whom everyone in the income trust business says they speak for, spoke for themselves.

''The federal government should not be giving tax incentives for seniors to purchase an investment that is risky and does not have a proper investor protection regime in place,'' the National Pensioners and Senior Citizens Federations said in its brief to the committee. President Art Field noted that even before Flaherty announced the tax on trusts, the federation had passed a motion expressing concern seniors were being urged to invest money in what it called ''unsuitable'' and ''questionable'' income trust investments."

The Liberals who continued to opportunistically defend Income Trusts, as does Ralph Klein speaking of strange bedfellows, stated they of course would NOT have taxed Income they should have made that an election promise.

"McCallum, meanwhile, defended the former Liberal government, noting it had moved to level the playing field between trusts and corporations, but by reducing the tax on corporate dividends rather than putting a tax on trusts. ''It's difficult to say what else we would have done had we stayed in government,'' McCallum added."

Well now we know what they would have, should have, could have done.

They issued their press release on the last day of the hearings, yesterday after Judy had issued her own private members bill, a bill that got NO attention from the MSM.

Despite the fact that neither the government nor the Liberals have addressed the real problem with Income Trusts that they are a Ponzi Scheme. An attempt to separate seniors from their pensions, since pensions are a vast untapped source of capital.

That is the elephant in the room,that the NDP has addressed in their private members bill.

“This NDP bill will bypass government inaction,” says Wasylycia-Leis.“We have a Finance Minister who claims he wants better securities regulation but continues to ignore this urgent problem. Meanwhile, our self-regulating investment system acknowledges there is a serious problem but has failed to produce an enforceable solution, and the industry continues to sell its products to unsophisticated investors using fuzzy numbers. This is unacceptable.”

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