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Are the Conservatives about to make your RRSP taxable?

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The Great Financial Trust Rip-Off

On November 1, 2006, the Conservative Finance Minister announced out of the blue that all Canadian Income Trusts (ITs) would be double-taxed just like ordinary corporations. So all Income Trusts, current or future, would have to pay income tax on their earnings, and you as a unitholder would have to pay income tax on those same earnings all over again, after they are paid out to you as regular distributions.

This obviously made the Trusts much less desirable as investments, as their distributions would be drastically reduced to pay the first of the two income taxes, before the unit holder paid taxes on those earnings all over again. At that point, many investors decided to dump their units, resulting in a huge crash of all ITs listed on the Toronto Stock Exchange, dropping up to 20% or more overnight.

So if you had in good faith and absolute legality invested $100,000 in ITs, the Conservative Party had just wiped out about $20,000 of your hard-earned savings. Without any mistake or misdeed on your part, other than assuming a certain stability and fairness in the Canadian financial markets.

Can They Do This?

Well, legally, yes, the Conservatives were in power although as a somewhat shaky minority government. But morally and ethically, this is a different matter. This is a clear case of changing the rules after the game has started. You had bought those IT units in order to achieve better returns on your nest egg, trusting the
Conservatives to lay off the ITs, as they had promised before the election.

Indeed you may have even voted for the Conservatives for this very reason -- when they berated the Liberals who had themselves considered this double-taxing scheme -- but then had come to their senses in view of all the furor this outrageous scam had generated. After they were elected, the new Finance Minister waited a while -- coïncidentally enough time for the friends of the Party to dump their holdings discreetly -- and then lowered the boom.

That's "Fiscal Equity"?

Conservative Finance Sinister Flaherty stated that this measure was necessary to "preserve fiscal equity". He claimed that the ITs cost the Federal Government billions of dollars, adding that "the Trusts' income tax evasion it is unfair to the taxpayers".

The truth of the matter is that the ITs were the only exchange-listed securities that were treated fairly. No matter what Flaherty claims, the ITs are taxed, but only once -- in the unitholders' hands, whereas common stocks are taxed both on the corporations' net earnings and once more at the stockholders' level when the earnings are distributed as dividends.

Corporations who changed their structure to that of ITs were not attempting to evade income tax, they simply wanted to protect their stockholders from double taxation. There is nothing fraudulent or unlawful in striving to pay no more tax than one's fair share. The only fraud is the Government's long-established double taxation of corporate profits.

And in appears that in 2011, the ITs will be taxed even more outrageously than ordinary corporations, as Revenue Canada at least allows some deductions for a taxpayer's dividend income, but there has been no sign that this "generous" treatment would be applied to IT income as well. This is the Conservatives' idea of "fiscal equity"?

The ITs "deprive the Government of billions of dollars"?

The Conservatives claim that the ITs "deprive the Government of a lot of tax money". So what? The truth is that so do literally hundreds of tax deductions, tax credits, subsidies, grants, allowances and benefits who all cost the Government money, either increasing its expenses or reducing its tax income.

Subsidies for oil exploration, forestry, aerospace, money given to foreign corporations so they'll build plants in Canada (and run away as soon as they can) tax credits to movie producers and to individuals for child care, old-age pensions, RRSPs -- those are just a few of the plans that "deprive the Government of substantial income dollars". The ITs tax treatment was just one of them, neither better nor worse. Or actually better, because ITs benefited small investors, not giant foreign corporations.

Did the Conservatives have to attack the established ITs?

The Conservative Finance Minister claimed that he had no choice but to make this move, as many ordinary corporations were about to turn themselves into ITs But the logical move would have been to block all future conversions, NOT to punish small investors who had invested in existing ITs in good faith.

Ah, but there's a four-year delay!

The Minister "generously" gave the ITs (or more accurately, gave the small investors) a four-year reprieve, until 2011, before the double taxation begins. Big deal! This is like the Conservative placing a time bomb in your house and claiming you have nothing to worry about because it won't go off for four years!

What about the fiscal compensations?

First of all, those only apply to retirees. If you're just preparing for retirement, you're out of luck. As for the seniors, the Minister gave them a $1000 increase in the old-age deduction. However this is later in the tax form subject to a 15% ratio, turning it into a $150 bonus. If you're 60 and had $20,000 sucked out of your RRSP, all you have to do to break even is -- live to age 193. 

What will the Conservatives cut next?

Let's now consider RRSPs, that are totally tax-exempt and even generate a tax credit when they are funded. This, too, "deprives the Government of substantial income dollars" If the Conservatives get away with the IT caper, will they decide to once more change the rules after the game has started and suddenly make your RRSP fully taxable?

Or will they eliminate the tax deduction for dependents or for seniors? Are they going to cut off all old-age pensions? This seems impossible, but so did the IT sting -- in fact, before being elected, the Conservatives has specifically promised not to touch the ITs.

If Harper's Conservatives lied to you and screwed you once before, they can do it again. Maybe they'll make your RRSP taxable. Maybe they'll do away with the old-age pension. Maybe they'll find some other outrageous way to make you pay for their misguided venture in Afghanistan.

Don't run this risk. Make your voice heard. Tell all your friends and family, especially those nearing or at their retirement age.

Sadly, both the NDPs and the BQ supported the Conservatives in passing this abomination. Only the Liberals voted against, as they had learned their lesson and seen the light after they had themselves toyed with this sordid double taxation scheme. So you know who to vote for: the lesser of four evils: the Liberals.

And pass the word! Alert your family and friends:

We cannot and will not be ruled by a party that
shows only scorn and unfairness to the people
.

           

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