Bell Canada to become Income Trust

jdobbin · October 12, 2006

http://ca.news.yahoo.com/s/capress/061011/...bce_bell_canada

Not only does it seem to soak taxpayers when major companies becone income trusts, it stops the major company from growing anymore.

Good for shareholders if it pays regular dividends but is it good for a company long term? Is it a good deal for taxpayers?

Renegade · October 12, 2006

Not only does it seem to soak taxpayers when major companies becone income trusts, it stops the major company from growing anymore.

Soak taxpayers????? The structure is a legal mechanism to move the tax burden to the individual investor. Why is it that when a corporation structures to minimize taxes, it is "soaking taxpayers", but for an individual is just maximizing tax efficiency?

Good for shareholders if it pays regular dividends but is it good for a company long term?

If shareholders value short term dividends over long term capital investments isnt that their choice to make?

Is it a good deal for taxpayers?

Taxpayers don't own the company, shareholders do. It shouldn't matter in the least if it is a good deal for taxpayers. Thankfully taxpayers don't have a say, only shareholders do.

Remiel · October 12, 2006

Sometimes I think " stakeholder " is a long forgotten and underused word...

jdobbin · October 12, 2006

Soak taxpayers????? The structure is a legal mechanism to move the tax burden to the individual investor. Why is it that when a corporation structures to minimize taxes, it is "soaking taxpayers", but for an individual is just maximizing tax efficiency?
If shareholders value short term dividends over long term capital investments isnt that their choice to make?

Taxpayers don't own the company, shareholders do. It shouldn't matter in the least if it is a good deal for taxpayers. Thankfully taxpayers don't have a say, only shareholders do.

You disagree with the Canadian Taxpayers Foundation on their assessment?

http://www.ctf.ca/pdf/ctjpdf/2002ctj5_hayw...%20taxpayers%22

Remiel · October 12, 2006

I'm not sure I am reading this quite right... but the article seems to be implying that Bell itself will pay $550 million less in taxes per year. As for the taxes being paid by unit holders, I'm not sure I buy that. Wealthy people are notorious for exploiting every single loophole in the tax system. I'm not an accounting specialist by any means, but if one told me that they would collectively be paying over $100 million less collectively than Bell was paying, I would not be surprised one bit. Hell, I wouldn't be surprised (or skeptical) if they told me it was more like $250 million less...

geoffrey · October 12, 2006

I'm not sure I am reading this quite right... but the article seems to be implying that Bell itself will pay $550 million less in taxes per year. As for the taxes being paid by unit holders, I'm not sure I buy that. Wealthy people are notorious for exploiting every single loophole in the tax system. I'm not an accounting specialist by any means, but if one told me that they would collectively be paying over $100 million less collectively than Bell was paying, I would not be surprised one bit. Hell, I wouldn't be surprised (or skeptical) if they told me it was more like $250 million less...

It's a significant tax loss for the government, which of course, I strongly support. I am, unfortunately, an accountant. The tax advantages are huge for the company, which obviously means they are huge for the shareholders. Shareholders pay all taxes, that money takes away from profit. It's easier to manage tax costs from an individual basis, and the total collected from the same revenues by the government is significantly less.

It's a brilliant idea.

jdobbin raises the much more important issue, will it stop expansion? To some extent, yes. There won't be much cash laying around for big investments, but growth can continue with just more restrained spending. This can be attractive to shareholders looking at a long-term investment that they expect to be stable and not going off into some risky major investments. Being said, many income trusts are highly risky endeavours as many are heavily commodity based so I advise some caution, don't bet your life savings on an energy trust no matter how tasty it looks today.

A company like Bell though? In an income trust? I'll likely make a purchase. Stable, long-term money maker. Sign me up.

Remiel · October 12, 2006

But not all shareholders pay tax. Pension plans and their ilk do not (though I woudn't say I am against that), but foreigh shareholders apparently do not... (or at least that is what I am getting out of a PDF attached to the story) So, if foreign shareholders are not paying income tax to Canada, then isn't converting to an income trust eliminating the only way we have of taxing the wealth they made here?

geoffrey · October 12, 2006

But not all shareholders pay tax. Pension plans and their ilk do not (though I woudn't say I am against that), but foreigh shareholders apparently do not... (or at least that is what I am getting out of a PDF attached to the story) So, if foreign shareholders are not paying income tax to Canada, then isn't converting to an income trust eliminating the only way we have of taxing the wealth they made here?

That's a bit of a misleading statement to say foreigners aren't taxed. You can find the areas a non-resident is taxed on here:

http://www.cra-arc.gc.ca/tax/nonresidents/...nonres-e.html#e

Revenues from Income Trusts are taxed. The rules are varied by example though it makes foreign investors better off, especially if it's a foreign corporation investing in Canada. A non-resident who carries on business or is paid a 'management fee' (euphanism for payout from a corporation) is taxed on that revenue. Your taxed on all the money you take out of Canada (or make in Canada). The exception is bonds and t-bills. Who cares though, that investment gives us jobs and capital, we need more investment. There may be a few more loopholes to be used, but my inexperience in income trust taxation leaves me with the semi-informed opinion that foreigners will pay pretty normal rates of tax on their earnings from income trusts.

And Riemel, they aren't 'loopholes,' those deductions and allowances are there for a reason. If you want all the money to leave Canada, keep insisting the rich get too good a deal. That top 5% of income earners pay a whole hell of a lot of our taxes.

The 'loopholes' aren't just for the rich either, anyone with any non-employment income can make use of a myriad of deductions and allowances in order to minimize their obligations. If all you have is a T4 based income, there ain't much I could help you with... self-employed? Investment income? Give me a shout come tax season.

Your $250million comment actually likely isn't that unaccurate. I figure it's more in line with that than the $100million. But you say it like a bad thing... it's good when people pay less tax. More mooooola.

Hicksey · October 12, 2006

Considering that corporations do not pay tax all this will achieve is to make the bottom line look better than it really is. Most smart corporations consider taxation as a cost and can pretty accurately predict what the taxes will be. When they cost out their products and services and come up with the end pricing -- with the cost of paying the associated taxes included -- the person that ultimately pays the taxes that are levied against Corporation X is Joe Citizen.

So unless they lower prices to Joe Citizen or start paying bigger dividends to Corporation X Shareholders, all that happens is a balance sheet magic trick.

Higgly · October 12, 2006

Bell expand? There are a lot of shareholders who are wondering when that is going to happen. My guess is that if they want to start a new growth adventure, they'll spawn a different company and sell shares. The dividend on this puppy is going ot be about 7%. A good stable company so looks pretty good to me.

As for the tax issue, the theory is that taxes will accrue to the shareholder rather than the company but a lot of those shareholders are going to be holding the stock in RRSPs, and others will have it in RIFs (retired people tend to live near the lower end of the income scale with a lower tax rate). This definitely will have an impact on government revenues, but it will be some time before anybody is going to be able to figure out what that is, I think.

M.Dancer · October 12, 2006

http://ca.news.yahoo.com/s/capress/061011/...bce_bell_canada
Not only does it seem to soak taxpayers when major companies becone income trusts, it stops the major company from growing anymore.

Good for shareholders if it pays regular dividends but is it good for a company long term? Is it a good deal for taxpayers?

When Income Trusts took off, they were seen as valuable instruments for smalled companies to raise capital. Retail investors were attracted to them for their dividends and institutionals loved the cash flow. The pressure to meet the dividend expectations has caused a number (as been said above) to limit operations investment and in some cases, to borrow against earnings to pay the dividend.

There are two good reasons to go public. To raise capital to expand and to cash out (sell the company)

As far as Bell is concerned, when mega cap companies turn to Income Trusts, I will bet there is no good reason involved. It is merely a legal tax loop hole that in the end will benifit the board and the top 100 shareholders. The rest of you will be screwed.

fellowtraveller · October 12, 2006

http://ca.news.yahoo.com/s/capress/061011/...bce_bell_canada

Not only does it seem to soak taxpayers when major companies becone income trusts, it stops the major company from growing anymore.

Good for shareholders if it pays regular dividends but is it good for a company long term? Is it a good deal for taxpayers?

When Income Trusts took off, they were seen as valuable instruments for smalled companies to raise capital. Retail investors were attracted to them for their dividends and institutionals loved the cash flow. The pressure to meet the dividend expectations has caused a number (as been said above) to limit operations investment and in some cases, to borrow against earnings to pay the dividend.

There are two good reasons to go public. To raise capital to expand and to cash out (sell the company)

As far as Bell is concerned, when mega cap companies turn to Income Trusts, I will bet there is no good reason involved. It is merely a legal tax loop hole that in the end will benifit the board and the top 100 shareholders. The rest of you will be screwed.

I think there is a very good reason involved. Note that Bell immediately followed the lead of Telus, a major competitor who has hurt Bell in some key markets.

Like any corp, the sworn duty of Bells directors is to maximize return to investors/shareholders. If that involves establsihing a legal structure that diminishes the tax burden, it is not their problem. It is hard to argue that they haven't benefited shareholders, given that they are now returning about 7% directly to them. In the previous regime, both dividends and an increase in share price were both shaky at best.

geoffrey · October 12, 2006

Considering that corporations do not pay tax all this will achieve is to make the bottom line look better than it really is. Most smart corporations consider taxation as a cost and can pretty accurately predict what the taxes will be. When they cost out their products and services and come up with the end pricing -- with the cost of paying the associated taxes included -- the person that ultimately pays the taxes that are levied against Corporation X is Joe Citizen.
So unless they lower prices to Joe Citizen or start paying bigger dividends to Corporation X Shareholders, all that happens is a balance sheet magic trick.

The idea is to pay nearly all (in Bell's case I think I read 85% in there) of their income to the shareholders directly through the trust. So yes, the later is done. It's not really a dividend though, that has different tax implications and wouldn't require a mutual fund trust situation like income trusts do. There is nothing preventing a corporation from declaring all their realised income as dividends, just the tax situation isn't as attractive as using the income trust method.

I don't know why everyone is fretting about people paying less tax, that is a good thing, celebrate.

M.Dancer · October 12, 2006

In the previous regime, both dividends and an increase in share price were both shaky at best.

Share price and dividends are both the result of earnings. Nothing has changed. The board will still decide based on earnings what the distribution will be and the market, based on earnings, will decide on the share value.

I have had professional dealings with Bell. They are a megacap despite themselves. If it wasn't for thier long history as a monopoly they would be a shadow of themselves. They are huge, monolithic. slow to act, slow to react. Marketing decisions can take months. The simple rebranding of Darome teleconferenceing and merging into their own moribund teleconferencing brand took almost a year. They exist for the most part due to inertia......

geoffrey · October 12, 2006

In the previous regime, both dividends and an increase in share price were both shaky at best.

Share price and dividends are both the result of earnings. Nothing has changed. The board will still decide based on earnings what the distribution will be and the market, based on earnings, will decide on the share value.

I have had professional dealings with Bell. They are a megacap despite themselves. If it wasn't for thier long history as a monopoly they would be a shadow of themselves. They are huge, monolithic. slow to act, slow to react. Marketing decisions can take months. The simple rebranding of Darome teleconferenceing and merging into their own moribund teleconferencing brand took almost a year. They exist for the most part due to inertia......

In the income trust situation, their distribution of income will be at a set rate. It would be adjustable, but there would be very significant market impacts from any lowering of that percentage. Why would an exec cut his stock option values down by lowering the distribution?

Michael Hardner · October 12, 2006

I have had professional dealings with Bell. They are a megacap despite themselves. If it wasn't for thier long history as a monopoly they would be a shadow of themselves. They are huge, monolithic. slow to act, slow to react. Marketing decisions can take months. The simple rebranding of Darome teleconferenceing and merging into their own moribund teleconferencing brand took almost a year. They exist for the most part due to inertia......

I don't understand why people are so positive about Bell's future. There are micro-companies out there offering voice over IP for local service at rates that Bell can't match.

M.Dancer · October 12, 2006

In the previous regime, both dividends and an increase in share price were both shaky at best.

Share price and dividends are both the result of earnings. Nothing has changed. The board will still decide based on earnings what the distribution will be and the market, based on earnings, will decide on the share value.

I have had professional dealings with Bell. They are a megacap despite themselves. If it wasn't for thier long history as a monopoly they would be a shadow of themselves. They are huge, monolithic. slow to act, slow to react. Marketing decisions can take months. The simple rebranding of Darome teleconferenceing and merging into their own moribund teleconferencing brand took almost a year. They exist for the most part due to inertia......

In the income trust situation, their distribution of income will be at a set rate. It would be adjustable, but there would be very significant market impacts from any lowering of that percentage. Why would an exec cut his stock option values down by lowering the distribution?

Which is another caveat regarding bell. The rate is set....it is the BofDs who set the price. If earnings are off, a responsible director would vote to lower distributions....if the market changes and a re-tooling is needed (like when soes that happen in high tech?) an investment is needed......notwithsatnding the exec and the stock options....if income is down and earning are down the street will force the sahre price down.

M.Dancer · October 12, 2006

A great comment form the G&M site

Scot Affleck from Prince George, Canada writes: Ah, yes. Income trusts. A round about way for corporate Canada to stiff the feds out of more tax dollars. That's OK. We, the great unwashed, middle income taxpayers will pick up the slack. Methinks we need some enterprising 'Bay Streeter' to come up with a plan to let the average Joe/Jane taxpayer get his/her own personal 'ïncome trust' to lessen their tax burden.
Posted 12/10/06 at 1:03 AM EDT | Link to Comment

fellowtraveller · October 12, 2006

In the previous regime, both dividends and an increase in share price were both shaky at best.

Share price and dividends are both the result of earnings. Nothing has changed. The board will still decide based on earnings what the distribution will be and the market, based on earnings, will decide on the share value.

I have had professional dealings with Bell. They are a megacap despite themselves. If it wasn't for thier long history as a monopoly they would be a shadow of themselves. They are huge, monolithic. slow to act, slow to react. Marketing decisions can take months. The simple rebranding of Darome teleconferenceing and merging into their own moribund teleconferencing brand took almost a year. They exist for the most part due to inertia......

Nothing has changed?

In the past, if I wanted to take advantage of good performance by the company as evidenced by an increase in share prices, I had to sell the stock, cutting off a smaller dividend flow. Then I had to find another stock. I also had to pay strict attention to the stock market. The income trust model is much more shareholder friendly, as evidenced by the billions invested in the last few years. Don't underestimate the attraction of cash in fist for investors, particularly seniors.

Hicksey · October 12, 2006

Considering that corporations do not pay tax all this will achieve is to make the bottom line look better than it really is. Most smart corporations consider taxation as a cost and can pretty accurately predict what the taxes will be. When they cost out their products and services and come up with the end pricing -- with the cost of paying the associated taxes included -- the person that ultimately pays the taxes that are levied against Corporation X is Joe Citizen.

So unless they lower prices to Joe Citizen or start paying bigger dividends to Corporation X Shareholders, all that happens is a balance sheet magic trick.

The idea is to pay nearly all (in Bell's case I think I read 85% in there) of their income to the shareholders directly through the trust. So yes, the later is done. It's not really a dividend though, that has different tax implications and wouldn't require a mutual fund trust situation like income trusts do. There is nothing preventing a corporation from declaring all their realised income as dividends, just the tax situation isn't as attractive as using the income trust method.

I don't know why everyone is fretting about people paying less tax, that is a good thing, celebrate.

That's what I meant. All they have done is to restructure for tax purposes.

Until people realize that the taxes that they paid before that they will no longer pay were paid by you and me and not Bell, they will continue to whine every time something like this happens.

M.Dancer · October 12, 2006

In the previous regime, both dividends and an increase in share price were both shaky at best.

Share price and dividends are both the result of earnings. Nothing has changed. The board will still decide based on earnings what the distribution will be and the market, based on earnings, will decide on the share value.

I have had professional dealings with Bell. They are a megacap despite themselves. If it wasn't for thier long history as a monopoly they would be a shadow of themselves. They are huge, monolithic. slow to act, slow to react. Marketing decisions can take months. The simple rebranding of Darome teleconferenceing and merging into their own moribund teleconferencing brand took almost a year. They exist for the most part due to inertia......

Nothing has changed?

In the past, if I wanted to take advantage of good performance by the company as evidenced by an increase in share prices, I had to sell the stock, cutting off a smaller dividend flow. Then I had to find another stock. I also had to pay strict attention to the stock market. The income trust model is much more shareholder friendly, as evidenced by the billions invested in the last few years. Don't underestimate the attraction of cash in fist for investors, particularly seniors.

Nothing has changed in that the board pegs the dividend rate and the market sets the share price.....But here's something that may may you take a pause.....

With most income trusts, the share are widely held by retail investors. BCE is held mainly by institutionals.

geoffrey · October 12, 2006

Which is another caveat regarding bell. The rate is set....it is the BofDs who set the price. If earnings are off, a responsible director would vote to lower distributions....if the market changes and a re-tooling is needed (like when soes that happen in high tech?) an investment is needed......notwithsatnding the exec and the stock options....if income is down and earning are down the street will force the sahre price down.

Though the share price is a little less critical in an income investment. Your not betting on long term capital gain, the company is winding down, not growing anymore. You want the short-term direct cash. I wouldn't look at companies like BCE for long-term growth anyway, income trust or not.

jdobbin · October 12, 2006

jdobbin raises the much more important issue, will it stop expansion? To some extent, yes. There won't be much cash laying around for big investments, but growth can continue with just more restrained spending. This can be attractive to shareholders looking at a long-term investment that they expect to be stable and not going off into some risky major investments. Being said, many income trusts are highly risky endeavours as many are heavily commodity based so I advise some caution, don't bet your life savings on an energy trust no matter how tasty it looks today.

I'm also concerned that it puts major companies in separate categories for advantage over others. The stock market becomes less important, companies are less innovative, less research. The list is pretty long.

I know the Liberals were thinking of acting against it when some other major companies were considering it. I wonder if Harper will allow it it to happen.

It is a major restructuring of the economy.

Remiel · October 12, 2006

How often do prices actually get dropped when the corporations taxes drop, though? And to make sure both sides are covered, how often to prices go up when the corporations taxes go up? Especially, relative to each other.

Also, what percentage of their wealth to the top 10% tend to pay in taxes every year, compared to the bottom 90%?

And, err, one other question I just thought of, that is a little off topic, but somewhat related... Is there an identifiable point (or range) at which a person begins to experience a diminishing return on standard of living compared to their own wealth?

geoffrey · October 12, 2006

How often do prices actually get dropped when the corporations taxes drop, though? And to make sure both sides are covered, how often to prices go up when the corporations taxes go up? Especially, relative to each other.

Prices won't just drop. They likely won't rise as fast until the market balances though.

Also, what percentage of their wealth to the top 10% tend to pay in taxes every year, compared to the bottom 90%?

I don't know if such stats are publically available, I haven't been able to track any down on statscan. I can tell you the tax brackets for various income ranges, and it's considerably more punitive to rich people, but a stat of the combined amount of the top 10% income earners? I don't think such a stat has been complied, though it would be very interesting.

And, err, one other question I just thought of, that is a little off topic, but somewhat related... Is there an identifiable point (or range) at which a person begins to experience a diminishing return on standard of living compared to their own wealth?

Depends on the person. Some people couldn't spend more than $50k a year, other couldn't live happily under $150k. I figure an overall average figure would be around the $300-400k mark, after that, the gains are pretty minimal, it becomes more wealth management then just personal enjoyment.