Bell Canada to become Income Trust

[Remiel]

Why is it then that people with riches beyond what any person really deserves still get so worked up about how much they pay in taxes then? If you literally have more money than you could ever spend on improving your life, why not spread the wealth out a little more? Ultimately, all of the money will be spent, and the economy will be stimulated, so what is the point of having it as concentrated as it seems in our society? Ugh... I'm getting off topic again... Even under the current model, I wonder if we couldn't achieve the same results with a more moderately wealthy people, a lot more wealthy people, and a lot fewer ridiculously wealthy people.

[Renegade]

You disagree with the Canadian Taxpayers Foundation on their assessment?

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

It is a detailed assessment much of which I agree with. Which part in particular are you referring?

[geoffrey]

Why is it then that people with riches beyond what any person really deserves still get so worked up about how much they pay in taxes then? If you literally have more money than you could ever spend on improving your life, why not spread the wealth out a little more? Ultimately, all of the money will be spent, and the economy will be stimulated, so what is the point of having it as concentrated as it seems in our society? Ugh... I'm getting off topic again... Even under the current model, I wonder if we couldn't achieve the same results with a more moderately wealthy people, a lot more wealthy people, and a lot fewer ridiculously wealthy people.

Remiel, your missing something here. They earned that money, why redistribute it to others? How do the lesser income people DESERVE that cash?

Explain that to me, hypothetically say I make a million bucks a year and you make $25k. Why do you deserve a share of my money?

Some social spending (police, fire, roads) benefit the economy and society as a whole. Individual transfers benefit individuals with no claim to the money they are receiving.

[Renegade]

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...

You are not reading the article correctly. BCE is expected to pay $250M (instead of $800M) WITHOUT the income trust structure becuse of tax shelters it has access to. Those shelters would be used up by 2008 leaving the entire $800M as a potential tax bill, hence the motivation to employ an income trust structure. It is not clear from the article how much tax would be generated at the hands of the individual investor.

[Renegade]

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?

True not all shareholders pay tax, becaue that is the way our tax system is designed. For example income trusts held within a RRSP or pension plan will defer paying tax but not completely avoid it.

I don't know where you draw the conclusion that foreign shareholders do not pay tax to Canada. When there is a payout to non-residents there is generally a witholding tax which is applied regardless of if the non-resident files a Canadian tax return or not.

[Renegade]

Considering that corporations do not pay tax all this will achieve is to make the bottom line look better than it really is.

Where do you get the idea the corporation do not pay tax? The federal government collects about $30B in corporate taxes. A pretty substantial sum from corporations who pay no tax, no?

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.

It makes no sense that a corporation would lower prices to customers. A corporations mandate is to maximize shareholder value. It will very much increase the payout to shareholders under the income trust structure. There is no real short term effect on consumers. The long term effect is that the company has made a decision to minimize investment in future infrastructure and in effect mine the current infrastructure for income.

[Renegade]

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.

Actually I think conversion to income trust will benefit all shareholders via increased payouts and valuation. It is really the federal government ( and indirectly the taxpaying base) which is screwed.

[Renegade]

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.

You are quite right. When people figure out that VOIP is a disruptive technolgy, and start migrating en masse to it, Bell's revenue stream will start to collapse. For the short term enough people are either unfamiliar with the VOIP technology or don't have access to it, so the income stream is safe. I wouldn't be buying this income trust for the long term.

[Renegade]

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.

If you read up a bit on economics you will see that an increase or decrease in taxes can only affect the supply curve. This extent to which this is passed on to consumers depends upon the elasticity of the demand curve. Supply and Demand

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

Let me present some numbers and quotatiion I've quoted before. The Relative Tax Burden

The following is an excerpt:

Who pays the tax bill?

Table 5.3 shows that the largest portion of the tax burden ultimately

settles on the higher income groups. In 2000, the top 30% of families

earned 59.4% of all income in Canada and paid 65.7% of all taxes. The

bottom 30% earned 8.1% of all income and paid 4.3% of all taxes.

To economists these figures are nothing out of the ordinary. Our

tax system is progressive. It is not surprising to find that those earning

lower income pay less tax as a proportion of their income than those

earning higher income. This result may, however, come as a surprise to

activists and reporters who claim that the rich in Canada pay no taxes.

As tables 5.3 and 5.4 show, the rich bear most of Canadas taxation

burden.

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?

Well, that would really depend upon the individual wouldn't it? I would guess that most of us never reach the point at which more money would detrementally impact our standard of living.

[Renegade]

Why is it then that people with riches beyond what any person really deserves still get so worked up about how much they pay in taxes then?

How do you determine objectively what any person deserves?

Even under the current model, I wonder if we couldn't achieve the same results with a more moderately wealthy people, a lot more wealthy people, and a lot fewer ridiculously wealthy people.

Many societies which have tried to equalize wealth have succeeded. Eveyone has become equally poor.

[jdobbin]

It is a detailed assessment much of which I agree with. Which part in particular are you referring?

About the inconsistent application on legal entitities, the large hole in the corporate tax base and the less efficient use of the tax code.

[Renegade]

It is a detailed assessment much of which I agree with. Which part in particular are you referring?

About the inconsistent application on legal entitities, the large hole in the corporate tax base and the less efficient use of the tax code.

No I agree with most of that. In essence in tax-advantaged application on income trusts over other corporate structures is why Bell is going this route. I expect more companies to go this route until the government takes furrther steps to eliminate the disparity. Yes, as more companies adopt an income trust structure it will erode the corporate tax base. As indicated in the article an income trust is more efficient from a tax perspective than issuing dividends.

None of this contradicts any of what I have said earlier.

[jdobbin]

No I agree with most of that. In essence in tax-advantaged application on income trusts over other corporate structures is why Bell is going this route. I expect more companies to go this route until the government takes furrther steps to eliminate the disparity. Yes, as more companies adopt an income trust structure it will erode the corporate tax base. As indicated in the article an income trust is more efficient from a tax perspective than issuing dividends.

None of this contradicts any of what I have said earlier.

The government needs to limit the disparity then. The system is becoming very complicated tax-wise and not very transparent. It is also could make corporations less fleet footed as they have no incentive to research, develop and expand to new markets.

[Renegade]

The government needs to limit the disparity then. The system is becoming very complicate tax-wise and not very transparent. It is also could make corporations less fleet footed as they have no incentive to research, develop and expand to new markets.

The previous Liberal government did make concessions to equalize the disparity by increasing the tax advantage on dividends. Apparently it is not enough. I don't doubt that at some point the government will need to take further actions.

[jdobbin]

The previous Liberal government did make concessions to equalize the disparity by increasing the tax advantage on dividends. Apparently it is not enough. I don't doubt that at some point the government will need to take further actions.

I think a company as big Bell Canada going income trust will certainly give the government pause. I'm surprised we haven't heard any comment thus far about it.

[Renegade]

I think a company as big Bell Canada going income trust will certainly give the government pause. I'm surprised we haven't heard any comment thus far about it.

An income trust avoids double-taxation by taxing income only once in the hands of the investor. We have heard suprising little debate on the justification of why double taxation should even be maintained even in a corporate structure.

[jdobbin]

An income trust avoids double-taxation by taxing income only once in the hands of the investor. We have heard suprising little debate on the justification of why double taxation should even be maintained even in a corporate structure.

I guess when a big bank goes income trust, maybe the government will pay attention.

[August1991]

We have discussed income trusts before.

Having read through this particular thread, I find Renegade's posts here the most interesting. But I have yet to see the key idea properly expressed.

Actually I think conversion to income trust will benefit all shareholders via increased payouts and valuation. It is really the federal government ( and indirectly the taxpaying base) which is screwed.

Really?

Corporate taxes amount to "double" taxation. Corporations pay tax on earnings and if the after tax earnings are distributed as dividends, the shareholders must pay income tax on this dividend income. In practice, this means that corporate earnings face a higher tax rate. (Nothing new there. Different people also face different tax rates.)

One solution for a corporation is to not pay dividends but instead to retain the after tax earnings and invest them in the business. This increases the size of the business, makes it more valuable and the share price rises. Shareholders receive the "dividend" indirectly through increased share price (and they are taxed favourably according to the capital gain if they sell their shares). Corporations have traditionally taken this route and so in Canada, we have firms that are larger than they otherwise would be. (This is a cost to Canada because it is inefficient - doing something merely to avoid taxes is rarely a good thing for an economy.)

OTOH, this is an obvious solution for firms such as Microsoft. It has never paid a dividend because it has too many good projects (eg. XBox) for its retained earnings. Shareholders benefit from Microsoft's rising share price.

Another solution is to incorporate offshore. This avoids Canadian corporate taxes but of course Canadian shareholders must pay income tax on any dividends.

A third solution is to create an Income trust. This makes sense for Bell Canada (a cash cow) that can't adopt the solutions above.

A fourth solution would be to abolish corporate taxes (as Ireland has done) but no Canadian politician has the courage to do that. (Toronto and Montreal lawyers like this fact because they get hefty commissions when a firm creates an income trust.)

----

Renegade noted that many shareholders avoid income taxes on dividend earnings since they hold RRSPs or RRIFs. That is as it should be. It is better to tax when you spend and not when you earn. That is why the GST is a better tax than income tax. When people spend their RRSPs, they'll pay tax.

It was also noted that income trusts are a gift to foreign investors. Foreigners don't invest in Canada because of our blue eyes. They do it because it is in their interest.

But this raises the real issue here. The best way to consider a tax is to think of what people do to avoid paying it. An income trust is a relatively costless way to avoid corporate tax since creating an income trust just makes a few lawyers rich. The alternatives, short of abolishing the corporate tax, are worse.

[Renegade]

One solution for a corporation is to not pay dividends but instead to retain the after tax earnings and invest them in the business. This increases the size of the business, makes it more valuable and the share price rises. Shareholders receive the "dividend" indirectly through increased share price (and they are taxed favourably according to the capital gain if they sell their shares). Corporations have traditionally taken this route and so in Canada, we have firms that are larger than they otherwise would be. (This is a cost to Canada because it is inefficient - doing something merely to avoid taxes is rarely a good thing for an economy.)

You are making an assumption that the corporation makes wise choices in where it invests the retained earnings. Certainly they should at least be wiser than the investor can make himself. This has not been true lately of BCE. It has invested in assets like Teleglobe, and BCE Emergis which has done nothing to enhance shareholder value, and as a result shareholders applaud the decision to stop retaining earnings and pass it on to them.

[M.Dancer]

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.

You are quite right. When people figure out that VOIP is a disruptive technolgy, and start migrating en masse to it, Bell's revenue stream will start to collapse. For the short term enough people are either unfamiliar with the VOIP technology or don't have access to it, so the income stream is safe. I wouldn't be buying this income trust for the long term.

Not to mention the other revenue streams of bell are fiercely competitive. This is not a company you should walk away from, you should run.

[Remiel]

Gah... so many posts since this morning...

Geoffrey - When I was said spread the wealth, I meant to imply through taxes that would go to infrastructure that would benefit everyone, including presumably the companies the wealthy own. You may still disagree with me on the taxes issue, I guess, but that is my position.

Renegade - Using the top 30% and the bottom 30% does not give a very accurate picture, in my opinion. Most of the people in the top 30% aren't really that wealthy compared to the people in the top 10%... I was hoping more for a comparison of the top 10% versus the bottom 50%. I'll look through the article you linked, and see if I can find what I want there. I appreciate your trying, however.

Renegade - There is probably no way to tell exactly what anyone has earned, but isn't as hard to gauge when a person is radically exceeding it. How many people do you think there are that can honestly be said to have earned an eight figure salary (including bonuses)?

[Renegade]

Renegade - There is probably no way to tell exactly what anyone has earned, but isn't as hard to gauge when a person is radically exceeding it. How many people do you think there are that can honestly be said to have earned an eight figure salary (including bonuses)?

Actually everyone earns exactly what they are paid. I don't think your question is on what they earned, but rather what they deserve. In my view it is easy to determine what someone deserves. They deserve what someone else is willing to pay them and they are willing to accept.

Does a baseball player deserve $25Million for being able to hit a ball out of the park? I guess so, because someone is willing to pay it.

[Renegade]

Renegade - Using the top 30% and the bottom 30% does not give a very accurate picture, in my opinion. Most of the people in the top 30% aren't really that wealthy compared to the people in the top 10%... I was hoping more for a comparison of the top 10% versus the bottom 50%. I'll look through the article you linked, and see if I can find what I want there. I appreciate your trying, however.

Here's a stat more in line with what you are looking for:

The top 10% of Canadians pay almost 60% of all income taxes

The bottom 60% of Canadians pay less than 10% of all income taxes

link

[Remiel]

How closely are our progressive tax rates tied to inflation?

I'm struggling to try and find a good way of trying to articulate my argument for earning and deserving. Somewhere in there, the relation between manager and producer and random factors are tied more closely together. Windfalls produced by random factors seem to inordinately benefit mangers and not producers, when they should have a more equal benefit for both. Managers earnings should be based on how much they add to production, not as a dollar value, but as a percentage value. Yet, in many of the richest industries, managers can give themselves huge raises based on random factors that benefitted their company, when they did not in fact add any value to production themselves. Owners are tougher to value I think, since they are facilitators and don't actually produce anything. Our economic system is based on owners getting a nice piece of the pie. A primary problem of this whole topic I think is that the money one earns or deserves is also affected by how one spends it, and that could be really difficult to formulate statistics on. A person whose wealth increases by $25 million a year who invests $22 million in new business and spend $3 million on themselves is in many ways a world apart from another person who gets $25 million and spends $19 million on themselves and invests $6 million.

[Jerry J. Fortin]

Some of these stats being thrown around are hillarious! I love the top 30% theory. Lets view things in at least a realistic manner shall we.

Taxation does not truely apply to higher incomes. This is factual in terms of both business and individual income taxes. The higher the income the greater the advantage of shelters and deductions. It gets to a point where huge incomes pay practically no taxes and that is a simple truth.

The public is taxed heavily to provide funding for government. That is the reality. Without taxation government would cease to exist. So don't expect taxes to go away, because they won't. The best that citizens could hope for is fair taxation, and that is asking a hell of a lot.