Incompetence and corruption at Finance

In September, the Finance department announced that because income trusts were costing the government $300,000,000 a year in lost tax revenue (that was desperately needed to fund more vote-buying schemes), the government was investigating changing the rules as to how these investment vehicles worked. This caused a lot of churn in the markets as investors drove down the prices. On Wednesday this week, the government declared their intention to leave the trusts alone, and instead reduce the taxes on stock dividends to try and level the investment playing field.

This doesn't sound very bad, and lower taxes are always a good thing, but the way it was done (which I'm going to get into) indicates that the Finance department has no idea what it's doing.

It began Wednesday at 5:20 pm, when John McKay, the parliamentary secretary of Ralph Goodale, went on live television and casually announced a major tax policy as easily as he might have announced new funding for macramé training for immigrants in a too-close-too-call riding -- and didn't even have his facts straight:

Jaws dropped among Department of Finance officials on Wednesday night as they watched John McKay discuss details on national TV of how Ottawa would resolve the income trust tax debate.

The parliamentary secretary for the Minister of Finance told of plans to cut the tax rates on corporate dividends. Then, he disclosed details of a 5% tax to be applied to trusts held inside pension plan, starting in 2007.

Department officials wondered aloud why Mr. McKay was talking about a market-sensitive issue on television. Worse yet, he got the details wrong. About an hour later, Ralph Goodale, the Finance Minister, announced there was no trust tax in the offing.

So. A major financial policy was announced at a last-minute press conference with no documentation. It's possible that the income trust policy wasn't even fully worked out yet; Goodale just had to say something, so he made a hasty decision and went to the press.

If that was the worst of it, it would only indicate incompetence. The news came after the markets were closed, so no harm was done, right? But there's evidence that something shady has been going on this week. In the three days before the announcement that cleared the income trusts from the cloud they were operating under, their prices went up 3.61%! And of course they went up a lot more after Goodale stammered through his statement. Some people made a killing.

It's obvious that some people were in the know as to what was about to happen. In Barry Critchley's column in today's National Post, he talks to an investment banker that didn't get a chance to be 'consulted' by the Finance department before it made its decision:

"I was talking to some prominent lawyers and bankers and they were up there in Ottawa earlier this week and they were basically told this was going to happen," added the banker, who over the years has won his share of the deals that are up for grabs. "It's all over the street. All the people are talking about who had a heads up and who didn't."

The events left the banker wondering whether Ottawa was interested in consultation or more interested in passing on inside information.

In this banker's mind, "It pays to consult. The government has leaked this out to their friends and cronies in the business community and [in so doing] panicked the little investors who sold.

"It's brutal. It's third world. It's unbelievable," he said.

And this banker wasn't just referring to the events of last Wednesday. Indeed, the process got off to a good start in early September, when Ottawa announced it was planning a consultation process on income trusts. A week or so later, the process reached amateur-hour proportions when the government announced it would not be giving any more advance tax rulings on trust conversions. More importantly, what did that decision mean for the process, which was kicked off with a 50-page report that indicated that everything was being analyzed?

Since then, it has been full-scale panic as Ottawa dealt with all sorts of anger from all sorts of people -- market participants, industry executives, retail investors and pension funds.

And the final straw: "The government then tells a bunch of Bay Street insiders what it is going to do so they can profit. And then it does it. It's insane," added the banker.

Small Canadian investors have possibly lost billions of dollars over this make-it-up-as-you-go-along policy making, and friends of the Liberals have been the beneficiaries. In the US, there would be insider trading investigations to determine who knew what, and when. But here in Canada, expect it all to be swept under the rug.

Posted by Bruce Gottfred at November 25, 2005 04:12 PM | TrackBack