The Canadian Spiral

Canadian Finance Minister Jim Flaherty told reporters in Ottawa yesterday that Canada will now tax income trusts for the first time and raise dividend tax rates for pension funds and foreign investors that own trusts.

The move strikes a blow at the market for the high-yield securities that have flourished in Canada, but simultaneously strikes a blow at retirees who have sought cash distributions to boost their retirement incomes. You can expect turmoil on the Toronto Stock Exchange.

The new rules won’t just hit Canadian retirees, as foreign investors own more than a fifth of outstanding income trust units. The number of trusts in Canada has tripled in the past six years to about 250, and their market value has soared 20-fold as companies convert to trusts to avoid taxes and boost share prices.

A decade ago I was asked to debate the Canadian welfare state with an economics professor from McGill University, and we wrote opposing articles in the Canadian journal, World Economic Review. His title was “The Welfare State, a Work in Progress,” and mine was titled “The Welfare State, a Failed Experiment.”

I worked for over a month constructing what I considered an iron-clad defense of the free-market, which seemed to me to would convince any open-minded individual that freedom always works better than socialism.

A month after publication, I received a letter from the editor of WMR, which simply said that both the professor and the subscribers (all Canadian academics) considered me simply crazy.
Well, Canada marches on, and socialism still prevails. As the welfare state expands, taxes must rise to pay the rising welfare class. The retirees who’ve depended on the tax-free distributions from income trusts will now stop investing in free-enterprise corporations, and find it easier to demand more subsidies from the welfare government. Corporations that have depended on investor capital will find the source drying up, and many of them will also turn to government for handouts.

Down, down, goes productivity.

Can you profit from this turmoil? Yes. There’s one Canadian advisor who understands exactly what this will mean to Canadian shares. Eric Roseman, the Sovereign Society’s investment director, is a world-class expert on trusts.

Be among the first to unerstand the effect of this destructive legislation by attending Eric's presentations at The Offshore Advantage Seminar in Puerto Vallarta, Mexico. Hurry! It happens next week, November 8-11. Reserve your spot today. Cal LaVita at 561-272-0413, x122, or register online by clicking here!