OTTAWA — The Mounties say they have gotten their man in the insider scandal involving income trusts, but some observers doubt that he is the only person involved.
On Feb. 5, the Royal Canadian Mounted Police charged Serge Nadeau, general director, analysis, tax branch, of the Department of Finance Canada in Ottawa, with criminal breach of
trust.
The Mounties started investigating the alleged leaking of new income
trust tax laws announced by the previous Liberal government Nov. 23, 2005, when it decided not to tax income trusts but to cut
corporate-
dividend taxes to level the playing field between the two types of business (InvestmentNews, Jan. 23, 2006).
The charge against Mr. Nadeau alleges that he used confidential Government of Canada information for the purchase of securities, which gave him a personal benefit. Breach of
trust is an indictable offense with a maximum penalty of imprisonment for up to five years.
“The RCMP has conducted an exhaustive investigation,” said a statement from the Mounties. “The investigation into the income trusts matter is now concluded.”
Others disagree that it should be.
“It’s just, to me, impossible that it was only one person involved,” Al Rosen, forensic accountant and principal of Rosen & Associates Ltd. of Toronto, told the Canadian Press wire service.
“I can see why the RCMP wants to close the whole thing down with one prosecution,” he said. “But there was just too much trading volume that particular day in just too many stocks, so it can’t possibly be one guy trading on his own behalf.”
No one is saying that there is anything crooked about the present Conservative government’s Oct. 31 decision to start taxing income trusts as corporations are taxed. Indeed, a spokesperson for the Finance Department said that Mr. Nadeau was not involved
But that is among the few points on which critics agree.
The decision to impose a 31.5% tax on all income trusts in four years and on new ones this year sent investors into a panic. The $171 billion (U.S.) income
trust market has lost about $13.8 billion in market value since the announcement (InvestmentNews, Jan. 22).
The new income
trust tax measure still has to be passed by Parliament. But investors aren’t waiting.
Last year, just five income trusts were acquired prior to the Oct. 31 decision. Since then, seven takeovers have been launched, including $1.67 billion worth of deals in 2007.
On Feb. 13, the Liberals, now in opposition, proposed that the Conservative government lower the tax it intends to impose on the income
trust sector and make it refundable to residents but not to foreign investors.
They propose that the government cut the new tax on trusts to 10%, from the proposed 31.5%, effective immediately, and prohibit the creation of new trusts.
Foreign holders of income
trust units are already subject to withholding tax, and about 15% of those holders are Americans.
Distributions Criminal?
Finance Minister Jim Flaherty dismissed the Liberal proposal, calling it “weak nonsense.”
But he is paying attention to one critic of income trusts, who claims that the RCMP should investigate their distributions.
“I have found that two out of three business income trusts pay well in excess of their incomes,” said Dianne Urquhart, a consulting analyst, while speaking before Parliament’s Standing Committee on Finance on Jan. 30.
In her research for a report, “Income Trusts: Heads I Win, Tails You Lose,” she noted that on May 3, the Canadian Accounting Standards Board said that the failure to distinguish clearly between returns on capital and returns of capital is inaccurate and potentially misleading, particularly when terms such as “yield” are used to describe the amount distributed.
“The actual criminal charges in the United States suggest that the misconduct of the limited partnerships of the ’80s and early ’90s was similar to that which has occurred in the Canadian income trust market, and it could be considered criminal in Canada upon investigation,” she told the committee.
Mr. Flaherty, the finance minister, said that accounting procedures involving income trusts need to be reviewed.
“It’s something we’re having a look at, because in the accountancy world, there have been some substantial criticisms; some recommendations came forward, some steps have been taken, and I want to make sure that they’re adequate,” he said at a recent news conference.
