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Mounties ride into thick of election Start criminal investigation into allegations by left-wingers that investors profited from insider information on income trust ruling Gary Park For Petroleum News
In its desperate struggle to retain power in Canada, the Liberal party government of Prime Minister Paul Martin has been dealt what many observers think could be a knock-out blow.
The Royal Canadian Mounted Police announced Dec. 28 it has started a criminal investigation into whether anyone in government leaked advance notice of Finance Minister Ralph Goodale’s decision on the taxation of income trusts before the official announcement on Nov. 23.
In the hours before Goodale removed the threat of a tax on the trusts, while deciding to enact a politically popular cut in corporate dividend taxes to reduce the advantage held by trusts in the market, the value of trusts and related stocks —especially those in the energy sector — rose sharply.
Although it is not clear whether the heavy trading was anything more than informed guesswork by investors, the Mounties said they intended to probe an allegation by the left-wing New Democratic Party “regarding a possible breach of security or illegal transfer of information.”
The investigation will involve a special unit of Mounties and securities regulators which was created in 2003 to concentrate on capital market fraud.
But the national police force emphasized it had seen no evidence of “wrongdoing or illegal activity on the part of anyone associated with this investigation,” including Goodale.
What is unusual is for such a high-profile, politically charged investigation to be started in the midst of a federal election campaign, leading to a vote on Jan. 23, while early polls showed the Liberals and Conservatives in a virtual tie for the first time in the campaign. Political clamor follows It set off an immediate clamor by the New Democratic, Conservative and Bloc Quebecois parties for Goodale’s resignation.
New Democratic finance spokesman Judy Wasylycia-Leis said that even though there was no indication Goodale was personally involved in the alleged leak as minister he was responsible for the actions of his staff and the civil servants in his department and should resign until the matter was resolved.
Conservative finance spokesman Monte Solberg said the confirmation of a policy investigation “highlights that the Martin government continues to operate under an ethical cloud.”
Goodale said he was “absolutely confident about my conduct in this matter and I do not see any basis on which to resign.”
He got the unreserved backing of Martin, who said Goodale is a “person of the highest integrity and he will not be stepping down.”
Editorial opinions on most of Canada’s largest newspapers agreed there was no reason for Goodale to quit his cabinet post.
However, Martin confirmed that he and some members of his staff were aware of Goodale’s income trust decision in advance.
“I knew and I’m one of them,” Martin said. “The fact is the people who would be on a need-to-know basis would have that kind of information.” Columnist: investigation unprecedented Although the trust probe could last well beyond the election date, it provides further ammunition for the opposition parties in their attack on scandals and corruption that have undermined the Liberals.
John Ibbitson, a columnist in the Globe and Mail, suggested the criminal investigation “may have cost the Liberals this election.”
He said the investigation is stunning and unprecedented.
“In the past police forces have deliberately delayed announcing criminal investigations or the laying of charges during election campaigns, for fear of influencing the outcome of those campaigns,” Ibbitson wrote.
Tom Caldwell, chairman of Caldwell Securities, was among those who doubted any criminal impropriety will be uncovered.
“My gut feeling is that by the time the smoke clears and a lot of money is wasted, I don’t think you’re going to find any clear villains.” Trust under further scrutiny Aside from the political fallout, the trusts — which carry a combined market value of C$170 billion — have come under further scrutiny by the C.D. Howe Institute, a national, independent research organization.
Jack Mintz, president of the think-tank, said more reforms are needed over and above those announced by Goodale to reduce the market distortions created by the investment vehicles.
He said the tax regime still encourages trusts to pay excessive cash distributions to investors because trusts that retain taxable profits are subject to heavy taxation.
An institute brief also cautioned that the dividend tax decrease does not affect foreign shareholders, who pay little or no tax on investment income earned in Canada.
Non-resident investors, as well as pension funds and retirement savings plans “prefer companies to convert business assets into income trusts since they can avoid paying corporate taxes at a 35 percent rate,” Mintz said.
To help remove the tax discrepancies between trusts and corporations, Mintz suggested:
• Making the dividend tax credit refundable to owners of pension and retirement savings plans so they would be indifferent between corporation and trust assets.
• Levying a corporate distribution tax to ensure that the refundable dividend tax is covered by corporate tax payments.
• Increasing the level of tax on non-residents receiving income trust distributions so that they pay a similar tax on corporate dividends and income trust distributions.
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