HOW CRA IDENTIFIES ISSUES THAT CONCERN THEM (AND THEN YOU)

You have a better probability of finding Sasquatch than a taxpayer eager to pay more tax (unless you're in Warren Buffett's locale). We hunt for effective tax strategies but our savings reduce what the government collects. Win/lose or lose/win.

Canada Revenue Agency (CRA) interprets the tax laws to identify potential under-payers. If you make the list, they’ll let you know. You can appeal their decisions and ultimately the courts decide who is right. CRA has a huge advantage since few are willing or able to go to court.

INSIDERS

How does CRA operate? Two insiders shared their insights at a CALU technical session last week:

• Susan Gulliver worked at CRA for 36 years — her last 23 in Aggressive Tax Planning. She spent 15 years on the GAAR (General Anti-Avoidance Rule) Committee. She's now a Senior Tax Advisor at PricewaterhouseCoopers.
• Dan Rivet has been at CRA for 17 years. He's on the GAAR Committee. He is the Manager of the GAAR, Inter-Provincial Tax Avoidance and Technical Support Section. How do you fit that on a business card without abbreviations?

I spoke to both briefly. In 2009, I met Donald Bowman, the former Chief Justice of the Tax Court of Canada. I need an autograph book!

Identifying Issues

How does CRA identify the issues which concern them? There are five key ways:

1. requests for rulings
2. conducting regular compliance audits and finding practices of widespread concern
3. attending conferences and seminars
4. reading published articles
5. participating internationally; e.g., in the OECD and the Joint International Tax Shelter Information Centre (JITSIC)

These sources are certainly reasonable. Let’s explore further.

Ruling Requests

If you ask for a ruling, you might change your mind and withdraw your request if you sense the decision might be unfavourable. While ignorance can be better than knowing for certain, CRA does not forget. Withdrawn requests go to the GAAR Committee for review. Lesson: If you'd rather not know, don't ask.

Ruling requests could be misused. Apple and Samsung are busy suing each other and already have 21 lawsuits pending around the world. Let’s turn to tax strategies. Suppose your company is a laggard losing sales to competitors or a leader staving off competition. Maybe you could get request a ruling anonymously (e.g., through a lawyer?) and withdraw your request to trigger a GAAR review. That’s nasty but might work, if structured properly.

Public Sources

CRA has been accused of not understanding industry practices, violating the 5th habit of the highly effective: seek first to understand and then to be understood.

Professionals require continuing education credits to maintain their designations (100 hours every two years for actuaries). Why not attend industry conferences and seminars? CRA staff are doing that and reading articles. While this may look like snooping, the purpose is to learn.

There are also internal courses. Some advanced courses are taught by outside instructors who don't have biases or conflicts of interest. That’s ideal. If you rely on financial advice from commissioned salespeople, be wary (e.g., read the wealthy reveal how their advisors fail them).

Outcome

We might not like what CRA does but now we have a better understanding of the inner workings. Before using a strategy that looks “too good to be true”, ask yourself how CRA may react (and these 13 questions). Happy tax planning!

Links

• How effective are tax auditors?
• Surviving an audit: two lies and three tips
• Warren Buffett’s very strange tax argument (Forbes, Aug 2011)
• Secret 7: The best tax-sheltering in Canada
• The four steps in wealth management
• Three steps to keeping financially solvent
• Mope, gloat or move: How tax compares by province
• How you comply with the taxman makes all the difference: The Related Party Initiative (Globe and Mail, May 2011)
• The tautology of Canada's GAAR: A tax haven for uncertainty
• Sharon Gulliver (PWC website)
• image courtesy of Kamil Dratwa (Poland)

Podcast 141 (5:23)

direct download | Internet Archive page | iTunes

PS Has your opinion of CRA changed over the years?

DO YOU CARE ABOUT LONG TERM CARE?

Thirty years ago, how the words would flow
With passion and precision,
But now his mind is dark and dulled
By sickness and indecision.
— Rush, Losing It

We're living longer than ever (see longevity over the last 100,000 years). That progress doesn't ensure we'll have a high quality of life in our final years. We may be unable to care for ourselves financially or physically. Babies don't mind but we're not babies. We can plan.

Ken's Parents

Gerontologist Ken Dychtwald explains what happened to his own parents.

The tale of Ken Dychtwald's parents

At least Ken's parents had long term care insurance. Coverage is harder to get these days. My first full-time employer, MetLife stopped selling coverage in 2010.

Plans typically provide cash for

1. cognitive impairments (inability to think, perceive, reason, remember), or
2. the inability to perform two of the five activities of daily living without help (bathing, eating, dressing, toileting, transferring positions of the body)

Provisions vary. There are limits and exclusions (the fineprint taketh away). Yet coverage can provide valuable financial support.

Since we think we'll be immune, we're reluctant to prepare. If your parents need long term care, your inheritance can melt away. One strategy is to buy insurance on them (if they qualify).

What Do People Live For

Ken showed this video at CALU 2011. You don't need to know Taiwanese to be moved by this quintet. They have an average age of 81, various ailments and a dream.

Dream: the adventure of five Taiwanese average age 81 (based on a true story)

We too can dream and do. Why wait? Get on your bike and ride!

Links

• Long term care takes planning (Financial Post, Oct 2012) (new)
• Dealing with the staggering cost of dementia
• Longevity over the last 100,000 years (Ken Dychtwald at CALU 2011)
• Three ways for hockey players (and you) to save for retirement
• Are you saving too much for retirement?
• The four financial risks
• Long Term Care (Riscario wiki)
• image courtesy of Nicolas Raymond (Montreal)

Podcast 118 (3:22)

direct download | Internet Archive page | iTunes

PS Why not care about the long term before you need long term care?

LONGEVITY OVER THE LAST 100,000 YEARS (KEN DYCHTWALD AT CALU 2011)

"For 99% of human history, longevity was under 18 years." — Ken Dychtwald

Gerontologist Ken Dychtwald (LinkedIn profile) of Age Wave spoke about aging and retirement at CALU 2011. (In the previous blog post, we discovered how the wealthy feel about their advisors.)

History

"I hope I die before I get old." — My Generation, The Who

Imagine 99,000 years with a life expectancy at birth of less than 18 years. Our ancestors died before they got old. Infectious diseases were a big culprit. Maybe the rock bands of those eras sang "I hope I live until I get old". 

Now, living a billion seconds is commonplace. Since 1900, US life expectancy has grown from 47 years to 80. That's a huge change in one century and unprecedented. Count on this trend continuing with medical advances. If only there were inventions to make our money grow and maintain our quality of life.

Economic Uncertainty

We risk losing health as we age. Treatment, lifestyle adjustments and long term care can be expensive.

The greatest fear is becoming a burden on the family (55%), followed by ending up in a nursing home (24%) and using up savings (12%). For the caregiver, the biggest worry is the emotional toil (57%), followed by the costs (49%) and impact on their own lifestyle (21%). That's from the 2010 Let's Talk survey conducted by Age Wave and Harris Interactive for Genworth Financial (PPT).

Would you rather have more money or predictability?

According to the same survey,

• 21% want to accumulate as much wealth as possible, while
• 79% want to save enough to have financial peace of mind (whatever that means)

Our views change during periods of exuberance and uncertainty. Maybe this desire for safety will remain. However, an aging population and longer lifespans are a bad combination when investment returns are volatile in our interconnected global economy.

In another CALU session, David Solie (LinkedIn profile) said that aging and volatility have created a new species of complexity. We're getting older and can't count on what we counted on counting on. Will it get any worse?

The Evolution Of Retirement

In this video, Ken shows how retirement has changed over the years.

Ken Dychtwald: Re-Visioning Retirement

The Science Of Longevity

Not only are we living longer, medical developments are likely to continue that trend.

Ken Dychtwald:: Exploring the science of longevity

The Bright Side

In the past, life was linear: education, work/family and leisure (retirement). Is that appropriate now that we're living longer? Why not spend our "longevity bonus" throughout life rather than at the end? If you're an employee, this is tougher to do. Entrepreneur have much more flexibility — should they choose to use it.

If you like what you're doing, you might continue working. That helps pass the time and provides income. Retirement can now last longer than people lived in prior millennia. Rather than leaving a legacy, there's an opportunity to live a legacy.

Links

• How the wealthy feel about their advisors (CALU 2011)
• Genworth/Age Wave "Let's Talk" Survey (2010) | PDF and PPT
• Long Term Care survey (Genworth Financial press release)
• Dealing with the staggering cost of dementia
• Your life expectancy exceeds 1,000,000,000 seconds
• Afraid So (Jeanne Marie Beaumont, poem read by David Solie)
• photo courtesy of Steve Jurvetson (US) + discussions

Podcast 117 (4:45)

direct download | Internet Archive page | iTunes

PS Let's take care of our health now so pain doesn't prevent us from enjoying our longevity bonus.

HOW THE WEALTHY FEEL ABOUT THEIR ADVISORS (CALU 2011)

The wealthy were treated as a single group. Now they are divided into segments. For instance, needs vary for entrepreneurs (making their own money), professional athletes (high income for a few years) and inheritors (receiving money they didn't earn).

This week at CALU 2011 in Ottawa, Keith Sjögren (LinkedIn profile) of research firm Investor Economics spoke about those with High Net Worth (HNW). Technically, they have $1 million of investable assets. Here we'll call them "wealthy" and review findings.

Key Issues

The wealthy identified two key financial concerns

1. how to minimize tax
2. how to transfer their wealth

They turn to advisors for help. Even then, the wealthy do little planning. Only 1/3 are willing to undergo comprehensive financial planning (see why financial planning is ignored). However, they are interested in estate planning which deals with what happens after their deaths.

Because of the recent poor economic environment, the wealthy have become more conservative. They're focusing more on capital preservation than returns. That's predictable.

Expectations

Overall, the wealthy are now more demanding. They want advisors with expertise and significant technical skills.

The older wealthy prefer older advisors. They don't feel a young'un can understand what they've gone through. The young wealthy aren't keen on older advisors who are prone to think like their parents. They prefer younger advisors who are technically-savvy and share contemporary views. Finding a "modern" advisor is a big challenge since

1. many advisors are close to retirement
2. there are fewer newer advisors
3. there's little training for new advisors

Changing Advisors

To simplify their lives, the wealthy have cut advisors and now use about 2.5.  Here are reasons they have switched (more most important to least important)

• inadequate level of expertise
• disagreement regarding strategy
• high fees
• lack of objectivity

The wealthy are open to ideas ... but they aren't contacted regularly. As wealth increases, there's more reluctance to give referrals. The wealthy aren't keen to be part of an advisor's business development strategy.

Confidence

Do the wealthy have confidence in their current advisors?

• Yes: 67%
• No: 5%
• Unsure: 28%

The last element is interesting. Imagine not knowing if you've got the right advisor. Comparing is difficult. You may not know what to expect or how your advisor compares. There are no standardized public scores to help you measure trust. Buyer beware.

Switching advisors is a hassle and less than 10% do in a year. When the wealthy leave an advisor, they tend to go to a bank. Private banks are growing but there is the perennial problem of biased advice and cross-selling. That's part of the cost of getting advice from your banker.

The Luxury Market

The session ended with some insights about consumers in the luxury market

• expect privileged service (e.g., private bankers)
• expect increasing levels of service
• less brand loyalty
• crave innovation
• reward performance over reputation
• demand technical expertise since they are becoming increasingly inquisitive

You probably distort your spending to spend part of your life in the luxury market.

Links

• Other posts from CALU sessions (Google search)
• Trading up: distorting our spending to get what we want
• The foolproof measure of trust
• Why is financial planning ignored?
• The key to financial literacy / numeracy
• Understanding the HNW market: Interview with Keith Sjögren (advisor.ca, Mar 2008)
• Most Canadian millionaires are self-made (The Record, Apr 2011)
• The million-dollar club (The Globe & Mail, Feb 2010)
• The dread of going to a bank for a loan
• The cost of getting advice from your banker

Podcast 116 (5:01)

direct download | Internet Archive page | iTunes (new)

PS I spoke at CALU too. Here's the background and a video of my session on YouTube.

BILLIONAIRE SIR TERENCE MATTHEWS ON HOW TO COMPETE WITH INDIA AND CHINA

Foreman says these jobs are going, boys
and they ain’t coming back
--- Bruce Springsteen, My Hometown

While a US engineer earns $70,000, similar talent costs $7,000 in India and $5,000 in China. That’s too big a differential to ignore in today’s ultracompetitive world. IBM alone hires some 3,000 engineers per month in India. This cheaper labour saves companies in countries like Canada about 20% of their IT costs and earns nice returns for the integrators. You won’t be quite as happy if you’re a displaced engineer.

Sir Terence Matthews gave  sobering messages at CALU 2010 today in his presentation ACT or Be Acted Upon. Terry is a low-key Canadian billionaire who does business around the world. He doesn’t golf but is hosting the 2010 Ryder Cup. Of his 80 ventures, he has 75 successes.

He gave a simple prescription for the conundrum of low cost foreign labour.

A Solution

Terry does not advocate anti-competitive measures. With businesses around the globe, he and his clients benefit from lower costs.

Google uses US engineers but remains competitive. How? Because of innovation and being first. Other companies can do the same.

Terry hires entrepreneurial graduates for start-up companies. Since they don’t have spouses or children, they can and do work long hours seven days a week for $25,000 a year. Why? The graduates learn valuable business skills and get partial ownership in the new venture in a year.

Since new companies have trouble getting clients, Terry pairs them with his established companies like Mitel for instant credibility. The clients are approached before the work starts. Rather than using the build-it-and-they-will-come model, Terry prefers to sell first and build second.

There’s hope for the innovative and swift. There’s also hope if you do work that must be done locally. How would you outsource a haircut?

Links

• Sir Terence Matthews (Wikipedia)
• Does billionaire Seymour Schulich help you "Get Smarter"?
• Warren Buffett's tough career choice: actuary or billionaire?
• Your life expectancy exceeds a billion seconds
• Billionaire Richard Branson: when your servant is your master
• Three reasons the rich get richer
• Secrets to billionaire success
• How to visit India (new)
• image by Darren Brown (Ottawa)

Podcast Episode 65 (coming soon)

(I’ll record the podcast when I’m back in my Toronto studio later this week. I did not lug audio gear to the conference.)

direct download | Internet Archive page

PS More highlights from CALU 2010 to come

HOW EFFECTIVE ARE TAX AUDITORS?

No one wants to get audited. Not even the tax auditors. But they get audited too.

The Auditor General, Sheila Fraser, looked at how the Canada Revenue Agency (CRA) audits Small and Medium Enterprises (SMEs). Despite 5,600 staff focusing on these businesses, earlier problems remain. As taxpayers, we want compliance with the rules to ease our tax burdens, which vary considerably by province, especially for entrepreneurs.

We're talking about big dollars. The CRA estimates there aren't many tax cheaters but those abusers cost us plenty. About $12.7 billion in unpaid tax according to their 2006-07 Annual Report. Of that, about $2.5 billion relates to SMEs.

Overall, the Canada Revenue Agency (the Agency) has made unsatisfactory progress in addressing the recommendations we selected from our previous reports for follow-up.

--- Auditor General, March 2009 Status Report

Sheila found the "taxman" fares poorly in

• taxing the underground cash economy (targeted by 1,000 CRA staff): "about half of its underground economy audits over the past five years did not detect unreported income"
• auditing too many low-risk files

Auditing The Wrong Files

The CRA "has difficulty demonstrating that it is selecting and auditing small and medium enterprises of high risk or priority."

--- Auditor General, March 2009 Status Report

The CRA uses computerized risk assessment to classify tax returns by the potential tax recovery into four categories from low to high. That makes sense.

However, the CRA focuses on low-risk files where they expect a $0 tax recovery. This is like targeting drivers going 0-10 above the speed limit but ignoring drivers zooming past at 50+.

In the last two fiscal years, the CRA audited 87,000 SMEs. Of these, 13% were tagged as high-risk and brought in 41% of the total tax recoveries. However, 56% of the audits were on zero or low-risk files and brought in 39% of the total tax recoveries.

"Available auditors may lack the experience necessary to do complex high-risk files and therefore audit lower-risk files."

--- Auditor General, March 2009 Status Report

What's going on? Among other explanations, CRA says their auditors are better suited to doing low risk audits. Also, audits do turn up problems even where tax recoveries are low. This is like a "broken windows" approach: tackle minor crimes like speeding and littering to prevent bigger crimes.

The CRA does not know why high-risk files bypass audits because the human screeners who make the ultimate decisions aren't required to document their reasons. Screeners favour their own judgement over computerized risk assessments. Human judgement leads to inconsistencies.

The Right Staff
During the Tax Roundtable in the 2008 CALU conference, a CRA official reported difficulties filling two senior vacancies in the Ontario audit unit. Why? The pay scale starts at $40,973 and caps out at $110,779. The private sector pays better. Also, tax auditors would rank among the least prestigious professions. Want proof?

At a party, announce that you're an actuary and people will leave you for fear of boredom. Say you're a tax auditor and watch them bolt even faster and go further away.

Cheaters

The study found that most people know little about the implications of tax cheating, and concluded that more communication would encourage better compliance.

--- 2007 public opinion research by the CRA

Honest taxpayers suffer. Cheaters prosper and encourage others to follow. Until they're caught. Let's see what happens.

Links

• Auditing Small and Medium Enterprises by Canada Revenue Agency (Auditor General, March 2009 | 40 page PDF)
• 2009 Auditor General's Reports Released (KPMG)
• Biography of Auditor General Sheila Fraser (about.com)
• Mope, Gloat or Move: How tax compares by province
• Surviving an audit: two lies and three tips
• photo courtesy of Adam Ciesielski (Capetown, South Africa)

Podcast Episode 37 (5:45)

direct download | Internet Archive page

Jim Flaherty on the Economy and Financial Literacy

If meetings could solve the economic crisis, it would be over by now. --- Jim Flaherty on the many international meetings he's been attending

Finance Minister Jim Flaherty addressed CALU for the third consecutive year, earlier this month. He spoke the day after his boss, Prime Minister Stephen Harper. Flaherty spoke off script, which made him more interesting. His triplets are already 18 months old. Sometimes strangers call his boys "three twins". 

Flaherty reminded us that a year ago there was concern that oil would reach $200 a barrel. The world is now in the midst of its first synchronized global recession, which Canada joined in the fourth quarter of 2008. We hate getting left out!

Canadian Differences

Since Canada still has a strong financial sector, other countries are looking at emulating the "boring" Canadian model. What sets us apart? Flaherty said:

1. effective implementation of regulations (regulations without monitoring mean little)
   
2. reasonable risk-taking
   
3. regulation of investment banks (which were acquired by commercial banks, which The Office of the Superintendent of Financial Institutions (OSFI) regulates); in the United States, investment banks faced less scrutiny and contributed to Dumb Money
   
4. no housing crisis (mortgages are not tax-deductible as they are in the United States); also mortgages are insured when borrowing 80% or more of the value of the property; the government purchased about $56 billion worth of mortgages to help banks stay liquid
   

Internationally, fixing the banks is crucial. In Canada, Flaherty sees access to credit as the main issue. The situation is improving and banks can still raise equity here. The government is spending to improve infrastructure as the Prime Minister described. The government has an increased appetite for risk. The Business Development Bank of Canada (BDC) and Export Development Canada (EDC) are lending accordingly. 

We lack a national securities regulator. Flaherty called this an international embarassment. Why does a country of 35 million people have 13 regulators? 

Other Good News

Politicians like to remind us of the good they've done. Flaherty remains proud of the Tax-Free Savings Account, which he still considers the centerpoint of his previous budget. The TFSA has been well received and benefits from what Warren Buffett calls the miracle of compound interest. 

Financial Literacy

What if you don't understand compound interest or other basics? Flaherty wants  to increase basic financial literacy. For example, what happens if you only pay the monthly minimum balance on your credit card? He asked CALU for help. At an evening reception, I spoke to Flaherty about this initiative, gave him my business card and volunteered to participate.

I talked to fellow blogger Canadian Capitalist over dinner. We both felt that anyone who wants to learn already can. Financial bloggers already help freely and would be willing to do more. The new Canadian Money Forum is a great resource started by CC and Million Dollar Journey. You can ask your questions and get thoughtful answers at no charge from a friendly community that cares. 

Links

• Seven in a Row: Prime Minister Stephen Harper Live Again
• Dumb Money 2009  (a US perspective)
  
• Secret 7: The Best Tax Sheltering In Canada
• The Original And Overlooked Tax-Free Savings Account
  
• Live from CALU 2008: Jim Flaherty, Stephen Harper, Mark Carney, Michael Ignatieff
• Why Jim Flaherty wants to boost our financial literacy ( Edmonton Journal | Feb 2009)
• Speech by Jim Flaherty to the International Conference on Financial Education (May 2008)

Podcast

direct download | Internet Archive page

Preston Manning on Financial Planning

Political parties are marketing machines for winning elections.

---Preston Manning

Knowing how to win an election doesn't mean knowing how to run the country. Or having well-considered ideas. Or being financially prepared to run for office. When Preston Manning made these points at CALU 2009, his slightly squeaky voice reminded me of early Jimmy Stewart.

Preston Who?

You may recall Preston as the leader of the western Canada-based Reform Party. He now runs The Manning Centre for Building Democracy, "a national not-for-profit organization supporting research, educational, and communications initiatives designed to achieve a more democratic society in Canada guided by conservative principles."

Just don't look meaningful French content on their website at this time. Here's what you'll see today:

TRANSLATION REQUIRED
What's New: Il n'y a pas d'evenements au Centre Manning.

The English site lists five events. You might find the spotty translation from a national organization established back in 2005 surprising, offensive or amusing.

When To Sweat

Preston pointed out that a new Starbucks employee must complete 20-30 hours of training before serving you a coffee. Politicians aren't required to have any training in their core activity, law making. How would you feel if pilot boarding an airplane said "I've never been in one of these before."? Politicians learn on the job, but there's little tolerance for mistakes. Elsewhere, magician David Ben said you can sweat in public or private. But you will sweat.

Preston wants to train future politicians so they know how to make laws in the public interest. 

Financial Planning

Besides preparing politically, those who may run for office should prepare financially too. They need help with financial planning. Besides the normal issues affecting us all, what about the financial impact of

• maintaining two residences
• placing assets in a blind trust (as is required for government ministers)
• drops in personal income while in parliament
• current investment strategies (e.g., renting space to the government may look suspicious later)

The financial planning should be done now to help prepare candidates who start running for office in 10, 15 or 20 years. Preston acknowledged that CALU members have the skills and knowledge to help future candidates now. 

Plans are nothing; planning is everything.

--- Dwight D Eisenhower

Financial planning isn't glamorous or perfect. It's necessary for the rest of us too. Time zooms past. Our lives are rarely as tumultuous as a politician's, where one slip can ruin a career. If we fail to plan ... you know the rest. 

Links

• Preston Manning biography
• The Manning Centre for Building Democracy
  
• Stephen Harper at CALU (7th year in a row)
• The Four Steps To Solving Problems Like a Magician
• What You Like/Dislike About Your Trusted Financial Advisor
• The Four Financial Risks

Podcast

direct download | Internet Archive page

Seven In A Row: Prime Minister Harper Live Again

"I have now spoken at your annual conference for seven years --- four times as Prime Minister and three times before that. This is highly unusual. I rarely speak to any organization two years in a row, let alone seven. I am a great admirer of the work you do both as an organization and as individuals. Your devotion to the principles of entrepreneurship and to the responsibilities of civic involvement are near and dear to my own philosophical heart." 

--- Prime Minister Stephen Harper

The annual Conference for Advanced Life Underwriting (CALU) sessions bring Canada's eminent advisors to Ottawa each year. Why is the conference room locked this morning? For a security check using dogs. Twittering live @riscario, I speculated about an important guest.

Prime Minister Stephen Harper addressed us for over 20 minutes. Four years ago, he had been PM for mere weeks and looked tired (but happy). This time, he looked rested and confident. He still joked:

I don't suppose this recession has made your jobs any easier. If it's any consolation, it hasn't made mine any easier either.

As you'd guess, the PM spoke about the economy. He used slides for the first time. 

Canada was the last into this recession. Canada is the least affected of the major developed countries and when the recovery comes --- as it eventually and inevitably will --- this country, Canada, will come out of it in the strongest position.

Better Than The Rest

Every country in the G20 is running a deficit. Ours is relatively small and expected to stay that way. We ran a surplus until February. Canada has

1. the best fiscal position in the G7
   
2. the lowest debt-to-GDP ratio in the G7
   
3. the soundest banking system in the world
   (by market capitalization: 3rd largest in the world, 4 of the 10 largest banks in North America)
   
4. low, stable inflation
   
5. highly educated, skilled, mobile labour force
   
6. diversified economic base
   

I felt good with these reminders. Our financial sector remains private.

Alone or in concert with other levels of government, we are moving planned capital investments from years ahead into the next two years. This stimulus spending must end when the recession ends. --- Prime Minister Harper

Other political parties might want to continue spending after the recession ends. Canadians can't decide ... and keep electing minority governments.

The Prime Minister faces many priorities. I'm delighted that he once again chose to spend time with CALU members, partners in helping you tame your financial risks.

Links

• Last year: The Prime Minister, the Finance Minister, the Governor of the Bank of Canada and Michael Ignatieff

Podcast

direct download | Internet Archive page

Live - The Prime Minister and Others

Spotting politicians in Ottawa is like spotting elk in Elk Island National Park. They're there but they're not in plain view. I lived walking distance from Parliament Hill from 1984-1989 but I only saw the Prime Minister on public events like Canada Day.

As a member of the Conference for Advanced Life Underwriting (CALU), I see politicians and senior government officials regularly now. Our annual conference took place in Ottawa this week (the reason I stayed in a suite for the handicapped). We were addressed (in order) by

• Deputy Opposition Leader Michael Ignatieff
• Governor of the Bank of Canada Mark Carney
• Prime Minister Stephen Harper
• Finance Minister Jim Flaherty
  

Here are some of their thoughts.

Michael Ignatieff
On Monday morning, Ignatieff spoke without prepared notes and answered questions. He talked about the role of the federal government. By reducing taxes, the Conservatives were making the federal government weaker, which makes the provinces stronger. Cutting GST by 2% reduces tax revenue by $65 billion over 5 years, which means less money for infrastructure and other projects.

The Liberals feel that Canada can't survive without a strong federal government. Inertia makes north/south relations with the Americans easy. West/East connections among the provinces take effort. He called Canada an act of imagination. It's easier for Atlantic provinces to send electricity to the US than west to Ontario. Since children are our future, they want more money spent on childcare and teaching young children.

Ignatieff wants the same level of healthcare regardless of province or urban density (city vs rural). Since healthcare costs spiral (consuming 51% of Ontario's budget already), he wants to focus on prevention. This means better food (e.g., better labeling) and more exercise. He was open to partnerships with the private sector.

Mark Carney
The Governor of the Bank of Canada spoke over lunch from prepared notes and then took questions. He flew in from a morning meeting with bankers in Toronto.

Canada's growth rate of 3.25% for 15 years is the best in the G7. Commodities have helped. Our jobless rate is the lowest in 33 years. In Alberta, 10% of current residents lived in another province five years ago.

Not all is rosy. Our aging population is growing at the second fastest rate in the G7. Our productivity is too low: 1% less than the US for the last 10 years. Globalization will determine our future.

The Bank of Canada focuses on maintaining a low, stable, predictable rate of inflation. This lowers the cost of capital. The target is 2%. We don't always gauge inflation well. Did you know that food prices dropped 10% last year? We can thank our strong dollar and new "big box" stores.

Two Pieces of Advice
Carney received two pieces of advice 20 years ago

1. In banking, it's never too soon to panic.
2. If it doesn't make sense, it doesn't make sense. [e.g., stay away if disclosure is poor as it was for Asset-Based Commercial Paper]

When asked about the rising prices for white rice ($230 to $1,000 to ??? per ton), Carney identified three factors

• speculation
• low supplies
• increasing demands, as people in poorer countries start eating more
  

Stephen Harper
The Prime Minister spoke in the afternoon from notes and did not take questions. He knew what Ignatieff said and joked that those who felt GST was a "good tax" could continue paying a higher rate. His focus is lower tax, controlled spending and debt reduction ($37 billion paid off during his term). He would rather strengthen individuals through tax relief than strengthen the federal government.

Canada is in the best position in the G7 but we are not an island protected against the US subprime problems. Canada is on track to have the lowest corporate income tax rates in the G7 by 2012 (but Ontario has not been supportive). Money is being spent on infrastructure and education.

Tax-Free Savings Account
Harper called the Tax-Free Savings Account the centerpoint of the 2008 budget, the single most important new savings vehicle since the introduction of RRSPs 50 years ago (see The Original and Overlooked Tax-Free Savings Account). Savings are exempt from taxation forever without penalty. The tax savings give a powerful incentive to create a national pool of investment capital. In contrast, the US has been encouraging debt. Here we are aiming far, aiming high.

Jim Flaherty
On Tuesday morning, Jim Flaherty spoke. His three budgets have all passed. A minority government hasn't had this success since the 1960s. When he first addressed the conference in 2006, he spoke of optimism. In 2008, we're being affected by world events and the US slowdown. We are not an island. Here is our situation:

• strong Canadian dollar
• high energy prices
• aging population
• shortage of skilled workers, especially in Western Canada

Even so, we continue to have the greatest fiscal strength in the G7. The value of our timber reserves has doubled in a decade to $1 trillion.

Even Flaherty's children ask why reducing public debt matters. His reply? Lower pubic debt reduces interest rates, helps us weather economic slowdowns and reduces intergenerational inequity. Our debt has been reduced by $1,570 per Canadian, which means savings in interest payments of $2 billion in 2009-2010.

Charitable giving has increased since the elimination of capital gains tax on donations of shares. Flaherty felt that Canadians should decide for themselves which charities they want to support.

In Canada, the subprime mortgages are less than 3% of the mortgage market. However, Flaherty felt we need one common securities regulator. We have 13 for a population of 33 million.

Tax-Free Savings Account
Like Harper, Flaherty talked about the significance of the TFSA, which is similar to programs in the UK and US. He reminded us that there are no restrictions on the reasons for savings, no federal clawbacks. Young people benefit the most. Over time, 90% of Canadians will pay no tax on their savings. Already, 20,000 Canadians have used an online calculator to see their tax savings.

In wrapping up, Flaherty said, "I have gone on almost as long as it seems".

Summary
Each speaker spoke well and radiated confidence. Last year, Stéphane Dion --- in his only appearance --- did not. I'm looking forward to next year.

Links

• The Original and Overlooked Tax-Free Savings Account
• CALU public website (www.calu.ca)