October 3, 2017

Community Comment re proposed tax changes, potential benefits to the Minister of Finance: Is it Fair?

Community Comment received today:

Finance Minister Morneau’s father started, Morneau Shepell,  one of the few financial organization with tools that can partially offset the draconian tax reforms for those who will be most affected (e.g., professionals, doctors, small businesses, entrepreneurs, farmers, etc.). Moreover, according to the Ottawa Citizen, as of October 28, 2015, Minister Morneau owns or controls 2,066,480 shares in the company with a value of $42,776,136 at yesterday’s close of $20.70. Although these are likely being held in a blind trust until the Minister is no longer an MP, the questions is, how much is he likely to benefit from measures he is personally responsible for enacting?

Cathren Ronberg, Director of Corporate Relations for Morneau Shepell wrote a letter to the editor of the National Post on September 29, 2017 where she said the claim “that Morneau Shepell will benefit from the increased sale of Individual Pension Plans if the federal government’s tax proposals are enacted as currently proposed. This is false. Individual Pension Plans currently represent less than one 25th  of one per cent of Morneau Shepell’s revenues. Moreover, while we continue to support clients who purchased these products in years past, we have not actively marketed this product since approximately 2012 and have no plans to do so.”

However, the question remains that in spite of not currently marketing Individual Pension Plans, being one of the few sources for these, inevitably there will be a windfall to Morneau Shepell. Therefore, what is the value of these tax changes to Minister Morneau?

Looking at the numbers, John Ivison claims in a September 21st Financial Post article that “only 300,000 private corporations report some kind of passive investment.“ Taking this at face value, and assuming the average holding is a mere $100,000, this translates to $30 billion being held in passive investments. With so few options to the holders of these accounts, and being extremely conservative, one could imagine 10% flowing to Morneau Sheppel. That is $300,000,000.

Based on the company’s latest year end financial statements (2016), they were profitable and reported operating revenues of $592 million, with an earnings per share (EPS) of $0.49. Since $300 million represents a 50% increase in revenues, it would probably bump the EPS to the $0.75 range. That could increase the value of Minister Morneau’s holdings to around $64.1 million.

The “funny thing” is if/after the Finance Minister leaves politics and decides to cash in some of these shares he would pay the lower tax rate of 50% versus the 73% all the affected doctors, professionals, farmers, small business owners, etc. will have to pay.

Now is that fair?