CRA Prescribed rates for Q3-2010

Thanks to the comments from Jeff Usher, it appears my initial thoughts about the CRA prescribed rates were incorrect. I consider myself well-researched in these matters, but once in awhile, things slip and this was one of them. Thank you Jeff.

The CRA, on June 28, 2010, published the third quarter prescribed rates.

Apparently the reason for the delay is that Bill C-9 implemented a reduced rate of accrued interest for corporate overpayment of tax. Corporations were using the CRA as a savings account, where they were getting higher rates of interest than the banks. In the previous quarter, this amount was 3%, but going forward it will be 1%.

Canada Pension Plan not happy with Magna

Magna International is a dual-class stock that retained control of the corporation in the Stronach family.

The Canada Pension Plan is unhappy that the corporation recently agreed to a deal with the Stronach trust to convert their class of voting stock into regular common stock, at a very high premium – $300 million in cash, plus 9 million class A shares. At today’s prices for class A shares, this works out to approximately $920 million in exchange for the voting rights of the company.

Suffice to say, shareholders are not too happy about the matters, including the Canada Pension Plan.

However, this should be a huge lesson to those that invest in majority-controlled companies – your interests have to line up with the interests of the majority holder in order for you to make any headway on your investment. In the case of Magna, its majority holder (Stronach) clearly wants as much cash and liquidity out of the corporation as possible – and the common shareholders, including those invested in the Canada Pension Plan, will be paying the price.

What is interesting, however, is that the deal was structured in a politically astute manner – common shares went up after the announcement since Magna was already trading at a discount due to the adverse interests of the majority holder. It is the company, however, that will be paying the price to buy out the Stronach voting stake.

If you have shares in companies that are majority controlled, pay careful attention to these agency issues.

Summer Markets

Readers here might have noticed a lull in posting over the past week – it’s because I’ve been on a break and will continue to be so until mid-July.

A good deal of people on Wall Street take some part of the summer off – especially the month of August. Trading, as a result, becomes dominated by computer trading and volatility is typically higher due to decreased market volumes.

This last quarter has been quite dull on the trading front, but as the markets continue to dive, I am watching for opportunities.

Questrade – Nickel and diming

Although I do not use Questrade’s platform for active traders, I do use their basic web-based interface. I don’t look at it too often since I don’t actively trade with the account, but I notice they are trying to implementing a cap on the amount of real-time quotes you can request to 1,000 per month. Anything else above that would cost 1 cent each. This doesn’t really affect me, but I was curious as to why they made the decision.

My guess is that it was designed to prevent an abuse of the system where you can pull data through the service with an application like Quotetracker or something. I did ask their customer support the following question:

Is there any way that the real-time quotations can be disabled after the free 1,000 quotes per month are reached? Or will there be any way to know how many quotes I have used in a month to date?

Their answer was the following:

Unfortunately there is no method to view how quotes have been utilized. We are, however, working to have a feature implemented on our platforms. In the meantime, please contact us and we will advise you of how many you have used. Thank you and I apologize for the inconvenience during this process.

I find this to be very silly on both a business and user interface perspective.

First, the data fees they pay to the exchanges to provide their customers with real-time quotes is probably on a fixed-price basis (either for the whole company or per-customer), so the excuse they gave for implementing a price is nonsensical. Secondly, it is very likely that customers that have more ready access to real-time data will trade more, generating more commissions for them, so by charging for quotations it is likely detrimental to their business of transacting trades. Thirdly, a customer has no idea whether they will be incurring billing for quotations, and asking for a customer to contact support for something like this is ridiculous for both parties.

It looks like this was a snap decision and done without any serious thoughts of the repercussions.

I continue to use Questrade for registered accounts (RRSP, TFSA) and non-registered holdings of TSX debentures, but as I mentioned in my previous review of them, security continues to be a lingering concern for me. They really need to implement a policy whereby if your accounts get hacked that they will cover you – similar to BMO Investorline, etc. Until then, my recommendation of them is lukewarm.

Why Canada’s corporate tax policy is paying off in spades

As readers of any of my sites know, I was a very big supporter of the Harper government’s decision in late 2007 to reduce the federal corporate income tax to 15% in 2012; it is currently 18% in 2010; and will be 16.5% in 2011. It was 21% from 2008 and 22.12% in 2007.

First, you had Tim Hortons moving its corporate headquarters back to Canada, where they will realize a substantial cost savings in taxes vs. their US operation.

Today, you have Biovail and Valeant merging together (note that long-time investors would know Valeant formerly as ICN Pharmaceuticals), but the key paragraph is the following:

Following completion of the merger, the new Valeant will be headquartered in Mississauga, Ontario and will remain a Canadian domiciled corporation, listed on both the Toronto and New York Stock Exchanges. In addition, the combined company will retain Biovail’s existing principal operating subsidiary in Barbados, which will continue to own, manage, control and develop intellectual property for the combined company. The location of the combined company’s U.S. headquarters will be determined after the close of the transaction.

This is purely for tax reasons. In Valeant’s California headquarters, they are subject to corporate income taxes of approximately 40% – 35% federal and about 8% state (which is deductible from federal taxes).

In Ontario, the current tax rate is 18% federal and 14% provincial; the provincial component will be reduced to 12% on July 1, 2010, for a combined rate of 31% in 2010. In mid-2011 and mid-2012, Ontario’s provincial rate goes down half a percent, and in mid-2013 it goes down to 10%. So the company will face the following effective corporate tax rates:

Calendar year 2010: 31%
Calendar year 2011: 28.25%
Calendar year 2012: 26.25%
Calendar year 2013: 25.5%
Calendar year 2014 and beyond: 25.0%

Corporations moving to British Columbia currently face a 10.5% provincial corporate tax rate, which will be reduced to 10% in 2011.

For Valeant, they reported $217 million in pre-tax income in the past 12 months. A 15% tax cut on this amount amounts to a yearly savings of about $33 million or nearly 40 cents a share. Also, any synergy benefits in the merger would also realize a 75% after-tax savings, as opposed to 60% if they had remained in California.

It is this huge 15% tax advantage that will cause more businesses to escape the USA and get into Canada. The US is going to be forced to cut corporate tax rates, otherwise they will continue to see investment leak out of the country like a thin helium balloon. As long as Canada doesn’t reverse this decision (which the opposition Liberal party has attacked the Conservatives on this very issue of corporate tax cuts) we will continue to be the beneficiaries of what is a very sound corporate taxation policy.