Tuesday, April 03, 2007

What's In Store for Private Equity in Canada?

Since there has been much talk in both the new and old business media about moves afoot in the US and Europe to legislate changes to the tax structure of Private Equity ventures, and since Lee Distad's Professional Opinion is dedicated in part to presenting a Canadian perspective on business and industry, and since nothing either amazing or stupid has happened in Consumer Electronics in the last two days, I thought I would bring this up.

For your enjoyment, Canadian Business columnist Jack Mintz's column this week deals with how the Federal Government is taking a look at Private Equity.

Here is the nub. In the United States, pension plans are less able than they are here to participate in private equity capital, since they are subject to the unrelated business income tax, which applies to business investments held by the plan. Thus, for example, a Canadian pension plan can buy out an oilsands development and restructure it with debt to eliminate corporate tax payments; in the United States, a special tax would be paid on income. If debt restructuring leads to a significant competitiveness issue, whereby pension-funded investments have a lower cost of capital to acquire Canadian businesses, as has already happened in real estate markets, watch out — the taxman might be at the door.

Read the whole thing here.

I consider myself somewhat laissez-faire small-"l" libertarian (definetely not a foaming at the mouth, gun-toting, tinfoil hat-wearing large-"L" Libertarian). That said, I am strongly opposed to government fooling around with the tax code evertime some clever finance monkeys find a way to generate huge returns on their investment and at the same time pay less tax on it. The whole debacle last fall on the Income Trust issue (not that many of the late-to-the-party trust conversions didn't deserve to have much of their value stripped from them in the free-fall that followed) is a good reminder of what happens when the government decides to change horses in mid-stream on economic policy. Rewriting tax code is seldom motivated so much by the desire to enact social good as it is a greedy attempt to shore up government spending by changing the rules on how hard they are allowed to squeeze.

What do you think?

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