Sunday, December 16, 2007

 

BC Rail's $2Billion tax shelter, the real prize

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"Lynx" wrote, in a comment today:

I want to include a link here to a stunning piece written by Kevin Potvin in January, 2004. In it Potvin theorizes that "BC Rail's $2 billion worth of tax shelter instruments may have been the real prize CN was after."

I remember reading it a long time ago but it is highly relevant to the discussion of the fairness report and what Charles River itself says in this regard - that in the end they were not privy to the detailed data on BC Rail tax shelters - and just had "to trust the government".

http://republic-news.org/archive/79-repub/79_potvin_bcrail.htm


This is an excerpt. It is long but it highlights what could be the greatest of losses to the people of BC in order for CN to gain the greatest of tax shelter prizes.

"Combined with the $1.2 billion in un-depreciated capital purchases, CN acquired in total $2 billion worth of tax shelter instruments for the princely sum of $250 million. Tax shelter instruments are extremely important to profitable companies because provincial and national corporate income taxes in British Columbia grab 38% of a company's reported profits in its tax returns. Reducing the profits a company must report reduces the taxes it must pay to governments. Companies with large carried-forward losses and large un-depreciated purchases have become increasingly attractive targets for take-over by larger, profit-making companies. It is often the case that the interest one company has in taking over another company is almost solely in the hidden value contained in its tax books, and can have little or nothing to do with its real assets or operations. BC Rail's $2 billion worth of tax shelter instruments may have been the real prize CN was after, while the actual assets and operations of BC Rail, worth just a potential $111 million annually, was simply a throw-in to legitimate the deal.

The firm hired to assess whether the Province received fair value in its sale of BC Rail explicitly disavowed any capacity to assess the value of the tax shelter instruments comprising the second half of the deal. The report generated by Charles River Associates states that, "historically, BC Rail has paid no income tax because of its relatively large backlog of" of tax shelter instruments. "We did not attempt to model the prospective tax strategies of an acquiring company," the report states.

The report further states that "We cannot offer much insight on the sale price" of the tax shelters "because we are not privy to the detailed data that would be required to assess a particular company's situation." The firm hired to assess the government's handling of the sale of BC Rail ended up simply trusting what the government said about its own transaction: "It is our understanding," Charles River Associates concluded, "the Province did compare the sale price of the [tax shelter instruments] to the potential future tax revenue that would be generated for the Province if the acquiring company did not have access to BC Rail's" tax shelter instruments. There is no documentation offered in the report to justify the authors' "understanding."

The report goes on to conclude, "It is safe to assume that there is sufficient inventory of [tax shelter instruments] to offset CN's income tax obligations to the Province of British Columbia for at least 25 years," and further, that "any future income tax revenue after 25 years is negligible."

This is an astonishing statement. If it's true that CN can expect to earn $6.7 billion in the next 60 years with BC Rail, and if the tax shelter instruments allow CN to avoid federal taxes as well, the $250 million portion of the sale is potentially worth more than $2.5 billion to CN, just on its operations of BC Rail alone. As the report explicitly states, "We can assume that in the future, CN will use the [tax shelter instruments] acquired as part of the BC Rail transaction to avert paying taxes." But the report further states that CN's entire operations in British Columbia, after acquiring BC Rail, will not be liable for any taxes because of its acquisition of BC Rail's tax books.

We don't know the size of CN's prior operations in British Columbia, but it is a substantial operator in this province. If its operations were roughly equal to BC Rail's operations prior to the purchase, then the benefits to CN in its purchase of BC Rail's tax books would exceed $5 billion. Had Charles River Associates evaluated the total value of the sale of BC Rail to CN, they would have concluded the package was worth close to $12 billion in anticipated profits to CN. If it's true that $750 million was a fair price to pay for the $6.7 billion in anticipated income from BC Rail operations, then it stands to reason that $12 billion in effective income should have been sold for no less than $1.75 billion. CN paid in total only $1 billion.

That $750 million gain is no chump change. The firm hired to assess the fairness of the deal admitted in its own report that it was not privy to the information necessary to do its job. It states that it relied on a vague understanding that someone in the finance or transportation ministries assessed the value of the hidden tax shelter assets on BC Rail's books at $250 million, instead of the $1 billion they may be worth.

Whoever within these ministries provided this understanding to the government and to the firm that assessed the fairness of the deal would have been in a key position to personally profit by arranging a $750 million gift to the executives of the private company, CN."


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Comments:
Correct me if I'm wrong Mary, but wasn't there a column in the Business Section of the G&M that made or hinted at this same conclusion?

I have this vague recollection of reading something there from the time of the original deal that also mentioned the tax costs of the sale to the BC treasury - if not the Canadian one.

I wonder if there's a mention of it somewhere in your achives...which, by the way, are an unbelievable asset for journalists and the interested public.

You deserve a lot of credit for the job you're doing.

Thanks.
 
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Your kind remarks are much appreciated, Anonymous 1:13.

Something is in the back of my memory-box too, about the tax loss.

My recollection has Joy MacPhail tearing the accounting to shreds in a Hansard debate with, I think, Gary Falcon. Joy kept deducting the losses (through tax benefits to CN) from the vaunted $1 billion until there wasn't much left.

So far, I haven't found it ... even though I have a feeling its right here in this web-site, too.

Also in the back of my mind, Anon 1:13, is the archival benefit of keeping as much information and analysis as possible in one accessible place for future study.

It really kills me, the way the CanWest news services seem willing to pretend that BCRail never existed.

Just watch this evening TV news or tomorrow's newspapers and see if they make any mention today's Supreme Court Hearing.

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It is not nearly as easy now to capture the loss carry forwards of an acquired company as it has been in the past.

In addition, the losses expire over time.

25% is not an unreasonable number to apply. If you read any fairness opinion on any transaction you will note that the auditors always cover their butts with statements that try to push liability back to the parties involved and away from them.
 
Snip ....."Something is in the back of my memory-box too, about the tax loss." - BC Mary

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June 28, 2009 TODAY

While reading through
"Before: The Honourable Madam Justice Bennett

Oral Reasons for Judgment

In Chambers
November 14, 2006" which took place a month before this Post was written I came across this: Item 20]

"As a result of reviewing the documents, the defence sought more disclosure. A number of the documents that they subsequently requested had, in fact, already been disclosed but were scanned into the wrong file and the index provided was so vague what was in fact contained in the file could not be ascertained. For example, Mr. Basi's tax records were filed in Mr. Virk's file. A memo relating to Commissioner Zaccardelli was filed under the file called "Operational Plan" and is listed as “correspondence memorandum”. The report from Mr. River which is of some importance, was filed under “correspondence” and called a “Report of Findings” with no reference to Mr. River."



MR. RIVER??? not CRA, not Charles River Assoicates which did the Fairness Report on the Sale of BC Rail to CN Rail, ..... but simply Mr. River. In the reporting done by Canwest there has always been an indication that it was a company of individuals who had been doing the report, not a singular individual....... which led me to do a search on the internet on Mr. River and found Kevin Potvin's excellent column Accounting scandal at BC Rail?.

Problem is you didn't include the last two paragraphs of his column in this Post. Kevin Potvin also wrote:

"It states that it relied on a vague understanding that someone in the finance or transportation ministries assessed the value of the hidden tax shelter assets on BC Rail's books at $250 million, instead of the $1 billion they may be worth.

Whoever within these ministries provided this understanding to the government and to the firm that assessed the fairness of the deal would have been in a key position to personally profit by arranging a $750 million gift to the executives of the private company, CN."



Gary Collins and Udhe Singh (Dave) Basi comes to mind, so too does Judith Reid and Bobby Singh Virk.



CN Rail is the key to this $250 Million Deal and the non-payment of taxes to British Columbia for the next 25 years.
 
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