The Legislature Raids

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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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