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(May 14, 2007) Federal Finance Minister Jim Flaherty addressed the Toronto Board of Trade on Monday, to clarify the government’s proposed anti-tax-haven initiative.

Corporate Canada has been pressuring Flaherty to rescind a controversial tax measure that eliminates interest deductibility on investment loans used by foreign subsidiaries of Canadian companies. In his speech to the Board of Trade, Flaherty asserted that the government will not rescind the measure, but it is putting a five-year moratorium on it to give Canadian companies time to adjust their financial strategies.

“We are providing corporate Canada with a transition period of almost five years to comply with these rules; we think this is fair and reasonable,” Flaherty says.

Under current tax laws, a Canadian company is allowed to claim the interest on a loan used to finance foreign investment. The proposed new rule is to prevent what the government calls “double-dipping.” This is when a Canadian corporation takes out an investment loan and gives it to a third-party company in another country to re-loan to one of the Canadian company’s subsidiaries in a third country. Flaherty argues that this effectively allows the Canadian company to claim an interest deduction on the same loan twice.

Flaherty says that the new law prohibits Canadian companies from doing this. But critics of the measure say that the new rule handicaps Canadian companies in the international marketplace since multinationals from other countries will not be prohibited from using similar measures and will therefore have a competitive advantage.

Flaherty counters that revenue from the proceeds of the anti-haven initiative and a lower domestic corporate tax rate will offset the anti-haven initiative.

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OSC seeks comment on hearing rules

(May 14, 2007) The Ontario Securities Commission is calling for public comment on proposed changes to how hearings are conducted. If approved, the proposed Rules of Procedure of the Ontario Securities Commission would replace the current Rules of Practice.

For the most part, the revised document simply clarifies the existing rules — for example, it tightens definitions — and codifies actual practices that have been in place since 1997.

One change that could affect those who find themselves slated for a hearing is the altered deadline for submitting documents prior to a hearing. The new rules will require full disclosure of related documents 20 days before the commencement of a hearing, instead of the current 10 days. There is, however, no indication that the subjects of the hearing will be given an additional 10 days’ notice prior to the hearing.

The new rules also set out criteria for the OSC to meet in order to claim costs of an investigation, enabling the respondent to test the validity of the claim.

The full draft of new rules is available on the OSC website and can be accessed by clicking here. Comments on the new rules may be submitted in MS Word format to John P. Stevenson, secretary to the Commission, at jstevenson@osc.gov.on.ca. The comment period closes July 10, 2007, at 5:00 p.m.

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S&P blasts retailers for reporting methods

(May 14, 2007) Standard and Poor’s points out that the accounting practices of retailers have a tendency to hide the amount of debt they are carrying.

Companies in general tend to understate debt. In a sample of 50 large, rated companies, Standard & Poor’s Ratings Services found that the amount of leverage carried by a rated company is on average 25% larger than what is reported by company management. This difference was far more pronounced in the retail sector, with a 43% difference between the reported numbers of management and the adjusted numbers of Standard & Poor’s.

S&P attributes a great deal of this discrepancy to the reporting of operating leases. Among the Canadian retailers included in the sample of 50 rated companies, there was more than $1 billion of non-cancellable lease obligations — which S&P considers to be debt-like — kept off the balance sheet. This off-balance-sheet treatment resulted in a lease-related understatement of reported leverage of 47% among the retailers sampled.

Retailers also tend to exaggerate their “free” cash flow. The numbers presented on sampled retailers’ cash flow statements were materially overstated by 55% using S&P credit ratings framework.

“There are certain accounting practices that are perfectly allowable under Canadian GAAP that nonetheless result in material misrepresentations of economic reality in our view. Operating lease accounting is one of them,” said Kevin Hibbert, Canadian director of financial reporting. “Although numbers might not lie, they can unintentionally misinform.”

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CI completes purchase of Rockwood shares

(May 14, 2007) CI Financial Income Fund announced Monday that it has acquired all of the outstanding common shares of Rockwater as is required by acquisition provisions of the Business Corporations Act of Ontario.

CI says the certificates representing outstanding Rockwater shares have been cancelled. Computershare Investor Services Inc., agent for Rockwater, holds in trust the amount to be paid to the holders of the outstanding cancelled Rockwater shares not yet tendered.

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(05/14/07)