Fording Tax Avoidance Deal: Lots of Unanswered Questions

Includes: BMO, BNS, CM, FDG, RY, TECK
by: Mark McQueen

The C$13 billion “Fording trade” settled the other day, which was one of the rare positive events for

Bay Street
dealers over the past few months. Positive, that is, if you are in the fee business, but not so for the Canadian taxpayer.

Canada’s banking system had the Teck Cominco (TCK) acquisition of Fording Canadian Coal Trust (FDG) tied up six ways from Sunday, which begs the question: if you are so hard up for capital, where did the $9.8 billion in loan capacity come from? To my pleasant surprise, CIBC (NYSE:CM), Royal Bank (NYSE:RY) and Bank of Montreal (NYSE:BMO) are each providing 13.3% of Teck’s $9.8 billion bridge and term loan facility. Then there was the C$2.3 billion that Scotiabank (NYSE:BNS) had handy in October to help Teck with some nifty tax “planning.”

It was just the other day that we all were hearing about the capital relief needed to keep the Canadian banks sailing in the right direction. The federal government stepped up to the plate with a C$25 billion program via the Canadian Mortgage and Housing Corp. [CMHC], along with some expansive new collateral posting rules at the Bank of Canada. In addition, the Canadian Bankers Association was understandably grateful:

Today’s [Thursday] announcement by the Minister is an important measure in making credit more available in the consumer marketplace. This is a safe, efficient and economic way of facilitating credit markets.

For some of us, this was a market-distorting event (see prior post “Political expediency trumps free market” November 3-08). However, as Wednesday's Globe and Mail reported, according to at least one bank, it wasn’t nearly enough:

"The rest of the world is putting hundreds and hundreds of billions of dollars into their systems,” a top executive at one of the big banks said yesterday [Tuesday].

Finance Minister Jim Flaherty announced a new program on Oct. 10 that allows Ottawa to buy C$25-billion of mortgages from banks in order to free up new lending capacity. That program is a step in the right direction, but needs to be dramatically ramped up, bankers argue.

"They could have done $100-billion by now at very low spreads and put a lot of attractive term financing into the Canadian marketplace, which we’re badly in need of and [which] every other country in the world has access to,” the executive said.

The irony of this complaint must be clear to the unnamed bank executive. The federal government is being asked to ramp up the backdoor subsidized financing program represented by the C$25 billion CMHC facility. However, according to media reports, these very same Canadian banks helped Teck “maneuver” to avoid a C$4 billion tax bill. All right there in plain sight for Canadian taxpayers and CRA to see. When the federal government announced the C$25 billion CMHC facility on October 10, (ostensibly needed to keep the economy rolling in new SME loan capital), do you think officials advised Finance Minister Jim Flaherty that one of the first demonstrations of the success of this bank subsidization program would be Scotiabank’s C$2.3 billion Fording Unit hotel strategy?

Yes, Minister, we are providing the very capital to Canada’s banking system that they are in turn using to help Teck avoid a C$4 billion tax bill.

On Thursday, when the Prime Minister met with Canada’s bank leadership and heard their tales of woe, one can only hope that someone in his delegation asked the obvious question:

You want us to give you access to more cheap capital, just so that you can help the next Teck that comes along with a $4 billion tax bill they want to avoid?

It wasn’t that long ago that Tyco’s (NYSE:TYC) HQ fled the United States for Bermuda, just to reduce its corporate tax rate (36% became 23%). Then Stanley Works tried to follow in 2002. One day, a brave U.S. official said, and I paraphrase: “you are doing that just to avoid paying tax and we won’t allow it”. The U.S. Congress held hearings, and tax-dodging CEOs were accused of being “unpatriotic” by their public leadership.

Here at home, the story is quite different, indeed.

Disclosure: We own BMO and BNS in our household.