Wednesday, November 01, 2006

BCE Blindsided By Canadian Gov't

Bell Canada (NYSE:BCE) has been blindsided by the Canadian governments announcement to tax income trusts. The minority conservative government, which had campaigned on not applying this tax has turned on a dime and changed their mind. BCE announced their quarterly earnings Nov 1. Earnings were off. On Oct 11 they had announced their intention to convert to an income trust. Management included this comment "Yesterday the federal government announced proposed changes to Canada's taxation system. Finance Minister James Flaherty said the changes are designed to level the playing field between trusts and corporations," said Mr. Sabia. "The Minister's announcement clearly has a significant impact on our proposed conversion and the immediate benefits such a conversion would have delivered to our shareholders. We will assess the proposed changes over the coming days and evaluate our options. In any case, we will continue to build our business to create long-term, sustainable, shareholder value," added Mr. Sabia. "We will proceed with plans to eliminate BCE's holding company operations."

BCE will almost certainly not convert. The real political question becomes will Canada lower its corporate tax rate to become competitive internationally. This may be on the agenda for the next federal budget. However widespread thinking is that the conservative minority government will fall and a national general election will be held. Therefore the tax reduction question will remain unresolved.