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	<title>IGOPPCommentary &#8211; IGOPP</title>
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		<title>Changes to capital gains taxation: insidious consequences for the intergenerational transfer of Canadian controlled companies?</title>
		<link>https://igopp.org/en/changes-to-capital-gains-taxation/</link>
		<comments>https://igopp.org/en/changes-to-capital-gains-taxation/#respond</comments>
		<pubDate>Tue, 21 May 2024 19:41:45 +0000</pubDate>
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		<guid isPermaLink="false">https://igopp.org/la-fiscalite-et-le-risque-de-transformer-nos-fleurons-en-etoiles-filantes/</guid>
		<description><![CDATA[Two weeks after the budget was tabled, Finance Minister Chrystia Freeland now intends to ask Parliament to approve proposed changes to capital gains taxation in a stand-alone bill. This measure has met with an abundance of reactions. The people affected are an assorted group with very high incomes, of course, but these incomes often reflect, [&#8230;]]]></description>
		<content><![CDATA[Two weeks after the budget was tabled, Finance Minister Chrystia Freeland now intends to ask Parliament to approve proposed changes to capital gains taxation in a stand-alone bill.

This measure has met with an abundance of reactions. The people affected are an assorted group with very high incomes, of course, but these incomes often reflect, among other things, a unique situation: a significant capital gain arising from the sale of a business, a revenue property, a family cottage, etc. Few comments have been heard about the taxpayers who are by far the most affected, and for good reason: these are people who die and are taxed on their capital gains, calculated as if they had sold all their assets at the time of their death and for which payment must be made immediately, often forcing the estate to sell the assets to raise the necessary cash.

Even before the increase in the inclusion rate, capital gains taxation was already a major issue of concern for many entrepreneurs and families who control their businesses, and it's one that should be of concern to governments as well.

Indeed, how is it possible to transfer the company to one's estate, when the calculation of the tax payable on the transfer is based on the value of the shares used to maintain control? And, as is also often the case, the family that holds this control—although appearing to be wealthy on paper—does not have the liquidity to pay this tax bill, as the family fortune is largely tied up in the value of the shares. So, to settle the tax bill, the choices are limited and disconcerting to say the least: sell shares and reduce the stake below the threshold of control (and thereby make the company vulnerable to hostile takeover bids) or sell the company.

Of course, there are ways to ensure a temporary deferral, notably by setting up trusts. Some tax experts will suggest schemes to prolong this deferral somewhat. But all in all, these solutions are highly imperfect since they involve sophisticated planning and extremely restrictive choices.

More than 35% of the companies making up the S&#38;P/TSX Composite Index are controlled companies, including many of the major companies often referred to as flagships in different provinces or regions of Canada. At a time when a review of tax measures associated with capital gains taxation is underway, our governments have an opportunity to act by adjusting the tax system to allow tax
deferral on the transfer of a controlled company: this is a lever that our governments must explore.

Why take action?

The tax collected by the government at the time of transfer can be a seemingly large amount that helps make up for deficits. But the risk of seeing a company sold for the purpose of paying tax is an ill-advised gamble for our governments. Numerous studies have demonstrated the essential role played by the head offices of large—and not-so-large—companies in provincial or regional economic ecosystems. Indeed, these companies are deeply rooted in the social and financial fabric of their communities, helping maintain well-paid jobs in addition to providing a significant revenue source for numerous direct and indirect suppliers, including services provided by professionals of all kinds.

The amount of the taxes collected by governments on all the employment income associated with these companies, not to mention the direct tax revenues from the companies themselves, represents much more attractive annual and sustainable revenue than a one-off collection from the transfer to the estate.

Offering a tax deferral to families who control a company is therefore an investment. And a deferral means that, unless these families maintain control, any sale will eventually result in the payment of the amounts owing to the government.

However, an investment is not a gift. Several G7 countries have introduced rules to facilitate such transfers by allowing a form of tax rollover, conditional on preserving employment thresholds and maintaining activities locally. The ideas and solutions proposed by these countries to help maintain local businesses should be considered.

In the absence of any other mechanism for deferring the tax owing on the transfer of shares, it may seem preferable—all the more so since the announced increase in the inclusion rate—for the controlling shareholder to sell the company before their departure; in this way, they will potentially obtain a 30-40% premium for their shares, which, after the tax bill is paid, will leave them (and any heirs) with a net after-tax value equivalent to their current value, but without any increased wealth for the stakeholders and the community.

For those entrepreneurs who can still maintain control and transfer it, let's hope we don't, one day, have to announce the sale of their company to foreign interests for tax reasons. It's not too late to act. The long-term control of our economy is at stake.
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		<title>Corporate Purpose, ESG, stakeholders: what’s the deal?</title>
		<link>https://igopp.org/en/corporate-purpose-esg-stakeholders-whats-the-deal/</link>
		<comments>https://igopp.org/en/corporate-purpose-esg-stakeholders-whats-the-deal/#respond</comments>
		<pubDate>Tue, 17 Nov 2020 15:15:16 +0000</pubDate>
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				<category><![CDATA[Commentary]]></category>
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		<category><![CDATA[American governance]]></category>
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		<category><![CDATA[Shareholders]]></category>
		<category><![CDATA[Stakeholders]]></category>

		<guid isPermaLink="false">https://igopp.org/raison-detre-esg-parties-prenantes-a-quoi-cela-rime-t-il/</guid>
		<description><![CDATA[Since the publication in 1932 of Berle and Means’ The Modern Corporation and Private Property, “capitalist” societies have been engaged in a forlorn quest for an appropriate definition of the role, justification and “raison d’être” of large corporations. Except for the legal fiction of shareholders as owners, corporations of the 1950’s, 60’s and 70’s, were [&#8230;]]]></description>
		<content><![CDATA[Since the publication in 1932 of Berle and Means’ The Modern Corporation and Private Property, “capitalist” societies have been engaged in a forlorn quest for an appropriate definition of the role, justification and “raison d’être” of large corporations.

Except for the legal fiction of shareholders as owners, corporations of the 1950’s, 60’s and 70’s, were not really “owned” by anyone but controlled by management. In this context, the manager had to be a man (or a woman) of many constituencies, a nimble balancer of conflicting interests, an impartial purveyor of amenities to one and all, a human synthesizer of the rights and interests of all parties which might directly or indirectly be affected by the actions of the corporation. Whether managers actually internalized these norms of conduct is a moot point. That concept of the corporation gave rise to formidable, dominant companies, such as IBM, Johnson and Johnson, GM, GE.

However for the last 40 years or so, with the rise of “financial capitalism” and the clever linking of executive compensation to share price, “creating shareholder value” became the driver of management, the rallying cry of the executive corps. That worked well for the managerial class. No matter that all large corporations proudly brandish statements about their Vision, Mission, Values and Ethics, recriminations and discontent simmered and eventually crystallized around a bundle of expectations now assembled under the ESG banner. [Environment, Social and Governance]

Institutional funds, pension funds, asset managers of various stripes and index funds particularly have joined, indeed led the bandwagon, relentlessly pushing corporations to include ESG issues in their management. Most corporations have given in to the pressure with various degrees of enthusiasm.

The proxy advisory firms (ISS in particular), their noses firmly in the wind, have sniffed the trend and now intend to include ESG factors in their assessment of corporate governance.

That’s the context which led some 181 CEOs of large (mainly American) corporations, under the aegis of the Business Roundtable, to sign a solemn undertaking, a year ago or so. They committed to adopt and impose on themselves a “Purpose” of care for, and nurturing of, their stakeholders. Henceforth, corporate decisions will factor in the interests of various parties, including the civic society and Mother Earth.

Professor Colin Mayer, one of the promoters of the ‘corporate purpose”, puts it this way: “the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems”. Hum, all leaders of large corporations will subscribe to this broad and vague agenda.

Business circumstances, at least for the oligopolistic leviathans, are changing; the greatest threat to these corporations’ survival often comes from the social and political environment, not mainly or solely from the economic and competitive environment. Large companies with slack resources can cope with the piling up of new demands and expectations in matters of environment, social responsibility, diversity and so on. But three points need to be emphasized here:

1. In this quest for a stakeholder oriented corporation and the multiplication of new ESG mandates, what’s the role of the entrepreneurial spirit, the drive to create and build a business in a world of sharp competition and evolving technologies? The vibrancy of an economy rests on entrepreneurial activity. Let’s be careful, lest we collectively stifle the entrepreneurial drive.

2. As the demands and legal requirements imposed on business corporations largely single out stock-market listed corporations, the current drought of new businesses listing on a stock exchange may worsen as entrepreneurs weigh the costs and benefits of “going public” and private sources of funding mushroom.

3. In Canada, two rulings by the Supreme Court clarified the meaning of acting in “the interest of the corporation” as stipulated in the Canadian Business Corporation Act. Boards of directors in their decisions must give equal consideration to stakeholders and shareholders; boards should not favor any particular group in its decision-making. Basically, we have in Canada a stakeholder model of governance. The U.S. jurisprudence is not that clear on this issue; several legal scholars still argue that maximizing shareholder wealth should be the prime objective of boards of directors. For instance, Professor Bainbridge writes “The law of corporate purpose remains that directors have an obligation to put shareholder interests ahead of those of other stakeholders and maximize profits for those shareholders”.

That is the context for the BRT’s “Purpose” initiative: an unclear American legal framework combined with investor and societal/political pressures on management to adopt a sort of stakeholder model.

But In Canada, this whole agitation about “Corporate Purpose” is moot as stakeholder governance is the law! Canadian boards of directors should be governed accordingly although there is yet little empirical evidence as to how that legal fact has impacted governance in Canada.

When all is said and done, managing for the long term, factoring in the multiple interests of the broader society, desirable goals indeed, will only happen when the games of some financial types are checked and executive compensation is re-arranged to support these objectives. Otherwise, all this agitation is perfunctory, pro-forma, “sound and fury signifying nothing”.

&#160;

Opinions expressed in this article are strictly those of the authors.
]]></content>
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		<title>SEC Rule Amendments and Dual-class returns</title>
		<link>https://igopp.org/en/sec-rule-amendments-and-dual-class-returns-commentary/</link>
		<comments>https://igopp.org/en/sec-rule-amendments-and-dual-class-returns-commentary/#respond</comments>
		<pubDate>Thu, 20 Aug 2020 18:38:47 +0000</pubDate>
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		<guid isPermaLink="false">https://igopp.org/?p=12824/</guid>
		<description><![CDATA[1. ISS is finally leashed: SEC Amends Rules for Proxy Advisors On July 22, 2020, the Securities and Exchange Commission (SEC) adopted amendments to better regulate the activities of proxy advisors, such as ISS and Glass Lewis, and to ensure that clients of proxy voting advice businesses have reasonable and timely access to more transparent, [&#8230;]]]></description>
		<content><![CDATA[1. ISS is finally leashed: SEC Amends Rules for Proxy Advisors

On July 22, 2020, the Securities and Exchange Commission (SEC) adopted amendments to better regulate the activities of proxy advisors, such as ISS and Glass Lewis, and to ensure that clients of proxy voting advice businesses have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions.
In essence, proxy advisors have always benefited from an exemption from the information, legal risks and filing requirements of proxy solicitation. The SEC has now stipulated that this exemption will apply in the future only if proxy advisors abide by the following conditions:

 	They must provide specified conflicts of interest disclosure in their proxy voting advice or in an electronic medium used to deliver the proxy voting advice;
 	They must have adopted and publicly disclosed written policies and procedures reasonably designed to ensure that corporations that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated by the proxy advisors to their clients;
 	They ensure their clients will receive, in a timely manner, any statement, explanation and contestation issued by the corporations that are the object of the voting recommendation.

The SEC is thus responding to oft-stated concerns of many issuers about these heretofore lightly regulated but influential market participants.

Proxy advisory firms are not required to comply with the amended regulations until December 1, 2021.

Of course, ISS has already announced its intention to challenge in court this SEC ruling.

IGOPP is particularly pleased with the SEC’s amended regulations as it called for such actions in a 2013 Policy Paper [1], The Troubling Case of Proxy Advisors: Some policy recommendations.

The complete press release of the SEC, and the links to retrieve pertinent materials, can be accessed here [2].

2. New study on relative performance of US dual-class companies

In a novel approach to the subject, researchers have “constructed” an index of dual class shares for the period 2009-2019. The intention here is to assess the performance of a hypothetical fund that would be made up of all dual class shares in proportion to their stock market capitalization. The performance of the fund may then be compared to other index funds, such as, in this case, the CRSP US Total Market Index. The results for dual class voting structures speak for themselves, as shown in the Table below.



Clearly, the volatility-adjusted return ratio of the Dual Index (a close variant of the Sharpe ratio where the higher the ratio the better) is clearly superior to the ratio of the Market Index.

The Index includes all dual-class companies with ordinary common shares listed on NYSE, NASDAQ, or AMEX and total market capitalization in excess of $100 million. A reconstitution process of the Dual Index is carried out semiannually, at the end of June and December. In case of a delisting or collapse of the dual-class structure, the researchers reinvested the proceeds in the portfolio until the next Dual Index reconstitution.

As of December of 2019, the Dual Index included 178 dual-class companies valued at $3.4 trillion. The Index accounts for 89% of the market capitalization of all dual-class companies listed across major U.S. stock exchanges.

The next figure shows the cumulative growth of a one-dollar investment in the Dual Index (green line) relative to the cumulative growth of a one-dollar investment in the market index (blue line). The performance of the Dual Index is especially strong in the second half of the decade .



The complete study by authors Byung Hyun Ahn, Jill E. Fisch, Panos N. Patatoukas &#38; Steven Davidoff Solomon, released as Research Paper on July 28, 2020, is available here [3].

[1] https://igopp.org/wp-content/uploads/2014/04/pp_troublingcaseproxyadvisors-pp7_short_3_.pdf
[2] https://www.sec.gov/news/press-release/2020-161
[3] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3645312]]></content>
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