With all this pension-driven activity heating up around the blue-chip phone company, it’s raising some questions about the growing gap between cash-rich public pension funds and the smaller private sector pension funds under which many other Canadians are covered. With only the biggest funds able to throw their hats in the ring for BCE(a deal said to be in the range of $32 billion), where will that leave smaller funds and investors also struggling to meet their own liabilities? And it begs the question down the road, if more large publicly traded Canadian companies are taken private for the benefit of a few public sector funds and their members, where will that leave the rest of the pension funds? Clearly, a major debate is in the works.

Malcolm Hamilton, worldwide partner with Mercer Human Resource Consulting in Toronto, is one of the pension industry experts voicing some concern over the potential ability of large public pension funds to buy big Canadian companies and take them private. He thinks any decision on the part of the government to allow such a takeover would be bad tax policy, because it would allow public sector pension plans to do things that other tax sheltered investors can’t. The crux of the argument lies in the federal government’s decision a few months back to put the kibosh on income trusts. As a result, Hamilton says, many pension funds are looking for another way to avoid the double taxation of corporate profits inherent in public equity investing. “This is something the Feds didn’t bargain on,” he explains. “There are a number of public sector pension plans in Canada that are large enough, working alone or in conjunction with others, to buy large corporations and change their capital structures. By buying a company, taking it private, levering the capital structure by taking on debt and reducing equity, a pension plan can eliminate much of the corporate income tax,” explains Hamilton. “The objective is to distribute corporate earnings as interest, which is taxed once, rather than as dividends, which are taxed twice. By taking BCE private and reorganizing it, pension plans can eliminate much of the tax that BCE would otherwise have paid going forward—which would be fine if other tax sheltered investors were given the same opportunity.” So, are big private equity deals the next big tax break for pension funds after income trusts? Possibly—but you have to be really big to do it.

Tax tricks