Video Killed the Radio Star. Will Unions or Corporate Greed Kill the Twinkie…

Hostess Twinkies. Yellow snack cake with cream...
Hostess Twinkies. Yellow snack cake with cream filling. (Photo credit: Wikipedia)

The first part of my title is correct.  The video killed the radio star, but the second part of my title is still playing out, although all rhetoric seems to indicate that the end of the Twinkie – and Hostess Foods, is near. 

It’s an interesting scenario playing out and after reading this, you tell me which side you think is at fault and if you were the other side would you blame them?

Start with these ingredients;

Enriched wheat flour, sugar, corn syrup, niacin, water, high fructose corn syrup, vegetable and/or animal shortening –  – containing one or more of partially hydrogenated soybean, cottonseed, canola oil and beef fat, dextrose, whole eggs, modified corn starch, cellulose gum, whey, leavenings (sodium acid pyrophosphate, baking soda, monocalcium phosphate), salt, con starch, corn flour, corn syrup, solids, mono and diglycerides, soy lecithin, polysorbate 60, dexterin, calcium, calcium caseinate, sodium stearoyl lactlate, wheat gluten, calcium sulphate, natural and artificial flavors, caramel color, yellow #5, red #40.

Put that all together and you get a Twinkie, which was invented in 1930 by a baker at the Continental Baking Company when they realized that several machines used to make cream-filled strawberry shortcake sat idle when strawberries were out of season.  So the bakers created a snack cake filled with banana cream, and called it a Twinkie.  During World War II when bananas became rationed, the company switched to a vanilla cream filling.  In 2007, banana-cream Twinkies were  permanently restored (although I have never had one).  

On January 11th, 2012, Twinkie manufacturer Hostess filed for Chapter 11 bankruptcy protection.  Hostess – maker of Twinkies, Ho Ho‘s, Wonder Bread, etc., blamed in on their customers deciding to consume healthier foods.  On the brink of closing down, Hostess hired a new CEO who accepted a wage of $1.00 to see them through bankruptcy protection, which may all be for not as workers at Hostess Brands have threatened to strike if the company imposes “unfair” contract terms, including wage cuts.

The workers are members of the Teamsters Union which represents about 7,500 of the company’s 19,000 employees, said that more than 90 percent of its Hostess members voted to authorize a strike if “unfair contract terms” are approved as part of its bankruptcy proceedings.

Now bankruptcy is nothing new for Hostess which – founded in 1930 – previously filed for bankruptcy in 2004 and re-emerged in 2009. The company has about $860 million in debt.

Here is the hold up; The company’s new CEO, Gregory F. Rayburn – who dispels the myth that their industry is bound to fail as consumers reach for healthier and healthier foods, citing booming markets in chocolate – said Hostess wants to cut annual pension contributions from $103 million to $25 million. Hostess also wants to change work rules that sometimes require two trucks instead of one, and they want to outsource deliveries to small stores.

The union has announced they will reject the offer, make a new proposal, and are willing to strike which could spell the end of Hostess and would ultimately see the 7,500 unionized workers put the other 12,500 workers out of jobs too by their actions.  

Apparently employees already accepted big concessions back in 2008 and back in February then union voted to authorize a strike, and the union vowed Saturday that workers would walk off the job if the bankruptcy judge agrees to the company’s cuts.

Hostess countered by saying if workers strike, they will be forced to shut down the company and liquidate assets.

Amazing, eh?

I read through several articles but could not figure out why the union was digging in their heels and taking such a harsh stance which would ultimately shut down the company and force both unionized and non-unionized workers out of jobs.  I worked in a unionized environment for almost 11 years and say what you will about unions, they are looking out for the best for the employees…

The I found this missing tidbit of information: 

Before the company filed for bankruptcy protection, eight top executives got pay raises last year of up to 80%.

In April, some of the executives sided with the CEO and agreed to accept $1 a year in income until the company comes out of bankruptcy or December 31st, presumably with all these reduced pension costs, whichever comes first.  some of the other executives wisely gave up their pay raises altogether.

Boy, the optics here look bad.  Why votes yourselves a raise if the company is heading into bankruptcy?  That looks bad to the employees, it looks bad to the creditors who are getting $0.10 on the dollar and it looks bad publicly.  Then again, the unions need to understand by striking they are not looking out for the 7,500 employees they represent but their actions are impacting 15,000 employees and because there are non-unionized workers does that mean no one looks out for them too?

This is an ugly battle and the outcome will be playing out in the media over time.

Stay tuned.

(P.S. It’s an urban legend that Twinkies have a shelf life of 25 years.  According to experts a Twinkie has a shelf life of 7-10 days.)

Who knew?

Some basics of Canadian Investing; Mutual Funds, Eligible Dividends and Deferred Tax

Here is a brief introduction to the absolute basics of investing Canada. If you know this, you really just know the basics.  If you do not know much about Mutual funds, Eligible dividends, income trusts, and deferring taxes owing then trust me, this is the tip of the iceberg.  The Investment Fund Institute of Canada (IFIC) has a mutual fund course as probably does the Canadian Securities Institute (CSI).  Both are sought after for entry into the financial sector.

At the very basic, here are the 2 main types of tax-sheltered investments you probably have heard about – RRSP or RRIF.  In both cases, you put money away into these investments which are NOT taxed at year-end.  you pay taxes when you withdraw or remove the funds after certain milestones, such as age 65. 

Investments that generate capital gains or Canadian source dividends are taxed more favourable than interest income because interest income earned from investments such as T-Bills, bonds, and GIC’s are generally taxed at the highest marginal tax rate.
• Dividends earned from a Canadian Corporation are taxed at a lower rate than interest income.  This is because dividends are eligible for a dividend tax credit, which recognizes that the corporation has already paid tax on the income that is being distributed to shareholders.
o This only applies to dividends from a Canadian corporation.
o Dividends paid from a foreign corporation are not eligible for the dividend tax credit.

As of 2006 there are now two types of dividends, eligible and non-eligible dividends, and they are treated differently from a tax perspective.
• Eligible dividends include those received from a public Canadian corporation and certain private, resident corporations that must pay Canadian tax at the general corporation rate. As a result, they have a federal tax credit of 18.97% and are grossed up by 145%.
• Non-eligible dividends include those received from Canadian-controlled private corporations not subject to the general corporate tax rate.  They have federal tax credit of 13.33% and are grossed up by 125%.

This change was introduced by the government of Canada in order to present a more balanced tax treatment between corporations and income trusts as Canadians were investing more and more in income trusts and less and less in corporations and why wouldn’t they, since prior to 2006 income trusts were not taxed on any income allocated to unit holders, whereas dividends paid by a Canadian corporation are paid out of after tax earnings. 

To combat this, many corporations began to restructure their operations to become income trusts.  Something had to be done.

In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of interest, royalty or lease payments, which are normally deductible in computing the operating entity’s income for tax purposes.  These deductions reduce the operating entity’s tax to nil.   

The trust “flows” all of its income received from the operating entity out to unitholders.  The distributions paid or payable to unitholders reduces a trust’s taxable income, so the net result is that a trust would also pay little to no income tax, which is never a good thing in the government’s eyes.

So who then gets hit with the tax bill??  The net effect is that the interest, royalty or lease payments are taxed at the unitholder level;
1. A flow-through entity whose income is redirected to unitholders, the trust structure avoids any possible double taxation that comes from combining corporate (T2) income taxation with shareholders’ dividend taxation
2. Where there is no double taxation, there can be the advantage of deferring the payment of tax.  When the distributions are received by a non-taxed entity, like a pension fund, all the tax due on corporate earnings is deferred until the eventual receipt of pension income by participants of the pension fund.
3. Where the distributions are received by foreigners, the tax applied to the distributions may be at a lower rate determined by tax treaties, that had not considered the forfeiture of tax at the corporate level.
4. The effective tax an income trust owner could pay on earnings could actually be increased because trusts typically distribute all of their cashflow as distributions, rather than employing leverage and other tax management techniques to reduce effective corporate tax rates.  It’s easier to distribute all the funds out and show nothing being retained that it is to implement strategies to reduce corporate tax owing which is the path most often taken. 

Where can a holder find their dividends reports?  Dividends are usually shown on the following CRA slips:
• T5, Statement of Investment Income
• T4PS, Statement of Employees Profit Sharing Plan Allocations and Payments
• T3, Statement of Trust Income Allocations and Designations
• T5013, Statement of Partnership Income
• T5013A, Statement of Partnership Income for Tax Shelters and Renounced Resource Expenses

When completing a Canadian tax return, where should a holder enter their dividend information?

Enter on Line 180 the taxable amount of dividends (other than eligible dividends) as follows:
• box 11 on T5 slips
• box 25 on T4PS slips
• box 32 on T3 slips
• box 51-1 on your T5013 or T5013A slips.

Enter on Line 120 the taxable amount of all dividends from taxable Canadian corporations, as follows:
• boxes 11 and 25 on T5 slips
• boxes 25 and 31 on T4PS slips
• boxes 32 and 50 on T3 slips
• boxes 51-1 and 52-1 on your T5013 or T5013A slips.

What do I do if I did not receive an information slips?

Ignore it and the CRA will let me off the hook?  No chance.  If you did not receive an information slip, you must calculate the taxable amount of other than eligible dividends by multiplying the actual amount of dividends (other than eligible) you received by 125% and reporting the result on line 180.  You must also calculate the taxable amount of eligible dividends by multiplying the actual amount of eligible dividends you received by 141%. Report the combined total of eligible and other than eligible dividends on line 120.

So what exactly is a capital gain?

Capital gains occur when you sell an asset for more than you paid for it. This gain is offset by any losses and can be further reduced by any expenses that are incurred by the purchase or sale of the asset – resulting in net capital gain.
Taxation of capital gains: 50% of a net gain is taxable at the appropriate federal and provincial rates.

My accountant advised me I need more “Tax deferral”.  What does she mean?   She means contributing the maximum amount to your RRSP which provides an immediate tax deduction and tax sheltered growth as long as the investment(s) remain in the plan.

Other less commonly used strategies include:
• Universal Life Insurance is a policy that combines life insurance coverage with a tax deferred investment component. Premiums paid are first used to ensure life coverage and the balance accumulates in an investment account where it grows tax deferred.
• Registered Educations Savings Plan (RESP) is a plan where contributions are used to fund a child or grandchild’s post secondary education costs.
o initial contributions are not tax-deductible
o any income earned within the plan is only taxable in the hands of the student at the time of withdrawal.

More is coming in the next few days, weeks and months…