BC Rail: How badly were we hosed?

And when did the hosing start?

Tax pools.  Indemnification. Valuation.

The BC Rail Corruption trial sounds like a corporate taxation seminar hosted by a team of accountants and tax lawyers this week.  And that only appeals to a narrow slice of  people.

I’m not one of them but I worked hard to stay awake because Virk lawyer Kevin McCullough did a fine job of getting to the nub of the deal – the value of the tax write-offs acquired by CN.  And that leads to a very fundamental question:  How badly did BC taxpayers get hosed by the BC Liberals.

According to BC Rail director and head of the audit committee, Brian Kenning, the answer is “I don’t know.”

Here’s how the tax deal works – when CN bought BC Rail, they paid $1 billion and acquired losses that could be written off against taxes CN owed.  In 2003 the losses were valued at $300 million.

But there was a risk that the Canada Revenue Agency wouldn’t ratify the tax loss deal, so CN bargained for and got indemnification from the BC government.

In other words the BC Liberals promised to pay CN $300 million if CN couldn’t take advantage BC rail’s losses.  Plus the BC government sweetened the deal (isn’t it supposed to be the other way around), agreeing to pay 9% interest each year the losses weren’t utilized by CN.  Right now the books show BC will have to pay CN over $500 million if the losses can’t be used by CN.  By the time the deal comes to an end in 2013 the price will be $900 million.

I feel eyes are rolling back in their sockets….  It’s time to cut to the chase.

If the government ends up paying out $900 million to CN the $1 billion deal is only worth a meager $100 million to tax payers.  Pocket change for a profitable second-tier railway.  In fact, a real steal, so to speak.

McCullough asked Mr. Kenning the obvious question.  Did the evaluation committee – which Kenning sat on – evaluate the three final bids in light of this taxation deal with CN.  In other words, if CN gets paid back $900 million was CN’s bid still the best bid?

And Kenning said “no.”  The Evaluation Committee did no due diligence on the tax deal when assessing the bids.

But wasn’t it the evaluation committee’s job to evaluate the bids, you ask?  Well “no”, said Kenning.  Because the tax deal was negotiated by the government after the Evaluation Committee made its recommendation.

You can read that two ways.  The evaluation committee didn’t do its evaluation job or the government negotiated a better deal for CN after the evaluation committee picked CN.  Neither is good news for taxpayers.

This strange deal leaves a lot of unanswered questions like;

  • Why didn’t CP and Omnitrax get the same opportunity to do a tax loss deal?
  • Why didn’t the evaluation committee evaluate all the bids on the same terms?
  • And, who in government negotiated the tax loss deal with CN?  Who gave away the big money?

McCullough’s questioning and Kenning’s answer left me feeling like the real BC Rail owners – the citizens of BC – got hosed by their government.


That takes me to today’s events, which started off when I read RossK’s morning post over at PacificGazetteer.ca

RossK makes a compelling argument that the hosing began February 26, 2002.  That’s more than eight months before Kenning says the government made the decision to sell BC Rail and more than five months before minister of Transportation Judith Reid claimed the government had yet to decide whether to privatize BC Rail.

Questioning in court today seemed to corroborate RossK’s timeline.   Today the jury heard how BC Rail cut deals with its management to give them hefty payouts if BC Rail was privatized.  Those deals were cut in January 2002, just before the meeting RossK writes about.  Coincidence?  Maybe if you believe in fairy tales.

At the end of last week I wrote that the BC Rail trial matters to the HST debate because the trial reveals this government’s modus operandi: lie during an election, cut a deal that benefits your friends and hurts residents after.  Doesn’t seem like such a stretch two days into testimony this week.

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5 Responses to BC Rail: How badly were we hosed?

  1. RossK says:

    Ya, the Jan 2002 severence thing sure doesn’t hurt the Feb 26, 2002 starting gun hypothesis.

    Getting back to the indemnity thing…..Don’t forget that it was that same whacky crew of post- sale BCRail Execs who were livin’ large while the SpurLine lay fallow that put the same line into the year end ‘Summary Financial Statements’ every single year after 2003 that says we British Columbians shouldn’t worry our pretty little heads about this matter because, in their estimation, the chance of a payout being invoked was essentially slimmer than none.

    Or some such thing.

    Finally, if it was the government that negotiated the deal after the recommendation by the Evaluation Committee was made (and, if I remember correctly there were real concerns when the whole thing suddenly became a sale/not sale/990 year lease at the last minute), doesn’t it figure that maybe, just maybe, someone with the ability to bring all of the sides together might have been required to step into the fray?

    Again….Like Joy McPhail (way, way) before me…. I’m just wonderin’…..


  2. Ian says:

    And RossK who could that be… They’d have to be registered as a lobbyist… or would they?

  3. RossK says:



    Maybe in another country, I suppose.



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  5. Dave says:

    “By the time the deal comes to an end in 2013 the price will be $900 million.”

    Is there some document, a Contract that has a …… end to it?

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