Manitoba Telecom Systems

by

Bruno Esteu, Caroline Gilbert, Alexander Hilmi, Amanbir Saini, and Shubhnit Singh

Social Parasite or Accounting Marvel?

Manitoba Telecom Services Inc. (MTS), a telecommunications company serving the province of Manitoba, has been profitable for over a decade – but has only had to pay cash taxes at a single point since 2004. Through the legal use of use of federal tax credits, pension investments, loss carry-forwards and CCA asset pools, MTS has been remarkable in its ability to bolster profits for owners and shareholders while avoiding tax contributions year after year.

This analysis answers how MTS was able to avoid taxation and speculates the important question: if the CRA has legally allowed for MTS to engage in tax avoidance, why does it feel so wrong?

Profits vs Tax Expenses

The two fundamental activities behind running a business are the generation of revenues and the minimizing of costs, and if done well, leads to profits for its owners and/or investors. Businesses must also consider taxes, the percentages of their revenues required by the state to pay for the infrastructure, safety and organization of the environment required to conduct business. Taxes are an expense which raises costs and lowers profits, so for many companies such as Manitoba Telecom Services, planning for and attempting to minimize tax expenses boosts overall profitability.

MTS is an adept tax planner; the company has only had to pay cash taxes at a single point since 2004 – when they finally contributed $1.2 million in tax expenses in 2010. Their effective tax rate in terms of what they actually contributed in cash averages 5% over the course of over a decade, and the company has issued dividends every year since 2004! Moreover, the company forecasts it will likely not have to pay any taxes until 2019.

But how?

Tax Deductibles & CCA Assets

MTS has collected tax deductibles through large contributions to its employee pension plan. Moreover, since communications equipment depreciates faster in value, MTS was able to build up a sizable CCA asset pool, which it deferred claiming to extend its tax shield. And last, through the acquisition of Allstream in 2004, the company gained the benefit of all Allstream’s tax loss carry forwards.

Allstream Purchase

In 2004, MTS purchased Allstream, another telecommunications industry firm, for $1.7 billion. This allowed MTS to benefit from future revenues generated by Allstream, but it also gave MTS a significant balance of unused Allstream’s tax losses. Tax loses are accumulated tax benefits that the company can use to reduce its future tax payments. After the merger, MTS happily took the tax assets from Allstream and was able to use these against future income taxes – this is why such a large number ($839.60M) appeared against Future Income Taxes: long-term on MTS’ 2004 Annual report.

Capital Cost Allowance

Aside from tax assets, another tax benefit coming from the acquisition of Allstream was the capital cost allowance that arose from the $2B investment MTS made into Allstream to upgrade its network infrastructure. CCA in this case was deferred until only after the carry- forward losses of Allstream had entered their expiry, thus allowing MTS to continue their effective tax avoidance strategy. They even attempted to sell Allstream in 2013 while still attempting to retain the tax assets they had secured in its initial purchase. This sale was blocked, but they did successfully sell Allstream to Zayo Group Holdings in an all-cash transaction of $465 million. In addition to the additional cash, which was partially used in share buybacks to increase their Earnings Per Share, one of the benefits which MTS was happy to retain from the eventual sale was the vast majority of the tax assets from its original purchase of Allstream. The estimated net present value of these assets is approximately $242 million.

SR&ED Tax Credits

The company has received federal tax credits for its investments in research and development. The SR&ED tax credit program is the largest federal government program that funds R&D in Canada. It is a refundable tax credit program, meaning that even if the company does not make a profit the program still refunds cash to benefactor companies. As of 2015, MTS has $76 million unutilized investment tax credits from the SR&ED program.

Is This Fair?

Looking at MTS’ history, it could be argued that tax planning has been almost as important a business strategy as telecommunications. Despite benefiting from Canada’s array of social services, infrastructure and regulations, MTS eschews its contribution to society by avoiding taxes. But as we’ve demonstrated – it’s all by the book.

However, this tax avoidance behavior is not uncommon within the Canadian telecom industry. Bell has also paid a very low amount of actual cash taxes for a significant amount of time. Citing carry-forward losses, contributions to pension plans, expenditure on large capital investments and CCA allowances, many other companies engage in strategic tax planning to maximize revenues for owners and shareholders.

In our opinion, since other Canadian corporations are bound by the same accounting rules and have the same access to the practices MTS uses, MTS is justified in its tax avoidance. All corporations follow the same rules of the game; we just think MTS is playing a little smarter.

As an endnote, we found this case particularly ironic considering MTS was a government utility before privatization in 1997. MTS swung from being a completely tax funded entity to a profit- generating business in 1997. Did MTS shift from social service to social parasite? Or are you just impressed as well? Let us know in the comments.

About the Authors

Bruno Esteu is a Production Engineer (Centro Federal de Educação Tecnológica – CEFET/RJ) , Master on Energy and Oil (Departamento de Engenharia Mecânica - PUC/RJ) and MBA candidate at Schulich School of Business, Class of 2018. He has 10 years experience in market planning, supply chain management, consulting, project management, sales strategy, and business development. He has professional and personal experience abroad (USA, UAE and Canada) and expertise in costing, consulting services, operations, oil and gas, team management, and sales.

Caroline Gilbert, BBA, MBA Candidate 2018, is a Marketing & Media Management professional specializing in the creative development and planning of integrated media campaigns.

Alexander Hilmi is an MBA Candidate 2018 at the Schulich School of Business.

Amanbir Saini, BEng,MBA Candidate 2018, is a technology enthusiast specializing in Information Systems and Strategy.

Shubhnit Singh, BBA, MBA graduate 2017, Schulich School of Business, has specializations within Computer Science and Management Science. Shubhnit is passionate about Entrepreneurship with a focus on Digital Strategy, Marketing, and Big Data Analytics.