Evidence of meeting #64 for Finance in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was income.
A recording is available from Parliament.
12:40 p.m.
Liberal
Robert Thibault Liberal West Nova, NS
You didn't at that time.
When you heard the Prime Minister's commitment, did you believe that he would maintain his commitment and not tax income trusts?
12:40 p.m.
Liberal
Robert Thibault Liberal West Nova, NS
Do you trust the Minister of Finance and the Prime Minister to manage the economy on which you depend now for your revenues and your income?
12:40 p.m.
As an Individual
No, as a matter of fact, I think they'll probably start to say that income trusts are the cause of greenhouse gases. That'll be the next excuse.
12:40 p.m.
Liberal
Robert Thibault Liberal West Nova, NS
Based on the information that's been given to date on the movement on income trusts, and on the actions of the Prime Minister and the Minister of Finance, do you foresee reduced revenues in income for you and your spouse?
12:40 p.m.
As an Individual
Definitely, because they're going to allow 31.5%. Some of these income trusts that exist today may be reverting back to a corporation, maybe tomorrow or next month. This isn't something that is going to happen in four years' time; this is something that could happen right now. I suspect that between now and four years from now, it's going to be at least 30% of our income.
12:40 p.m.
Liberal
Robert Thibault Liberal West Nova, NS
How much of that 31% of your income will you be recovering from the income splitting allowed for you and your wife?
12:40 p.m.
As an Individual
I didn't figure that out really, but we're not going to be getting the tax credit because a lot of our investments are in RIFs and RRSPs. We do have some in the non-sheltered one, but in our sheltered ones there's a fair amount, and we're going to be losing there.
As far as the splitting is concerned, probably there will be some, but I can't really think it would be that much, not in comparison to the losses we're sustaining right now.
12:40 p.m.
Liberal
Robert Thibault Liberal West Nova, NS
Do you have any idea? Will it be a 20% net loss at the end of the day? Is that what you're having to plan with?
12:40 p.m.
Liberal
Robert Thibault Liberal West Nova, NS
Mr. Francis, I would ask you the same questions. Did you increase your participation in income trusts after the promise of the Prime Minister?
12:40 p.m.
As an Individual
No, I didn't, actually. I'm a well-diversified investor. I thought for about 30 seconds that, gee, that's a good promise. Then I thought, no, I don't trust this guy, and I actually went the other way. Even still, I did lose significantly.
12:40 p.m.
Liberal
Robert Thibault Liberal West Nova, NS
We heard from two witnesses this morning who thought about their losses in the investments and their family's losses. I've been advised by them that they did trust and did increase their participation, as did a number of Canadians. If you listen to the witnesses we've heard, there's some very good information that income trusts are not necessarily the vehicle for all business activities, but that they do go very well in certain sectors. The Governor of the Bank of Canada responded that we hear of energy trusts and we hear of REITs that are good for that sector.
Mr. Kinnear, one of the things that people do point out—and we heard some of that this morning—is that there are concerns with some of the organizations or corporations that had gone into trusts as to the accounting, as to the auditing, as to the reporting procedures, and that there had been very drastic actions taken on the income trust sector with $30 billion lost to Canadians, taken out of their retirement income, out of their savings. Could you explain to me the magnitude of the changes in reporting accounting, or were there any?
12:40 p.m.
Conservative
The Chair Conservative Brian Pallister
No, Mr. Thibault, you're done. Thank you.
We now continue with Mr. Paquette.
You have four minutes, sir.
12:40 p.m.
Bloc
Pierre Paquette Bloc Joliette, QC
My question is for Mr. Kinnear.
You heard what Ms. Urquhart had to say. In her opinion, most, if not all, income trusts distribute more revenue than performance funds, without investing in business maintenance and development. Occasionally, they even borrow money to ensure higher returns.
With respect to the energy royalty trust industry, you say that, as with all trusts, distributions will be based on cash flow, and that cash flow is approximately twice the level of net earnings.
Can you explain to me why energy or royalty trusts do not pose a threat to productivity and growth?
12:45 p.m.
President and Chief Executive Officer, Pengrowth Corporation
The industry has grown considerably in the past several years. Unit funds have been invested in the market, allowing the industry to expand and to buy and develop new properties. A prudent approach has been taken and it's important to maintain a careful balance for industry investors. There have been major developments in mature properties. These developments have been fairly prudent, but nevertheless more extensive that those of other companies that have invested in these properties.
This year, we purchased a property called Carson Creek from Exxon Mobile. We are doing some seismic exploration with a view to drilling a well on this property in the very near future. Investment in the growing energy sector is encouraged.
12:45 p.m.
Bloc
Pierre Paquette Bloc Joliette, QC
Mr. Poschmann, you say that you agree with the government's decision. When the Governor of the Bank of Canada, Mr. Dodge, testified before the committee, he had this to say:
[...] I can say that while the income trust structure may be very appropriate where firms need only to manage existing assets efficiently, it is definitely not appropriate in cases where innovation and new investment are key.
In your opinion, overall, do income trusts pose a problem in terms of economic productivity, or can they indeed be somewhat relevant in certain sectors? Mr. Kinnear mentioned the development of mature deposits
12:45 p.m.
Conservative
The Chair Conservative Brian Pallister
Thank you.
I would encourage committee members to take note of the fact that they must leave time for the witnesses to respond to their questions.
Mr. Dykstra.
12:45 p.m.
Conservative
Rick Dykstra Conservative St. Catharines, ON
I appreciate that heads-up. It means a lot.
To Mr. Poschmann, and perhaps through to the finance folks who are here with us today, one of the things we've heard over the last number of hours of discussion and debate on this issue is that the department loosely, or maybe on purpose, forgot to mention RRSPs or capital gains as income in this whole mix.
Is that a fair point? Is that a fair assessment?
12:45 p.m.
Director of Research, C.D. Howe Institute
I wouldn't want to answer on behalf of the department, but I think it's fairly reasonable to assume that some folks on staff understand how RRSPs work.
Now, the key point to make is that this committee has been repeatedly told that various estimates have not taken into account the downstream taxes paid on withdrawals for RRSPs. That's simply nonsense on stilts. The committee is being misled on that score.
The money flowing into RRSPs is deductible in the first place. If you do a present-value calculation, you have to allow for both. If you don't do that, then you're simply wrong.
So as I said, it's simply nonsensical to not allow for the fact that the income flowing is deductible in the first place when you talk about the taxes paid on downstream income.
12:45 p.m.
Conservative
Rick Dykstra Conservative St. Catharines, ON
If one of the ministry guys wants to respond, perhaps it could be quick. I don't have much time.
12:45 p.m.
Senior Chief, Financial Institutions, Business Income Tax Division, Tax Policy Branch, Department of Finance
I don't have much more to say beyond what Mr. Poschmann said.
As indicated before, we take in our estimates—we're doing budgetary estimates. When you're looking at a full life cycle, you have to do the kind of calculation that Finn Poschmann raised.
The other aspect you have to assume is that tax exempts are holding the shares when there's a conversion, because that's normally when there's a bump in value of the business.
12:50 p.m.
Conservative
Rick Dykstra Conservative St. Catharines, ON
Thank you.
One thing you mentioned right at the beginning of your presentation, Mr. Poschmann, was that nine years ago this was brought forward by the former finance minister. It was noted as an issue that needed to be raised. What was done at that time, from your perspective?
12:50 p.m.
Director of Research, C.D. Howe Institute
With respect to the taxation of income trusts, very little specifically. There was a change in the thin cap rules later on that would have been helpful if they were extended to trusts and partnerships, as the committee recommended, but there was nothing directly on that score.
12:50 p.m.
Conservative
Rick Dykstra Conservative St. Catharines, ON
Ms. Urquhart, one thing you stated in your last presentation was that when you borrow money to pay an investment return above earnings, it is commonly referred to as a “plansi” scheme. Would you expand on that?