Finance Committee on Feb. 13th, 2007

[The Chair, Conservative, Brian Pallister]

Thank you, Madam Wasylycia-Leis.

We continue now with Mr. McKay. To permit as many members as possible, just go with three minutes, John.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair.

I think Mr. Rosen makes a point, and it would be in the interest of this committee to follow up on the points and possibly invite Mr. Rosen and other relevant people back with respect to that particular point. What we are talking about today has to do with the market action of the finance minister and the deception of the Prime Minister.

Let me speak to Mr. Bruce, first of all. I wanted you to respond directly to the finance officials with respect to whether they considered the legislative changes in corporate taxes.

[Dennis Bruce]

I cannot see how that was handled appropriately in their coming up with the $3 billion estimate. Based on what I read in terms of market growth assumptions, including the front page of yesterday's business section in the National Post, indicating that perhaps in 18 months 75% of the trust sector is going to be gone, I can't see how that could be feasible at all. I've crunched the numbers using various growth assumptions and I just don't see how it's possible to be correct.

[John McKay, Liberal, Scarborough—Guildwood, ON]

In your opinion, it's just not there.

I want to turn to Mr. Barrowclough, because I have very little time.

I can appreciate that you're a pretty angry guy, and pretty legitimately so. You've been deceived. You made these investments, and Mr. Rosen makes a point about the mix of capital and income distributions and how all these schemes are ultimately going to collapse on themselves. We got into a whole war of doublespeak, that this is all about tax fairness and other nonsense like that.

But I'd be curious as to how this business of witness tampering came about. What would people say to you that would suppress you from coming before this committee and telling of your experience?

[William Barrowclough]

Nothing that was overtly said directed my testimony, but this person spoke to me for an hour on the telephone, and I couldn't hang up. It was much like watching a train wreck; you don't want to watch it, but you can't tear your eyes away. This person spoke to me for an hour and harangued me on the evils of income trusts—the criminality of which Mr. Rosen is commenting on—what horrible things they were, this being two days before I was to come here. We had never communicated before; I could come to no other conclusion but that it was an attempt to colour my testimony before this committee. If it had been two days after our hearing here, that would have been a totally different story, and I would perhaps have hung up, as I would on a telemarketer.

[The Chair, Conservative, Brian Pallister]

William, what percentage of your investment portfolio was in the income trusts before October? An approximate number, would you know?

[William Barrowclough]

Eighty percent-ish.

[The Chair, Conservative, Brian Pallister]

And Mr. Lapointe.

[Jean-Marie Lapointe]

One hundred.

[The Chair, Conservative, Brian Pallister]

One hundred percent in the income trust.

Thank you, sir.

We continue with Mr. St-Cyr now.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Thank you, Mr. Chairman.

I'd like to follow up on Pierre's question and ask Mr. Dennis Bruce about the $192 million figure. Mathematically, you seem to have arrived at this figure by multiplying 32 by six. Is that how you did your calculations?

[An hon. member]

Yes.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

I see.

You can always respond to the question later. Without going into any details about the method used, a discussion took place with Department of Finance officials on how the market reacted to the announcement. According to the department, the reaction reflects the fact that income trusts represent a very significant tax advantage.

Do you believe that's the case?

[Dennis Bruce]

To calculate the $192 million, essentially what we did was take our 2006 estimate, remove the one-time effects, as Mr. Normand suggested as appropriate, and then multiplied it by six, so implicitly in that we're assuming the market will be flat over the ten years going forward, which is perhaps optimistic. That's point one.

The second point is with respect to the market reaction on October 31. I would interpret the market reaction on October 31 to be an assessment of the taxation proposed for the new SIF structure versus the taxation that's in place today of the current trust structure. I wouldn't even factor in the fact that it was a comparison to corporate taxation. I think the market, from our estimates on November 1, saw a large increase in taxation of the trust structure. In fact, under the new SIF structure versus the corporate structure, if you do the math very similarly, we would estimate an extra billion in taxation. That presumes, of course, that no one moves back to a corporate structure, and of course they will because the tax rate is just not sustainable. I would interpret the market to be reactant to that phenomenon, and I don't believe the market, in that sense, the market reaction had anything to do with tax leakage.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Mr. Rosen, you presented a number of tables showing a series of companies and income trusts. You demonstrated that a significant percentage of distributions could be attributed to capital, rather than to income. I find that interesting, but I'm curious as to the situation for the overall market. Is the problem confined to just a few companies, or is it more industry wide?

[The Chair, Conservative, Brian Pallister]

Mr. St-Cyr, I'm sorry, you have used up your time, as you were expecting.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Already!

[The Chair, Conservative, Brian Pallister]

Mr. Dean Del Mastro now.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

Mr. Rosen, the finance minister acted very definitively on this issue. We dealt with it in what we felt was the fairest way to deal with it. It was obviously a very difficult situation. Could you talk a little bit about the difference between...maybe you could touch a little bit on how investors were hurt through the various muddlings that went on with the issue in 2005, how a number of people who were in the know made quite a bit of money on that, and talk about how that is wrong.

[Al Rosen]

Yes. I thought in September 2005 that the warning signal had been given, that it was a good move, and that hopefully it would have cleaned things up. The reversal in November floored me, personally. The fallout we've seen after that has been significant.

What amazes me is that somehow or other, on the distributions, if you use a typical 8% distribution and 75% of that is a return of capital—and there are quite a few companies like this—then your real return is 2%. But the market is somehow capitalizing the 8%. If you look at many of the newspapers and the articles, they call that 8% the yield.

From my point of view, the action taken on October 31 was overdue. It should have been taken a long time before, because of the Ponzi frauds.

[Dean Del Mastro, Conservative, Peterborough, ON]

In your opinion, the market correction on trusts was inevitable?

[Al Rosen]

For sure. I can sit here right now and tell you we're going down a long ways still.

[Dean Del Mastro, Conservative, Peterborough, ON]

Right.

I'm going to give you a quick preamble and tell you a story. My uncle started working full time at 15 years old, retired a number of years ago, and took a significant loss on October 31. He had a significant portion of his portfolio in income trusts. Obviously he was not my only family member who was caught in that.

How did this happen? How did we get here? We've had Bank of Montreal officials come in and compare these income trust investments to junk bonds and high-yield bonds. How did we get here?

[Al Rosen]

Well, it's massive hype. If you want to look at the number of inserts that were in the newspapers that were pure income trusts, if you want to look at the brokers—The brokers call me. You have TV stations doing this. It was just absolutely ridiculous hype telling people what the yields were, what the distributable cash was.

Even calling these income trusts—They are not income and you can't trust them. So with the wording that came out, all of this was highly misleading. Why aren't the underwriters number one on the list to blame? Why aren't the brokers second? Why aren't the accountants third? We can go down the list. Why people are blaming the two federal governments of the last few years is beyond me. Somebody had to act.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Rosen.

Thank you, Mr. Del Mastro.

We'll conclude with a quick question from Mr. Pacetti.