Finance Committee on Dec. 4th, 2007

[Lee Richardson, Conservative, Calgary Centre, AB]

I just want to follow up on that point. I think it's been about a year since your organization and affiliated interests made some, I thought, positive recommendations with regard to things like extending the grandfathering from four years to ten years, and other suggestions. And there has been this difference of opinion over tax leakage or loss to the unitholders.

Do you have a sense, in that year, of how the tax leakage, if any, would have been different if we had, for example, extended it out to 10 years, having a little hindsight now, with the changes you'd proposed? Have you documented that?

[Bill Andrew]

I think we've provided estimates to the committee. I know Dennis Bruce as well has done a representation—not on our behalf, but to the committee—as has Yves Fortin. We would look to those types of numbers.

Basically, the income trusts were set up as a flow-through vehicle. So we don't buy the fact that there's any leakage in taxation. The taxation flowed to the investors, and the investors paid the tax, were very happy to pay the tax. Certainly now, when you look at the yield markets, when you look at bond markets that are at record lows, where do people go to seek income? Increasingly, it looks like they really don't like a vehicle that has a three-year shelf life, because they're flushing the units of the income trust down the toilet as fast as they can right now.

[Lee Richardson, Conservative, Calgary Centre, AB]

For my own edification, because I was always a bit concerned about potential tax leakage to American owners of trust units, I did see information from the industry that suggested that over 50% of the trusts were owned by Americans. Do you dispute that? And if not, would it not have been some leakage to Americans who were only paying a 15% withholding tax?

[Bill Andrew]

Yes, they were paying a 15% withholding tax. I guess one thing to advise the committee of is that they weren't receiving any of the benefits that Canadians do from paying taxation within the country; so they don't use our infrastructure, they don't use our health system. They were paying a pure 15% surtax, I guess you would call it.

It's interesting, Mr. Richardson, for example, that our trust pre the decision was owned about 64% or 65% by Canadians. Currently, we're owned about 43% by Canadians. If part of the reason was to drive the Americans out of the stock and put the Canadians in, you've succeeded in doing the opposite--another unintended consequence.

[Lee Richardson, Conservative, Calgary Centre, AB]

I wasn't suggesting that was the reason. I was suggesting that there was probably some tax leakage if they were only paying 15% versus 31% in Canada. You were continually responding that there was no tax leakage, or no notable tax leakage--

[Bill Andrew]

I think the other thing to remember, Mr. Richardson, is the size of the sector itself. Anyone who has an investment portfolio will know that you probably invest in some U.S. stocks, and if those stocks pay dividends, you pay a percentage of tax in Canada. That's what trade agreements are for and it's what financial agreements between countries are for, so you can finance sectors.

The energy sector cannot be financed within Canada; it's too large. If you start to grow a company over $5 billion or $10 billion, there's not enough liquidity left in Canada. You have to go to the U.S. And it followed that with the success of the income trusts and....

The one thing I bristle at is the notion that somehow we're tax evaders and tax avoiders. The growth of the income trust had to do with the demand, the tremendous demand, for yield. That's evident, not only with individuals but with institutions as well. And because of this demand, there was tremendous growth in the sector and we've lost that growth.

[Lee Richardson, Conservative, Calgary Centre, AB]

Could I make one point? Do you think that yield is sustainable?

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Richardson.

Monsieur St-Cyr--

[Bill Andrew]

Sorry? The yield was sustainable?

[Lee Richardson, Conservative, Calgary Centre, AB]

No, were the yields--

[Bill Andrew]

We weren't paying 15%, we were paying about 8% before your decision. We're paying about 15% right now, because their stocks have gone down 40% to 50% in value. That's where the 15% yield comes from.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

Go ahead, Monsieur St-Cyr.

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

Thank you very much. I would like to continue on that topic. The Bloc Québécois has been calling for a moratorium on income trust conversions for a long time. While the Bloc Québécois agrees with the government on the end result, which was to tax income trusts, the Bloc Québécois does not agree at all with the means used to achieve it. First of all, promising not to tax income trusts and then doing so was outright irresponsible. Many people invested in these trusts in good faith, believing them to be an attractive investment tool. People were misled and deceived by the government.

Having said that, on the issue foregone taxes and revenues for the government, I was equally unimpressed with the demonstration here in committee. In my mind, it is an important tax issue, if only because the day after the announcements, stocks plummeted. That is the best indication that people who invested in those tools and companies that decided to structure themselves that way did so essentially for tax purposes. In my view—and in the view of my party, that was the main problem.

In your brief, you say that we should not impose a corporate model throughout Canada. I agree with you. There are different models that correspond to different organizations, but those models should be chosen based on the nature of the operations, and not based on tax considerations. That is why we are still in favour of taxing income trusts. However, as you reiterated in your brief, the proposal was for a ten-year transition period rather than a four-year one, which is somewhat short, in our view.

I would like you to repeat the figures. I heard you mention figures on Canadian ownership, on changes to Canadian ownership of trusts before and after changes made by the government. You gave them to us, but I did not have time to grasp them. I would like you to repeat them.

[Bill Andrew]

I'm talking specifically about our company, but I think anecdotal.... Certainly the coalition will attempt to get some more information on U.S. ownership. But we've seen an increase generally in U.S. ownership of the funds over the past year and a general walking away from the Canadian retail side. They tend to be a little more conservative as investors, and they're probably worried about the next shoe to fall in the income trust. Generally, they've started to make an exit out of the sector. Some of the stock has been picked up. There's been some demand in the U.S., and that seems to be the incremental buyer, the primarily institutional buyer, in the U.S. So there has been an increase. It's a--

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Andrew, you quoted some numbers. Could you repeat the numbers? Some of the staff didn't catch that.

[Bill Andrew]

At the time of conversion, we were some 40-odd percent, in the low forties, on U.S. ownership. Now we would see ourselves, our foreign ownership, at about 60% or a little over 60%, so to us that's a dramatic increase.

Commenting about the sector, it seems that there are certain individuals in the corporate world who figure there's only one model, some of whom seem to have the Prime Minister's ear. I would remind the committee--and we'd like to provide some information to the committee in the future as well, with regard to the absolute money that's been spent on the energy trust sector versus some of the corporate--if investing means buying back stock, we wonder what that's doing for the economy and the growth of the economy.

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

Once again, I agree with you on the need for more than one model. However, I believe that must not be done essentially for tax purposes.

Moreover, among the people who appear before the committee, CEOs of large corporations—and we could see conversions coming—told us that they were converting not because the income trust model suited their company, but for tax purposes. That is what their shareholders wanted, because they wanted quick short-turn gains. But that creates risks for the economy.

Are you denying the fact that more and more companies were converting to income trusts essentially for tax purposes that had nothing to do with their true corporate structure?

[Bill Andrew]

I think you have to look at individual situations. I'll run you through ours quickly.

Our situation is very simple. We converted in 2005. The three choices we had were these: to attempt to merge with another company, and that failed; to sell to the company.... The only offers we had were from American companies, at what I felt was a discounted value to the assets. I went to our board and said, “We want to keep this thing together.” The only way we could keep this thing together was to go to a trust. We did pay some $213 million in stub taxes to do it, so it wasn't exactly the most tax effective measure for the company to take at the time. We did it to maintain the company. We probably should have sold. If we had sold then, we would have received about $25 a barrel on the ground. We're currently trading at about $15 a barrel on the ground and waiting for the phone to ring.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

Have you seen a slowdown because of the strength of the Canadian dollar, by U.S. investors or potential U.S. investors?

[Bill Andrew]

A bit.

I was listening in on Pierre's discussion. One of the things they understand, for you gentlemen who are from Quebec and Ontario, is that the increase in the Canadian dollar impacts the resource sector. When you're trading oil at $70, and it's an 80¢ dollar, that's the equivalent of $90 oil at par. So there's nothing. There's no change to us in terms of our revenue. That's been the difficulty. We've probably seen a bit of an increase in the U.S. investor, to answer your question, because as they call it in the States, their dividend--we call it the distribution--goes up because the relative value of our stock goes up. For example, we pay 34¢ per unit, per month. If it's on par, the Americans get 34¢. If it's an 80¢ dollar, they get 20-odd cents.

[The Vice-Chair, Liberal, Massimo Pacetti]

Yes, but it's 15% more expensive for them to purchase a Canadian company now than it was a month, two months, three months ago.

[Bill Andrew]

Yes.

[The Vice-Chair, Liberal, Massimo Pacetti]

So they're still going to spend that extra 15%.

[Bill Andrew]

If you look at the stock market, there doesn't seem to be a whole lot of incremental buyers out there right now. When you see Fortress Mountain duplicated on the stock market, there are not a lot of incremental buyers.

[The Vice-Chair, Liberal, Massimo Pacetti]

Is there any talk about extending the holiday or the tax relief period to 10 years? Has there been any advancement?