Finance Committee on Nov. 9th, 2006

[John McCallum, Liberal, Markham—Unionville, ON]

The official is nodding.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Yes.

[John McCallum, Liberal, Markham—Unionville, ON]

So then the agreement under apprenticeships that benefits all Canadians equally you are counting as part of money paid to Ontario to address specific unfairnesses to Ontario. I don't understand the logic of that. The Canada-Ontario agreement was Ontario specific, because Ontario was treated unfairly in immigration and other things. And now you provide money to every province in the country--people or governments of those provinces--and you count as money under the Canada-Ontario agreement money that goes to all, and not money that is specifically directed to Ontario. I don't understand the logic of that.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Nor do I understand the logic, Mr. McCallum, of some governments in Canada thinking they should get twice as much as every other provincial government in the country.

In fact, the Province of Ontario, under the Canada-Ontario agreement, in infrastructure, for example, is getting $300 million more than every other province in Canada. That agreement had various provisions in it, but the culmination--and this was signed by Mr. McGuinty and Mr. Martin--was that these sums would be transferred to Ontario or Ontarians. That's according to the agreement they entered into, not me.

[John McCallum, Liberal, Markham—Unionville, ON]

The essence of what you've said is a critique of the Canada-Ontario agreement, which implies that you have not lived up to that agreement. You are giving to Ontario money that goes to every other province. Therefore, that should not be counted under the Canada-Ontario agreement.

Is my time already up?

[The Chair, Conservative, Brian Pallister]

We will continue with Mr. Paquette. You have six minutes.

[Pierre Paquette, Bloc, Joliette, QC]

Thank you, Mr. Chairman.

We can talk about income trusts here because Bill C-28 contains a clause amending the Income Tax Act to bring the taxes imposed on dividends more in line with those that apply to interest and income from these trusts.

I would first like to ask you whether this measure, which was announced before your decision on income trusts, is still relevant. Why do we need to do anything about dividend taxation now that income trusts will be taxed at the same level as companies?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I would like to thank the member for his question.

The effort we made in budget 2006 with respect to the dividend tax credit was designed to try to remedy the income trust challenge. It was insufficient. That became plain as more and more companies in Canada announced that they were going to convert to income trusts this year, including the two large telecommunications companies.

We still want to proceed with that change in taxation of dividends in budget 2006 and in Bill C-28 because we have designed the program going out four years from now so there will be a level playing field by the time we get to 2011, including this dividend change between corporations and income trusts. Then it will make no difference in Canada, from a taxation point of view, whether a corporate entity chooses to do business as a corporation in the traditional sense, or as an income trust.

[Pierre Paquette, Bloc, Joliette, QC]

When the Liberals asked you questions on this over the past few days, you answered that the government's decision—which we support even though the government did make a promise in this regard during the election campaign—was based on tax fairness and the fact that the tax burden needs to be distributed fairly among taxpayers. Do you not think that you should go further than what you have announced, in particular in dealing with tax havens? Two different auditor generals have mentioned that the use of tax havens by Canadian companies and taxpayers was chipping away at the tax base in Canada, and that is the argument that you used when you took action to deal with income trusts. Do you intend to do something about the use of tax havens as a tax-avoidance measure?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Thank you for the question.

We are interested in broadening the tax base and in tax fairness to Canadians, broadly defined. I'm aware of the Auditor General's comments and views on the issue of tax havens, and it is a matter that we are reviewing.

[Pierre Paquette, Bloc, Joliette, QC]

Do you think that there will be anything on that in the next budget? Can we expect action to be taken quickly?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

You'll appreciate that I'm not going to talk about what may or may not be in the next budget.

[Pierre Paquette, Bloc, Joliette, QC]

I want to ask you one last question if I still have some time, and I am being very straightforward here.

There has been considerable criticism of the fact that you announced the income trust decision on a Tuesday rather than a Friday. If you had made the announcement on Friday, at the start of the weekend, small investors may have panicked less. They would have had time to better understand the real effect of the decision you made, particularly regarding existing trusts, since there is a three-year transition period. Why did you decide to do this on a Tuesday rather than a Friday, or why did you not just decide to impose a moratorium on trading in income trust shares?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

My primary concern was not the day on which the announcement would be made.

[Pierre Paquette, Bloc, Joliette, QC]

You know as well as I do that people panicked temporarily. If the announcement had come on a Friday, people would have had two days to read the papers and call their brokers and that way they would have made well-informed decisions. I am sure that there are people who took advantage of the fact that the price of income trust shares nosedived and is now going back up. It seems to me that those windfalls could have been avoided.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

The most important thing was that the announcement be made after the markets and the after-market trading were over for a given day. There was some advantage to doing it on the last day of the month, which will help for accounting purposes for some, and to have secrecy and confidentiality because of what had happened the previous year under the previous government. I'm comfortable that we accomplished those goals.

[The Chair, Conservative, Brian Pallister]

Madam Wasylycia-Leis.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you, Mr. Chairperson, and thank you, Mr. Flaherty, for the time you're spending with us this morning.

While we're on the income trust issue, how much did department officials estimate the status quo on income trusts was going to cost the treasury?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Currently, this year, the number was between $400 million and $500 million, anticipating another $300 million with TELUS and BCE, were they to convert to income trusts as they had announced they intended to do; and then the corporate income taxes that would not have been paid by those two companies, which they have spoken about publicly, in their own estimates, were together in excess of $1 billion next year.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Can you give us any sense of which corporations were looking at conversion, or how many?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Do you mean corporations that had not announced? I'm not going to get into names, but—

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Was it significant? What I'm trying to understand is that the status quo obviously has led to possibly $1 billion or more in loss to the treasury, but if we had maintained the status quo, was there any threat of it driving us into the red?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Over time, yes. There was a clear and present danger that Canada was going to become an income trust economy. That has been stated by others since we made the announcement, and we have substantial support for that, including among businesses in Canada that became income trusts and are existing income trusts. Many of their executives have said to me, and have said publicly, that this was not in the best interests of our country, going forward.

What we were seeing in 2006 was not only an increase in the number of income trusts, but also an increase in the quantity being engaged, being in conversion. Also, we saw this domino effect, that when TELUS announced it would become an income trust in the telecommunications sector—and this was spoken of openly by people in the industry—BCE felt that it also had to convert. Then we knew, if one of our financial institutions converted subsequently, there would be great pressure on other financial institutions in Canada to imitate that conversion, which would mean that increasingly, as I say, the mode of doing business in Canada in the corporate world would be through income trusts and not through the traditional corporate model, which we and others felt was not in the best interests of our country in the long haul.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

I think even before the Liberals made their botched announcement a year ago, economists were saying that the status quo on income trusts was going to cost us a great deal and there would be massive losses in tax revenue. Were you not aware of this before you made your election promise? Did you not get the information soon enough? Could you tell us when you first became aware of this problem?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Certainly it was some months ago, after we became the government, that we started to see the acceleration of conversions. That concerned me some months ago. Then, as I mentioned a moment ago, the quantity of the conversions--the amount of money involved, the size of the conversions--was accelerating as well. Then we had the conversions moving into a new sector of the Canadian economy that is capital intensive, namely the telecommunication sector, first with TELUS and then imitated by BCE. I had directors telling me that they felt compelled and were getting advice that, as directors of publicly traded companies in Canada, if they did not convert they were not serving the best interests and were violating their duty to maximize value to shareholders. That was a matter of increasing concern to me, that this was the wrong model for Canada. It was the wrong way to go. It was the wrong thing to do.

It was not in the best interests of Canada for next year or the year after that, and certainly not for the next generation. It was counterproductive in terms of our agenda to have a more competitive, productive Canadian economy, to keep our standard of living and quality of life, and to keep our social services. These massive transfers that we make to the provinces come from tax revenues to the Government of Canada, and that erosion of the tax base would have meant that, to pay for those services, the health transfers, the post-secondary education transfers, the social transfers, and infrastructure, we would have had to tax more and more individuals and their families in Canada, which I also felt was not in the best interests of our country. It was not fair.