Evidence of meeting #59 for Finance in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was trust.
A recording is available from Parliament.
1:05 p.m.
Royalty and Income Trust Analyst, BMO Capital Markets
I don't have that number off the top of my head, but I would say that the markets are probably down. Again, this is a number off the top of my head. I could certainly get it to the committee if they require it, but it would probably be off by about 10%, as things stand today.
1:05 p.m.
Conservative
The Chair Conservative Brian Pallister
It would be off by about 10%. So that number, $28 billion, wouldn't be $28 billion anymore, assuming that people had bought on October 30 and had held until now. It would be less than that.
1:05 p.m.
Royalty and Income Trust Analyst, BMO Capital Markets
It would be slightly less if they had held until now, yes.
1:05 p.m.
Conservative
The Chair Conservative Brian Pallister
My concerns, as I think are most of our concerns, are around issues of proper diversification. I hear the stories. I've gotten the letters, as all MPs have, from people who say they've lost a tremendous amount of money and who claim, as William did in his presentation, that they were counting on that money for the rest of their lives, which tells me that they were low-risk investors investing in a higher-risk vehicle. It tells me that they were inappropriately invested in the first place.
What would be an appropriate diversification percentage for income trusts? Is there a number you could throw out? Would a person who had more than 15% invested in income trusts be a higher-risk investor? Would that be a fair statement?
1:10 p.m.
Royalty and Income Trust Analyst, BMO Capital Markets
I'm not an investment adviser, so I can't recommend to clients what their investment alternatives should be and where they should sit. Certainly, diversification is key. And it should be across the trust sector. You shouldn't be isolated in one part of the trust income sector. It should be diversified. But I can't recommend to any given client what that number should be.
1:10 p.m.
Conservative
The Chair Conservative Brian Pallister
So accepting the fact that there should be some diversification there, investors shouldn't have more than a significant amount of money in income trusts. They should be diversified, especially a senior, you would think. I think that's a fair statement.
Let's go back a little bit, because all of this is on the assumption that these people bought in just the day before. What was the performance of the index for the four-year period prior to October 30 of last fall?
1:10 p.m.
Royalty and Income Trust Analyst, BMO Capital Markets
I don't have that number in front of me.
1:10 p.m.
President and Chief Executive Officer, Canadian Association of Income Trust Investors
That's irrelevant.
1:10 p.m.
Conservative
The Chair Conservative Brian Pallister
Thank you very much for your contribution, sir. I'm getting used to that.
1:10 p.m.
Independent Consulting Analyst, As an Individual
I think it's roughly 20% a year. I don't think we should take comfort in that. In the prior four years we had a tripling of the energy price, and we had something like a 40% reduction in long-term interest rates. So there was very strong performance.
1:10 p.m.
Conservative
The Chair Conservative Brian Pallister
So there's a strong performance. My point is, of course, that the people who invested in income trusts over that period of time obtained very significant double-digit yields, is that not correct? When people throw around this $35 billion loss, aren't they ignoring the fact that people made $100 billion in the previous four years, assuming they were invested for that four-year period? Is that right?
1:10 p.m.
An hon. member
But you don't know when they bought.
1:10 p.m.
An hon. member
Clearly they're specific issues.
1:10 p.m.
Conservative
The Chair Conservative Brian Pallister
Of course I don't know when they bought. What I'm trying to establish here is that throwing this $35 billion number around is not entirely fair or demonstrative of the actual facts for investors.
Cameron.
1:10 p.m.
Royalty and Income Trust Analyst, BMO Capital Markets
I would disagree. I think the market valuation that we saw diminish was $35 billion immediately, and it has somewhat come back since that point because of various reasons, but I do think that's the number to focus on. I don't believe it's relevant to when individual investors bought and when they didn't buy. It's a specific case. Some investors lost much more than others. Some were more diversified.
1:10 p.m.
Conservative
1:10 p.m.
Total Asset Management Research & Investment Rights Consultancy
I think one thing needs to be made clear. These investments were going to fall during a period of market decline and economic recession, the leverage to the economic cycle, and the market cycle. That means that if demand for that area falls, the prices are going to fall. If the revenue the company depends upon to provide its distributions falls, its distributions will fall and its cash will fall.
These companies are highly leveraged to the market and the economic cycle. The types of declines we saw in October are the types of declines that we would have seen in a market correction or in a recession, and possibly more.
1:10 p.m.
Conservative
The Chair Conservative Brian Pallister
Thank you.
I shouldn't use up too much time.
We'll move over to Mr. Szabo.
1:10 p.m.
President and Chief Executive Officer, Canadian Association of Income Trust Investors
[Inaudible—Editor]
1:10 p.m.
Conservative
The Chair Conservative Brian Pallister
Order.
Mr. Fullard, cool it. You've interjected, interrupted, and used props. All of these things are against the rules of our committee. I am encouraging you now to listen to me when I call you to order.
Mr. Szabo.
1:10 p.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
Mr. Chairman, the issue here is the determination of the leakage. The chart the minister presented to us is a hypothetical. It compares a group of investors under one scenario, that being income trusts, to the same companies under a corporate scenario. It shows a differential of $500 million. I think the committee really should try to obtain the computations that were requested by Mr. Tait under access to information, so that we can actually see how the $500 million is determined, based on published data of the finance department.
The other issue has to do with the reference to RRSPs being tax exempt. As we all know, RRSPs and RRIFs do have deferred taxes, in fact, but they deregister or people make withdrawals. Taxation revenue is actually paid in cash to the government, but that cash revenue is never included in any analysis of leakage, ever, in any year, even though every year there is revenue coming out of RRIFs and RRSPs.
The issue to me, Mr. Chairman and colleagues, seems to be that the numbers are not as important right now as the methodology. The methodology seems to be flawed.
I think Mr. Fullard has done some work on this, and maybe others have. I believe it's a methodology question, and I'd ask for the opinion of the panellists.
1:15 p.m.
President and Chief Executive Officer, Canadian Association of Income Trust Investors
I'd like to comment on that. In fact, it's amazing how much the redacted documents that we were provided under the spirit of the Freedom of Information Act actually do reveal as to the methodology.
It's very clear. I have a handout here and I'd love to take you through it. It just lays bare the fact that the work that Finance does is somewhat concocted, from the standpoint of whether they do or do not acknowledge the retirement taxes Canadians pay.
It's one thing to ignore the fact that Canadians at large pay $9 billion of retirement taxes on $52 billion of income, which is coming in the front door. It's funny because Mr. Flaherty referred to the front door/back door concept—interesting—when this is in fact coming through the front door but has not been acknowledged inside the house. By virtue of that, they come up with these false tax leakage results.
Then, to make matters worse, they create policies that are regressive to those very people whose taxes they don't seem to want to acknowledge. Therefore, we're in the situation we are in today, and that's just not good.
1:15 p.m.
Conservative
The Chair Conservative Brian Pallister
Sorry, but we have to let the committee members control their time.
Mr. Pacetti, it's over to you for a minute.