Thank you very much.
We are pleased to be here today on behalf of the Canadian Association of Income Funds.
First and foremost, we commend this committee for undertaking these hearings into the proposed taxation of income trusts. This is the first time that due process has been allowed since the Conservative government shocked financial markets last Halloween with the announcement that they would break an election promise and impose a tax on income trusts.
You and your viewing audience are all familiar with the Prime Minister's repeated promise to seniors that he would never raid their hard-earned assets, yet that is exactly what Mr. Harper's government has done, moving arbitrarily and without consultation to tax the distribution payments of income trusts for millions of investors.
Minister Flaherty's stated intention last October was to level the playing field with corporations. Instead the government caused a multi-billion dollar meltdown of investor savings almost overnight and sounded the death knell for this sector.
Before looking at the damage that has occurred, let me deal with the key issue underpinning the government's case: tax leakage. The minister's claim now that over $1 billion per year is lost due to tax leakage is grossly exaggerated and is not supported by facts. That appears to be, unfortunately, the heart of his case.
Given the importance of this issue, it is unconscionable for the government's numbers to keep changing. Even if we could believe the original $500 million leakage figure, the minister later raised it to $800 million following the announced intentions of Bell and TELUS to convert. These organizations do not pay taxes, so how can there be additional and increased leakage?
Permit me to quote from a news release issued by Bell Canada on December 12, 2006:
Bell expects it will have no significant federal cash taxes through 2010, due to organizational simplification enabling accelerated use of Bell's R&D tax credits.
Similarly, in a news release issued on December 14, 2006, TELUS stated:
Based on an updated review of the company’s tax loss position, TELUS now expects minimal cash tax payments in 2007, a preliminary estimate of approximately $100 million in 2008 with the payment of significant cash taxes largely deferred to 2009, rather than 2008 as previously anticipated.
To date, and even including what we're seeing today, there is no clear, credible data that has been released by the Department of Finance to prove its claim. When information was requested through access to information to substantiate the numbers, we were given blank page after blank page.
I can, however, report to this committee that CAIF's independent third-party consultants, HLB Decision Economics, which will appear before this committee in a few days, met with and agreed upon a methodology with the Department of Finance throughout 2005 and concluded that there was no federal tax leakage due to the existence of trusts. Based on independent, expert third-party economic analysis, there therefore is no federal tax leakage. In fact, federal tax revenues generated from income trusts are higher than tax revenues that would be generated were these organizations structured as corporations.
The reality is there is no tax leakage, and the studies you will read and see in the coming days will prove this to you.
I can also report to this committee on behalf of my colleagues in the industry that we have been inundated by phone calls, letters, faxes, and e-mails from individual Canadian investors who are frightened and worried by the government's actions. We are hearing from them by the thousands in every region in Canada, and no one on this committee should believe this issue is simply going to go away.
In addition to the damage done to retail investors, what are the other unintended negative consequences flowing from the government's trust announcement? Again recall the minister's stated intent: to level the playing field between trusts and corporations. The reality is this policy does not accomplish its stated objective. Private trusts and other public partnership arrangements, for instance, are not included. Why single out the one business entity instrument that serves the retail investor?
The effect of the minister's policy has been very severe and could put a stranglehold on the publicly listed trust sector. Let me explain what we as a sector have experienced. Access to capital has been severely curtailed, and in some cases terminated, for many trusts. Those trusts, for which access to the capital markets has become impaired, have been, in many cases, simply put up for sale. Billions of dollars in financing and mergers have been put into limbo or cancelled entirely. Depressed valuations have occurred, leaving many trusts susceptible to takeover by private equity funds or foreign investors, which, by the way, exacerbates the loss of tax revenues if these assets end up being owned by such entities.
With reduced valuations, infrastructure trusts are targets of pension funds and U.S. private equity. As this occurs, we Canadians will be frozen out of the opportunity to invest in our own infrastructure and natural resources.