Finance Committee on Jan. 30th, 2007

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

Thank you, Chair.

We're all in favour of facts around here.

I wonder, Minister, if you could reverse the decision of your department to send Mr. Tait blacked-out copies of this document. Mr. Tait apparently asked for documents on November 10, and he was sent all of these blacked-out documents on loss in federal tax revenues allocated by province, etc. So if we're ever going to deal with facts, we would like to at least have the facts, as you see them, before the committee. I wonder, could you do that?

The second question is with respect to the apparently permanent loss of about $30 billion to $35 billion in Canadians' savings—hard-working Canadians, as you're fond of saying.

I have in my hand The Globe and Mail globeinvestor.com chart dated yesterday, and it shows that loss as a permanent loss of $35 billion. You apparently think taking $35 billion out of Canadians' savings is worth this alleged leakage of something in the order...well, we've had an inflation of numbers from $200 million to $300 million to $800 million, and if I read The Globe and Mail headlines correctly this morning, it's $1.3 billion. So you apparently are prepared to dip into Canadians' money to the tune of $35 billion for this leakage.

Then when you start to parse the leakage, it divides into three arguments. The first argument is the pensions/RRSP argument, and you call it tax-exempt. It's not correctly stated. As any other person would understand it, it's not tax-exempt; it's a tax deferral. If in fact my RRSP is now tax-exempt, I think we can all quit and go home, because we're all happy little campers. It is a tax deferral.

The second issue is with respect to the losses to foreign investors of about 22%. Why not close off the other loopholes as well? Apparently, it's a 15% withholding tax with respect to bonds and other remittances to other holders of Canadian securities. With the balance of the money, which is approximately 40%, the argument is that the effective tax rate for those who hold trusts is higher than distributions under corporate entities.

It's very difficult, Minister, to make a reasoned assessment as to whether in fact the advice you're receiving is correct when all you receive is blacked-out documents.

First, will you re-instruct your officials to give us the full document? Second, would you please comment on whether you received any analysis as to the impact on the market with respect to your decision?

Thank you very much.

[The Chair, Conservative, Brian Pallister]

Mr. St-Cyr, please proceed.

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

Thank you, Mr. Chairman.

I have a few questions for you, Minister. First of all, you showed very clearly that the number of conversions had increased in 2006 and that more were in the works. Ultimately, don't you think this situation is more the result of this irresponsible promise that was made by this government?

I'm also wondering if you have an answer to the question asked earlier by my colleague, the Member for Joliette. If this decision was made with a view to achieving tax fairness for all, why then have property trusts been excluded?

Thirdly, you quoted a figure of $3 billion in connection with the transition period. How did you arrive at this figure? Did you simply multiply $500 million by six? Can you let us in on how you did your calculations? I didn't find the answer anywhere in the guide you supplied to us.

Fourthly, today you are breaking a promise, arguably because the cost of the status quo is too high. While the Bloc Québécois agrees with you on principle, it regrets your making this irresponsible promise. Another big promise was made in relation to the fiscal imbalance and I'd like to know if we're going to get the same answer when the next budget is tabled, namely that it would prove too costly for the government to keep this promise.

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

I don't know how long I have.

The member will appreciate that on the last question about moving from fiscal imbalance to fiscal balance in Canada, we will have to await the budget. That's not too far away, so we'll get to that before too long.

I'm trying to respond to your questions. In terms of the $3 billion estimate, that is an additional six years at $500 million a year, $3 billion. It's a straight arithmetical calculation.

On your question about the REITs, internationally REITs are being treated separately. In other jurisdictions that are comparable to ours they've been carved out and treated separately. We thought it was justifiable to continue that practice here in Canada with respect to passive real estate investments, which is what they do, as opposed to active, knowledge-based industry of the future of our Canadian economy.

With respect to what was happening in 2006 with BCE and with TELUS, these were very serious announcements. The member from Winnipeg North asked me earlier about when I was briefed and so on. As we looked at this issue in July, August, September, October, we had the TELUS announcement, which I believe was September 11, and the BCE announcement, which I believe was October 11. I had communications with these companies. I had directors of other companies saying to me, “Jim, you know what's happening out there. We're being pressured to convert to income trusts by our shareholders because of a tax loophole. And is that the right way to run our businesses?” I had directors saying to me, “I don't want to vote in favour of this publicly traded corporation that I'm a member of the board on. I'm an experienced business person. I don't think the income trust is the right thing for this ongoing operation, but the shareholders do, because they can get greater returns in that structure.”

So that is what was going on.

[The Chair, Conservative, Brian Pallister]

Merci beaucoup, Monsieur.

We conclude with Mr. Wallace now.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

Thank you, Minister, for appearing this morning.

As you know, I was not in favour of having these meetings until we had the actual legislation in front of us, which I believe is coming. Last night, on my way back to Ottawa, the Honourable John McCallum said to me on a public airplane that we're going to have some fun this week with this. Well, I find it ironic that he would consider these types of discussions as fun, as if this is some sort of game. As we look at what happened in November of the fall of 2005, when they talked about it, mused about it publicly, you'll see what happened is that the markets went up and down, and investors were hurt. I don't think that was appropriate.

One of the issues that was to be discussed was “Why four years?” While you were giving that presentation, all of our Liberal friends were chatting with each other and weren't paying attention. Whether they agree or not, I'm not sure. But I think they should have at least been paying attention.

So my question is to you, as the Minister of Finance. I think it's obvious that the governments before us were given the information, obviously started this information, and have received the studies. But why is it important for the finance minister of this country to act with certainty and decisiveness on this particular item?

If you could explain that to me, I would appreciate that.

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

I was certainly aware when we looked at this issue last year, in 2006, of what had gone on in 2005, which was leaked information, the market fluctuations that you've seen--all by the previous Liberal government. We had Mr. McKay, who's here, saying on Newsworld on November 23, 2005--and I quote--“The trusts will be taxed going out or starting, I think, around 2007”, and that it would be a very modest tax. Then we had the Minister of Finance of the day going out and doing something else, not doing that, and issuing a consultation paper, and there were more leaks and more market gyrations. That's not right for the Canadian economy. It's not fair to investors. If we were going to act, we were going to act with certainty and decisiveness, and that kind of certainty we maintain for the people of Canada.

The “having fun”, which the Liberal Party is now intent on doing with this issue, simply serves to create market uncertainty and more difficulty for Canadian investors. It's time to move on. Canadian investors have.

[The Chair, Conservative, Brian Pallister]

Thank you very much.

The committee thanks you very much, Minister, and your officials for being here. We appreciate also the fact that there are some finance officials who will be staying here as providers of additional information if there are more detailed questions for them. Thank you for that.

We will not recess; we will simply allow two or three minutes for the panel members to come forward now. I urge them to do that expeditiously so that we'll have the maximum time to enjoy their presentations.

[The Chair, Conservative, Brian Pallister]

We will reconvene. I will give committee members just a few seconds to return to the table and then we'll proceed.

Thank you to our guests. We appreciate your being here. We thank you also for the materials that you provided to our committee in advance of this meeting today. I know you have been alerted to the fact that you'll have a maximum of five minutes to make your very detailed presentations. I will give you an indication of when you have one minute remaining in your time just to avoid the necessity of cutting you off in mid sentence. We'll unceremoniously cut you off at five minutes, just to allow time for exchange with committee members.

Thank you all for being here. We will proceed first of all with Dianne Urquhart, who is an independent consulting analyst and is here as an individual.

Welcome, Dianne, and over to you.

[Dianne Urquhart, Independent Consulting Analyst, As an Individual]

Thank you.

I support the income trust tax plan, with no increase in grandfathering beyond four years. I strongly urge that the income trust tax plan be enhanced by the addition of prescribed conditions to the Income Tax Act to stop income trusts from reporting deceptive, non-gap financial measures. Cash distribution must be defined as income distribution and return of capital distributions. The cash yield calculation should be restricted unless there is an equally prominent income yield calculation.

The federal government should not be giving tax incentives for an investment targeted to seniors where the product is an unsuitable investment based on the investment objective of secure retirement income and preservation of retirement capital. The high-risk design of income trusts and their deficient investor protection legal framework makes them unsuitable for seniors.

Making matters worse, the tax incentive is promoting the purchase of an investment where there is considerable malfeasance in the financial reporting and marketing material, which I'll speak about in a moment.

I have found that two out of three business income trusts pay distributions well in excess of their incomes. The average amount that the cash distributions are above income is 60%. The sources of the extra money are borrowed money, reserves from prior financing, and not retaining cash to replace plant, machinery, equipment, and software. This financial engineering, without proper transparency, is causing the return of capital to be capitalized as income. This is causing excessive pricing in the market.

In my research “Heads I Win, Tails You Lose”, I found that the business income trust market was trading at a premium of 55% relative to the TSX/S&P60, which comprises sixty of Canada's largest public corporations and a few income trusts. I also compared it to a sample of Canada's non-cyclical public corporations, which comprise the banks, the telcos, the utilities, and the power companies. On that basis, Canadian business income trusts were trading at a 55% premium. Even when I looked at the cashflow from operations, I found that income trusts were trading at a 40% premium. I believe the tax advantages in income trusts contributed 16% of the 55% premiums.

I conclude that the income trust tax plan with a four-year grandfathering period has a 10% negative impact on prices. My calculations differ from the calculations Mr. McKay asked about earlier with respect to what the investment losses have been since October 31 and the announcement of the plan. Business income trusts and energy income trusts, based on a roll-up of each of the individual trusts, are down 13%—up to about two to three days ago—for a loss of $23 billion.

On the basis of my detailed analysis of the tax advantages and the elimination of the premium associated with the tax advantages, it's my opinion that the income tax loss associated with the decision to introduce the income tax plan is $17 billion. This damage is a necessary consequence of a government closing a tax loophole that is not achieving benefits for the economy and is promoting the purchase of an investment by seniors for which this investment is unsuitable.

For a properly diversified portfolio with less than 20% invested in income trusts, the new tax damage is 2%. This is clearly capable of being absorbed by Canadians who invested in this security. Those who have higher losses than this have seen them occur as a result of improper diversification, or perhaps they have suffered the losses as a result of the malfeasance with respect to the improper marketing of income trusts to seniors.

I want to note that on May 3, 2006, the Canadian Accounting Standards Board said that the failure to distinguish clearly between returns on capital and returns of capital is inaccurate and potentially misleading, particularly when terms such as “yield” are used to describe the amount distributed.

[The Chair, Conservative, Brian Pallister]

Thanks, Dianne. I appreciate that. Your five minutes is up.

We'll move on to George Kesteven, who is president of the Canadian Association of Income Funds.

Mr. Kesteven, welcome.

[George Kesteven, President, Canadian Association of Income Funds]

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.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Kesteven.

We continue now with Mr. Brent D. Fullard, president and CEO of the Canadian Association of Income Trust Investors.

Welcome. Over to you, sir.

[Brent Fullard, President and Chief Executive Officer, Canadian Association of Income Trust Investors]

Thank you for holding these hearings, and holding those responsible.

Five minutes is barely sufficient time to make the points I need to make; hence, the prepared comments.

Our association represents the interests of the 2.5 million Canadians who are directly and negatively affected by this policy and who will sustain the $35 billion hardship the so-called tax fairness plan will inevitably result in. If only this policy had purpose and reason--purpose and reason supported by fact. To quote the Auditor General of Canada, “parliamentarians need objective fact-based information on how well the government raises funds”, namely, taxes.

We also represent the interests of the 70% of Canadians who are not members of defined benefit pension plans, unlike our elected representatives and members of the civil service, of which there are 280,000. We are the only association coming before you in these hearings representing the interests of Canadians in a way that is credible and free of commercial influence. Please hold others to this standard, or at least take this into consideration when weighing their testimony.

Providing for retirement income in a protracted low interest rate environment is not an easy task by any means. This is why income trusts have emerged as a popular retirement investment vehicle. The made-in-Canada income trust phenomenon is a product of investor pull and not issuer push. This is why income trusts need to remain as a vibrant and sustainable part of the Canadian capital markets going forward. People's lifestyles and standards of living are fundamentally at stake. Canadians' lives and hard-earned savings should not be compromised to assist in the narrow interests of corporate Canada and many of its influential persons, regardless of their last names or their privileged access to decision-makers.

The ability to introduce this tax legislation is made possible by only one thing, the enabling document entitled, “The Notice of Ways and Means Motion to Amend the Income Tax Act”. Therefore, anyone who wishes to weigh in on this debate and these public hearings needs to make their arguments in the context of that motion's five stated provisions. Issues that are tangential to those five provisions are just that—tangential issues. Some tangential issues are perhaps worthy of further study. However, in the limited time you have allotted, the scope of this committee needs to be focused on these five provisions, all of which are quantifiable propositions, by the way.

Our pre-submission document submitted nine days ago to each of you in both official languages does just that. It is also available on our website at www.caiti.info, under the tab, “Public Hearings”. I call upon the committee members to challenge me today on any of the points our association has raised in this document that you do not agree with or that you feel need clarification or additional documented support. We need to turn these public hearings into a debate, not a speaker's corner.

Unless I am challenged by you, and until I withdraw any of these points, I will assume that our pre-submission document stands as the authoritative voice on the tax fairness plan. This is government in reverse. The government should be presenting Canada with its thought process and supporting evidence, which Canadians could then challenge and subject to peer review. The burden of proof should rest with the architects of a tax fairness plan. Their seeming unwillingness and failure to do so simply makes the tax fairness plan a false moniker, as it's being advanced on five hollow constructs. Absence of facts creates a void—a void in logic, a void in purpose, a void in reason. We do not intend to fill this void with $35 billion of Canadians' hard-earned savings, nor do we wish to lose the only investment vehicle that has any hope of providing retired Canadians with the ability to maintain their retirement lifestyle after they no longer receive employment income.

I do not come before you as an advocate of income trusts, since only licensed investment advisers are able to advise their clients on what investment products best suit a given investor's investment goals. This is called the know-your-client rule, and it is the most fundamental rule that underlies the Canadian investment industry. The tax fairness plan is an abrogation of this rule, as it will prevent Canadians from investing in what they have determined best suits their investment needs.

Despite condemnations from our Prime Minister and Minister of Finance that Canada not become a nation of coupon clippers, the need for retirement income will go on unabated. Canadians will simply turn to other markets to fulfill these basic needs. The TFP will result in a flight of Canadian investment capital out of this country into other markets, like the U.S. high yield market, and Canadians will therefore be financing the growth and prosperity of other economies, principally the U.S.

Meanwhile, the tax fairness plan has created the perfect storm for private equity investors and Canada's largest pension plans to exploit. The 20% decline in market value and the inevitable forced sale of income trusts as a result of the double taxation of RRSPs under this plan will allow these large investors to exploit small Canadian investors.

This inevitable take-out by foreign private--

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Fullard.

[Brent Fullard]

--equity buyers will induce the very outcome that the tax fairness--

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Fullard.

Mr. Fullard, you're done now.

[Brent Fullard]

When can I return?

[The Chair, Conservative, Brian Pallister]

You're done. There will be time for questions after, sir. That's the reason I'm cutting you off now.

Next is Total Asset Management Research & Investment Rights Consultancy, Andrew Teasdale.

You have five minutes, sir.

[Andrew Teasdale, Total Asset Management Research & Investment Rights Consultancy]

Income trusts have not been sold to help retired individuals meet their financial security in retirement; they have been sold for the revenue they generate for the financial institutions and the often phenomenal financially engineered returns for private equity and institutional investors who used income trusts as exit routes. The income trust IPO has been an exit strategy that has allowed cashflows and leverage, and hence valuations, to be manipulated in favour of private equity, corporate, and institutional sellers.

The decision to buy an income trust is principally a decision between current and future consumption and the decision between the rates of capital depletion and the rate of capital accumulation. Many trusts have been distributing not just return on capital but a good portion of capital itself. Many are also using debt and capital raised from new issuance to fund distributions in excess of cashflow, let alone earnings.

The yield on cash bonds and traditional equities is insufficient to meet the financial needs of all but the very wealthy. Individuals are forced to meet lifetime expenditure by depleting investment capital. It is this that has drawn the individual investor towards the income trust sector.

Unfortunately, income trusts have not been valued as lower capital growth or capital-depleting investments that are exposed to the economic and market cycle for their return and access to capital. They have been valued as higher growth, high-yield investments that are impervious to risk. With most income trusts having been launched from the bottom of the last business cycle and up through the current commodity-led boom, investors have been led to believe that they provide both high yield and high rates of capital growth over the long term. Given this belief, it is no wonder that the average income trust investor is up in arms.

Are income trusts a value to the economy? Canada does not have a consumption problem; it has a productivity, growth, and investment problem. An entity that leverages short-term consumption at the expense of long-term capital accumulation will exacerbate short-term inflation problems and impact long-term economic growth. Income trusts are cash generative businesses that invest in cash generative activities and acquire cash generative businesses. They're unlikely to invest capital in businesses that are not immediately accretive to cashflow. Their investment objective is therefore short term.

Some have pointed out that sales revenue and capital invested by income trusts have increased at a far higher rate than the economy at large. These figures ignore the fact that this sector of the market is growing strongly through IPO issuance and post-IPO acquisition and that much of this gain is due to the transfer of capital from other business structures, economic sectors, and asset classes. At any one point in time, resources are best allocated and managed by efficient, competitive, and informed markets without distortion. The efficient allocation of capital and the pricing of capital within the Canadian marketplace has been negatively impacted by tax distortions and by informational asymmetry.

Are they important to the Canadian resource sector? At a time when the world economy has seen overweight commodities and when global capital has been aggressively seeking exposure to commodity investments, it would seem absurd to state that the Canadian resource sector has been dependent on income-hungry Canadian investors. The problem Canada has is in allocating return from the resource sector to the rest of this economy.

Are they important sources of capital for small- to medium-sized businesses? I have analyzed the financial histories of 100 income trusts, from pre-IPO and conversion to the current point in time. The majority of the businesses at IPO that I looked at were not businesses seeking capital for expansion, but private equity and institutional investors seeking exit strategies for businesses acquired. Another important source of income trusts was large corporations spinning off non-core businesses or minority stakes to raise capital. Many of the genuine corporate conversions were companies that were grown well enough prior to conversion, that were retaining earnings, acquiring business, investing, and clearly had access to debt and equity capital. Companies with significant cashflow are also companies that are best able to finance their own organic growth and the least likely to suffer from the end of the income trust model.

Is there a real viable and valuable cost of capital? The lower cost of capital argument only works if capital is not transferred to institutional or private equity sellers but retained for organic growth or for an acquisition strategy that does not value its targets on a similarly distributable cash multiple. There is evidence that income trusts are paying higher multiples for their acquisitions. Clearly, the cost of capital for an income trust in the marketplace is so high that they can only meet this cost through a return of investors' own capital.

Does an income trust structure pose greater fiscal discipline? From my analysis, it would appear that far too many income trusts have been raising capital far too easily. At the same time, with valuations and the ability to raise cash dependent on the maintenance of high cash distributions, many companies are forced to maintain the cash distributions at levels well beyond those the business is capable of maintaining.

[The Chair, Conservative, Brian Pallister]

Mr. Teasdale, you have given the translators the best workout they've had in some time. Thank you very much for your presentation, sir.

We continue now with Cameron Renkas, from BMO Capital Markets.

Welcome, Cameron. Over to you.

[Cameron Renkas, Royalty and Income Trust Analyst, BMO Capital Markets]

Thank you for the opportunity to present in front of the committee. Given the short timeframe, I plan to keep my discussion narrowly focused on an area I've done an extensive amount of work on lately, the U.S. flowthrough market.

One of the statements I want to make first is that it's difficult to make comparisons to one small aspect of a country's tax policy without giving regard to how it fits into the broader tax system, but I do believe it's important for the finance committee to have all the facts regarding the experience that occurred in the U.S. back in the mid-eighties.

There are three key points that I want to stress first off. One, the U.S. continues to have a large, active flowthrough market across a broad range of industries. Two, recent actions by U.S. policy-makers have expanded and encouraged investment in flowthrough entities. And three, U.S. flowthrough entities could become active acquirers of Canadian trust assets, particularly in the energy- and resource-related sectors.

In the U.S. today, there are 214 publicly traded flowthrough entities, including master limited partnerships, limited liability corporations, and trusts, with a combined market capital of over $475 billion and growing. Practically speaking, the U.S. flowthrough structures are essentially the same as Canadian trusts. The majority of pre-tax income is passed through to individual investors in the form of distributions, and each investor pays personal tax on his or her share of that distribution. However, the actions taken by the U.S. government in the mid-eighties were much different from those proposed by the Conservatives' tax fairness plan.

In 1987, the U.S. amended its tax code to require any publicly traded partnership to receive 90% of its income from qualifying sources. Otherwise, it would be treated as a corporation for tax purposes. But unlike the tax fairness plan, exemptions were provided to a broad swath of the market, including oil and gas production, transportation and refining; mining; fertilizer; propane distribution; timber; and real estate. Moreover, existing publicly traded partnerships that did not meet the exemptions were given a ten-year transition period at that time, to meet the rules before being taxed as corporations. That's very different from our four-year transition period provided to Canadian trusts. During that transition period, I'd note, there were no restrictions imposed on partnerships expanding within their existing lines of business.

We estimate that a ten-year transition period to Canadian trusts would have mitigated a negative market impact to about 8%, rather than 12.5%. In other words, it would have saved Canadian investors approximately $10 billion. When the U.S. ten-year transition period ended in 1997, partnerships that did not meet these rules were exempted indefinitely so long as they elected to pay a 3.5% tax on gross income.

Since 1987, many U.S. corporations have spun assets into flowthrough structures in order to capture a higher valuation for those assets. Canadian trusts are at a competitive disadvantage to their U.S. peers because of the significantly higher valuations at which U.S. flowthrough entities trade. As a result, an unintended consequence of the tax fairness plan could be that U.S. flowthrough entities become active acquirers of Canadian trust assets, particularly in energy- and resource related-sectors, as I mentioned.

In contrast to Canada, U.S. tax policy-makers have clearly recognized the benefits of the flowthrough structure, and they've taken steps to expand and encourage investment as a means to attract capital to certain mature industries. In 2004, changes were made to allow mutual funds to participate in the sector. In addition, a structure called the “i-unit” has been allowed. It lets tax-exempted investors' true exempt investments, such as IRAs and pension funds, own flowthrough structures without penalty.

In summary, I again want to reiterate the three key points. One, the U.S. flowthrough market is large and active and is growing across a broad range of industries. Two, the policy-makers in the U.S. have expanded and encouraged investment, and they continue to do so in flowthrough entities. And three, an unintended consequence will be that, very likely, many trusts could be acquired by U.S. flowthrough entities.

I also want to stress on a slightly different note that while the U.S. flowthrough market totals $475 billion, it only comprises a small part of the nearly $6 trillion high-yield market in the U.S. Despite having similar demographics in need for income, Canada's high yield market is only about $200 billion, consisting almost entirely of trusts. On a ten-to-one population equivalent, Canada should have a $500 billion to $600 billion high yield market in one shape or form or another.

This leads to an important question for the finance committee. Why does the tax fairness plan want to limit investment alternatives to investors? More importantly, what are the longer-term repercussions of not providing sufficient income alternatives for Canadian retirees?

In an economy that tends to grow only 2% to 3% annually, not all businesses can meet the 8% to 10% growth expectations of most equity investors. Without attractive reinvestment options, many mature businesses will otherwise have their capital trapped without an efficient use, or, worse, they'll try to chase high-risk projects in order to generate growth. This can often lead to poor investment decisions.

The flowthrough structure allows excess cashflow from these businesses to be returned to investors efficiently, with no double taxation. Those investors can then reinvest it back into that trust, they can spend that money, or they can reinvest it into a different area of the economy. It's their decision.

The structure also helps to satisfy the important growing income demands from our aging population for providing high yield on investment options.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

We'll conclude our presentations now with a representative from Canada's Association for the Fifty-Plus, William Gleberzon. Welcome, sir.

[William Gleberzon, Co-Director, Government and Media Relations, Canada's Association for the Fifty-Plus]

Thank you very much. I want to thank the committee very much for allowing us to make this presentation.

CARP is here to bring forward the views of our members and of the hundreds of thousands of retail investors adversely affected by the government's new policy on income trusts. Those actually impacted by the new policy must be represented because they embody the expertise of experience.

You all know who CARP is, I'm sure, so I can go to the next paragraph, if you're following what I'm saying.

CARP recommends that current income trusts should be exempted from the new tax regime, as is the case with REITS, and at the very least current income trusts should be exempted for 10 years, as occurred in the United States under similar circumstances, as Mr. Renkas has just pointed out. This would give retail investors a chance to readjust and redirect their investments without panic and perhaps recoup a portion of their losses.

After the October 31 policy change was announced, CARP received more correspondence than on any other single act by the federal government since the initiative to introduce the senior benefit 10 years ago. By the way, the Minister of Finance at that time courageously rescinded his proposed policy to transform the public pension system. I say “courageous” because he recognized that it was a mistaken initiative.

The correspondence we received reflected anger and outrage and disgust at the government's sudden turnabout after having been promised that the income trusts would not be touched. They expressed fear and panic over the loss of income that they were counting on to live out the rest of their lives, and at their stage of life, how are they expected to recoup it? If the government goes ahead as planned, there will be more loss of income after four years on a regular basis.

It was welcome news when the government promised not to tamper with income trusts, but what they did, and especially how they did it, was unconscionable and totally insensitive to the impact of their actions. Many of the correspondents told us they used the monthly income from those investments to enhance their daily standard of living, being taxed and spending the balance, as you can actually see on this chart here. Some of the large amounts of money, as much as $20,000 to $100,000 or more, were lost through no fault of their own but rather because of the government's new policy.

Many of the correspondents told us about themselves. Like other demographic cohorts, there was nothing stereotypical about them. They ran the gamut in wealth and occupations. Some were retired chefs, or taxi drivers, or truck drivers, or small business persons--because a lot of women corresponded with us on this issue--who had worked long and hard to accumulate their own personal retirement savings without the benefit of corporate or occupational pensions. Often, their savings were insufficient to meet their daily cost of living so they invested in income trusts. They also had to augment their retirement income so they would not outlive it. Others were more affluent or had income from a corporate or occupational pension, but they wanted to grow their retirement income. The human cost of the change in policy must not be forgotten or ignored in all of these figures.

What I'd like to do now is to very quickly read what some of the people have been telling us in the correspondence. I don't have enough time to read all of it, so I'll just pick some excerpts.

On page 4, this is a letter that was sent to Mr. Harper:

Like so many senior citizens, I have no pension income and have to rely on my savings. In addition to the totally inadequate income from CPP, I, like so many others, have relied on income trusts, which are the only source that up to now offered a decent return. Your recent announcement cost me $20,000 of my hard-earned savings. In fact, that pales in comparison to the losses other seniors have suffered. I don't think I and hundreds of thousands of other seniors can ever recover from the loss you inflicted.

On page 5, at the very top:

I'm a retired widower who worked hard all my life, paid my taxes, never took a nickel back from this country until my pension started. I planned for my retirement, invested according to the laws of the land, and was encouraged by Harper's anti-Liberal rantings when they thought out loud of taxing the trusts. I pay almost $10,000 tax yearly on my income trust income--note, at a higher rate than any corporation would have paid--and I'm sure thousands of small retail investors like myself do the same.

Further down, third paragraph:

I cannot, under any circumstances, bring myself to vote for a government that lied to me and then proceeded to steal over $100,000 from me and my family, money that it took me--

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

On that note, we'll move on to questions now.

Mr. McCallum, you'll commence. You have six minutes.