Finance Committee on Feb. 1st, 2007

[Art Field]

We passed a resolution on this at our convention in Truro. It came from an independent consultant we're working with, who is here today with me. It came from her, and our convention, which had 150 people at it from across Canada, passed that resolution. There was some debate, but it was really unanimous after the debate, because of the resolution. The resolution is in the package I gave when we were here before, and it's going to be in the package you're going to get this time.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

I'm aware of the resolution, Mr. Field. As you recall, I spoke to your convention. At that convention, I advised them to avoid income trusts, but that's an aside.

I am very pleased with Mr. Murphy coming forward and reminding us that all the finance ministers of this country have shared the same concerns. Our political party had those concerns prior to the last election, and we were clear that we would have to act upon this issue were we to become government.

Out there, of course, ordinary Canadians had mixed messages. Their government promised not to tax but is ultimately doing that. Still, this is a file that has a lot of questions remaining, with a lot of questions stemming from the previous government's actions.

I still would like to come back to you, Mr. Elitzur, on your suggestion of perverse incentives. Would you give us an example?

[Prof. Ramy Elitzur]

I wouldn't name the company, but one example is of a company that basically went public recently as an income trust. It's a telecom company, and I guess you can guess the name. They have huge investments that they face. They also are facing a potential attack in terms of their revenues because of the huge technological risks. Voice-over IP is going to kill most of their profitable sectors, so the question is why they went public as an income trust.

In one of the things I hypothesized, I took a look and saw that the CEO owns over half a million shares, and there are more in the pipeline. So he's going to not be due from now until basically eternity.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

I was really asking about the incentives you were referring to.

[Prof. Ramy Elitzur]

The incentives were basically to go and register as an income trust because the financial institutions were having a party. Instead of being listed on NASDAQ, they got listed here. The CEOs were making lots of money, lawyers were making fees, and everybody was making fees. But in the long run, it's like a musical chair game. The music will stop and some people will stay without the chair, and sometimes without pants.

[The Chair, Conservative, Brian Pallister]

Mr. Robert Thibault, I would like to welcome you as a new member of this committee. You have three minutes.

[Robert Thibault, Liberal, West Nova, NS]

It is a pleasure for me, Mr. Chair, to join your committee.

I have a couple of questions, but one brief question to Monsieur Normand.

I would presume—and tell me if I'm correct—that prior to the minister making his announcement, you would have prepared a memorandum to cabinet and a memorandum to the minister, outlining options, outlining what the risks were of options, and outlining the cost and risk, including the effect of an eventual decision on the market. Am I correct?

[Brian Ernewein]

I'll speak to that.

Yes, we did provide advice to the minister.

[Robert Thibault, Liberal, West Nova, NS]

And you have prepared such documents, like a memorandum to cabinet in this case?

[Brian Ernewein]

Without being specific about the documents, we did provide material with advice to the minister.

[Robert Thibault, Liberal, West Nova, NS]

Thank you very much.

I come to you, Mr. Field. We've listened to a lot of witnesses today, and we've heard a lot of credible people talk. One of the things they point out—and I tend to agree with them—is that there is a sector out there that is ideal for these types of investment, for this type of a vehicle, the income trust, like energy and real estate. The government has agreed on the real estate side and has left it in.

Intelligent investors approaching retirement would have heeded, I would presume, Mr. Marston's advice and limited their exposure to income trusts within their portfolio, on advice from their brokers—if they're being advised by good organizations—based on the fact that there was a proliferation of income trusts, that there were a lot of companies moving to income trusts, and that they were risky. It wasn't the ideal advice that we hear about innovation, that we hear about this thing.

Prudent investors would have tended to say that somebody has to react at some time. But when your Prime Minister says he will not take action, then the prudent investors, the smart investors, are encouraged to go the other way, to increase their exposure in income trusts, to maximize the value of their retirement savings, to make sure they can care for themselves and their families in their retirement years and in their failing years, should ill health come upon them. So this broken promise, this lie to Canadians, has cost them a lot of money.

We have seen and we continue to get evidence and letters from seniors who worked very hard to save a little bit of money that, well invested, would give them some comfort in their retirement. Now they are in situations of poverty when they most need the money because they believed the Prime Minister.

I accept what the minister says about the cost to the provinces because of the way these taxes are paid in some of these companies, but in your opinion, has anybody provided to you, Mr. Field, what the cost is socially to the provincial governments, to the cities, to the municipalities of these people who are put in poverty and who don't have the money to care for themselves?

[The Chair, Conservative, Brian Pallister]

Monsieur, you have used your first opportunity for a question with a preamble. This is not an isolated case, unfortunately, for many of the panel members, but we do continue now.

Mr. St-Cyr, you now have the floor, sir.

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

Thank you very much, Mr. Chair. My first question is directed to Mr. Murphy.

You referred earlier to the possibility of interprovincial losses which may have occurred if steps have not been taken to deal with the tax benefits inherent in income trusts.

I fully understand that you would have to forgo revenue from businesses in your province if they were to convert into income trusts, because the taxes would be paid in other provinces. But isn't the opposite also true? Aren't there income trusts in your province from which, should the companies go public, you would no longer be able to collect taxes because they would be withheld outside your province? For example, if an individual in your province has income trust units in a company which mines oil in Alberta, as things currently stand, any taxes would come back to your province. Moreover, if this trust were to become a publically traded company, the money would go to Alberta.

Have you done the math to make sure there is really a clear difference?

[Mitchell Murphy]

Thank you very much for your question.

Yes, we have, and part of it obviously relates to our population of 140,000 people. What we would stand to gain from growth in personal income tax from unit-holders who may participate in income trusts outside our province but pay provincial income taxes in Prince Edward Island is insignificant compared to the tax that we lose when one of our major corporations becomes an income trust.

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

Is that specific to your province or is that something you find in many Canadian provinces?

[Mitchell Murphy]

If you look at the correspondence that has been provided to the committee by other finance ministers across the country, they have done estimates on what it has cost their provincial treasuries, of course, from almost a half a billion dollars in one province, down to us.

In speaking to a former colleague of mine in Newfoundland, they were very concerned because of the growth in the offshore that was happening. They wanted to be able to capture that to move their province ahead, so they had grave concerns in that area.

I don't feel comfortable speaking for other provinces. In a general sense, though, in our discussions at the meetings of the ministers of finance, everyone was very concerned about the loss of income.

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

I just have one other question—

[The Chair, Conservative, Brian Pallister]

Mr. St-Cyr—

Nice try.

We will conclude with a question from Mr. Dykstra.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you, Mr. Chair. It's great to be the final person in the order here and to have a chance to ask a couple of questions.

Mr. Field, one of the things we haven't talked a lot about is part and parcel, and you referred to it. I ask the question straight out to you. Do you think any member of the House of Commons should actually vote against the legislation that will actually allow income splitting for pensioners?

[Art Field]

No.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you.

One of the things we heard on Tuesday was that the unit payments for income trusts were actually from the investment of capital, versus the investment from profit. Does your association have any comment on that?

[Art Field]

No. My adviser could probably answer that for me, but that's over and above my capabilities of high finance. My capability, as the president, is running the organization and meeting here with the government and MPs on issues. That's an issue, but I can't give you a fair answer on it, so I'm not going to try.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you, Mr. Field.

Mr. Elitzur, I noted that at the beginning of your presentation you noted the fact that you came to the table as unbiased an observer as you possibly can be. What do you think from the other extreme, in terms of those witnesses who have commented on this while being six- or seven-figure folks who are making a lot of money on income trusts? They make huge salaries in a particular year and stand to gain tremendous bonuses based on the sales and growth of the income trusts. What are your thoughts in terms of whether or not their viewpoints are clouded because of that?

[Prof. Ramy Elitzur]

As somebody who deals with incentives, I would say that whenever you have an interest that you can gain something, chances are that the opinion is biased.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you.

Mr. Murphy, in terms of your letter, one of the things that intrigued me was that it was somewhat different from others because of your focus on the regional aspect. We're all here talking about this from a national perspective. Certainly the riding I come from has over 23,500 seniors. To me there's a lot at stake with respect to pension splitting, so you can see how it breaks down from a regional perspective. I wonder if you could comment further on that from a regional perspective.