Thank you, Mr. Chair.
Good afternoon. Thank you for inviting me to appear before the committee today. It's a great honour.
I'll be presenting evidence on tax leakage, and I'll submit it after my testimony today.
I'm vice-president of the firm HDR|HLB Decision Economics. For the sake of time, I'll refer to it as HLB going forward.
Our firm specializes in the provision of impartial and objective third-party economic analysis. Since the fall of 2003, we have been working on behalf of the trust sector to ascertain whether taxes generated under the income trust structure are less than tax revenues generated under the corporate form.
We also have met and collaborated with the Department of Finance in developing our methods and models. In the period during which the Department of Finance prepared the government's 2005 consultation paper on the tax effects of income trusts, HLB was asked by the department to work with them to help come up with a common methodology and assumptions for deriving tax leakage estimates.
HLB and the Department of Finance achieved a consensus on general methodology, with one key exception. We did agree to disagree with respect to whether or not to include the value of deferred taxes. While not immediately taxable, distributions received in tax-exempt accounts are taxable upon withdrawal from such accounts, and they do therefore have economic value.
The discussions that you're hearing about deferred taxes reflect confusion about budgeting convention versus policy analysis. While budgeting is done on a current basis, policy analysis should be done on a life-cycle basis. Accounting for the life-cycle effects of tax changes, namely deferred taxes, is appropriate in consideration of tax policy.
With the release of the new data from the Department of Finance on Tuesday, HLB has updated its analysis. The results are summarized in exhibits that I'll provide to the committee after I testify.
We can confirm that the general methodology employed by the department remains the same as that which we had previously discussed with them. In fact, given the department's assumptions, we've managed to replicate their numbers based on their assumptions. There remain, however, important differences in the way the methodology has been applied, leading HLB to conclude that the department is sharply overstating tax leakage.
The difference between HLB's analysis and that of the department stems from four key factors. First, the department's assumed effective corporate tax rate for energy trusts fails to reflect the reductions in the tax rate for resource corporations from 2004 through 2006. This results in an overstatement of tax leakage of approximately $84 million per year.
Second, the department's figure for income trust units held in tax-exempt accounts is overstated. Derived from data from surveys, interviews, and Scotia Capital Markets data, the percentage of units held in tax-exempt accounts is approximately 31%, which is less than the department's estimate. This results in an overstatement of tax leakage by approximately $125 million per year.
Third, the value of deferred taxes, as I discussed earlier, is excluded from the Department of Finance's analysis. This results in an overstatement of tax leakage of $80 million per year.
Fourth, the impact of future legislated tax changes through 2010 has not been accounted for. Doing so reduces the ongoing federal tax leakage by $232 million per year, and this excludes planned corporate tax cuts that have been announced for 2011.
In addition, in our analysis, we looked at the income trust sector only, and not limited partnerships, which have a small impact. Based on our overall analysis, we conclude the following.
Federal tax leakage for income trusts for 2006 was $164 million, not the almost half-billion dollars stated by the department. Ongoing tax leakage for income trusts post-2010, after taking into account the legislated tax changes, is approximately $32 million a year, or about 5% of the department's estimate.
I'd be pleased to answer any questions from committee members during the remaining time or after the session ends today.
Thank you very much.