Finance Committee on Feb. 1st, 2007

[John McCallum, Liberal, Markham—Unionville, ON]

Do you accept the point about the $232 million being due to the fact that you didn't consider legislated tax changes?

[Denis Normand, Senior Chief, Financial Institutions, Business Income Tax Division, Tax Policy Branch, Department of Finance]

The $3-billion figure that the minister quoted the other day took into account the legislated tax changes from 2007 onward. The estimate that the minister provided in the background is for 2006.

[John McCallum, Liberal, Markham—Unionville, ON]

Can I ask Mr. Bruce to respond to that?

[Dennis Bruce]

Yes.

It was not my understanding that this was referenced in the documentation that I've seen from the Department of Finance. My understanding was that the estimate for 2006 was an ongoing tax impact of $600 million, with $100 million in one-time effects, the net impact for 2006 being $500 million. I may have misinterpreted the data, but my understanding was that there was a $600-million ongoing impact assumed. I did not understand, from the information presented, that it reflected the legislated tax changes going forward.

[John McCallum, Liberal, Markham—Unionville, ON]

Mr. Normand.

[Denis Normand]

It's important—and the backgrounder attempts to do this—to understand that there are ongoing tax losses from income trusts over a number of years. They are offset by a one-time capital gain in 2006 for conversions that occurred in the year, but you have to look at what's ongoing. It's still a picture of 2006.

The second point that HLB disputed is again in the paper. We've used the same effective corporate tax rates as we did in the 2005 consultation paper. In terms of the energy trusts, we've indicated that energy prices have gone up 65% since 2004. The statutory tax rate has come down about 15%. Therefore, we thought it to be a very conservative assumption to leave the rate the way it was.

The second point—

[John McCallum, Liberal, Markham—Unionville, ON]

I fear my time is running out.

[Denis Normand]

If I could just complete the comment on the effective rates, new Statistics Canada data would imply that business trusts should actually have a higher effective rate than in the paper—about one percentage point higher—which would mean the revenue loss is $100 million or so more than stated in the paper.

[John McCallum, Liberal, Markham—Unionville, ON]

I fear I'm about to run out of time, but I'd like to give a little time to Mr. Bruce to respond.

[The Chair, Conservative, Brian Pallister]

You have about thirty seconds for a response, sir.

[Dennis Bruce]

With respect to the legislated changes, it was my reading of the document that they weren't included. Again, I didn't notice them there, but I guess that's something the Department of Finance could confirm.

With respect to the statutory rate on energy trusts, it did fall from 2004 to 2006. I understand that the profitability of the market may have changed over that time due to the high world price of oil, but I'm looking at this more from of a tax policy perspective. I wouldn't want to hinge tax leakage estimates on the sustenance of a certain world crude oil price. I would feel uncomfortable with that.

That's my comment.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir. It is Mr. Paquette's turn.

You have five minutes.

[Pierre Paquette, Bloc, Joliette, QC]

Thank you for your testimony. Mr. Bruce, based on the minister's presentation last Tuesday, I understood that he and the department foresee losses totalling $500 million for 2006. And he actually said that he got the $3 billion figure by simply multiplying $500 million by six. Was that your understanding, as it was mine, of the method the minister proposed last Tuesday? He even use the word “arithmetic”.

[Dennis Bruce]

Again, it comes down to the legislated tax changes. My understanding of the numbers presented on Tuesday was that there was a $500 million tax leakage in 2006, and that was multiplied by six to get the $3 billion. Because of that, my interpretation was that the future changes in future years—the corporate tax rates falling to 19%—were not taken into account. That's my interpretation.

[Pierre Paquette, Bloc, Joliette, QC]

That is exactly what I took away from the minister's presentation. You may have already said this, but if you take the 2006 figures and apply them to 2011, what sort of a bold pack tax leakage would you be looking at?

[Dennis Bruce]

If you take everything into account that we have, we would show that from 2011, after the legislative tax changes and some of the other things that I spoke of earlier, we would get a very marginal tax leakage, in the order of $32 million a year. If you're just looking at the legislated tax changes—and those that are just legislated, not those that are planned and have been at least announced in some fashion—the impact is about $232 million from those. Again, that's from our math, but that would be the impact.

[Pierre Paquette, Bloc, Joliette, QC]

So you took in the differed income tax then. Is the minister making a valid argument when he says that he needs to pay for this year's federal government programs and that income trust units which are in RRSPs or RRIFs are actually tax leakage?

[Dennis Bruce]

There are a couple of points on that. As Mr. Dodge said in his testimony on looking at impacts, it's important to take into account the present value of things. That's what deferred taxation is. We feel the inclusion of deferred taxes is important because even though all of them do not occur in-year, they will occur at some point and they're related to the issue at hand, which is tax policy. So I think it's important to take into account the life cycle effects. There is a value there.

That issue is not a debate for income trusts. We can make the same argument about whether or not it's a good thing to have the ability to defer taxes.

[Pierre Paquette, Bloc, Joliette, QC]

Mr. Kerr, I was a little surprised to read in your brief that you link the disappearance of income trusts in the energy sector to an enhanced reduction in greenhouse gases. Could you elaborate on that please?

[Gordon Kerr]

Actually, in our report, we point to the fact that some of the members of our coalition are involved in projects that have involved carbon dioxide sequestration with regard to enhancing productivity out of older, more mature reservoirs. This is something they've been looking at to see whether they can actually employ it in additional reservoirs.

There is already application of carbon dioxide flooding, as is referenced commonly, in reservoirs in western Canada. Given the impacts that this could have with regard to those decisions to pursue what are right now economic projects, and given where we play and what we can bring to bear from our investor base—in other words, those investors who are looking at lower returns, but something better than a GIC rate—we can actually enhance the recoveries out of these reservoirs through things like carbon dioxide sequestration.

It's an incremental piece, I think, in the grand scheme of maybe some of the things that Canada is looking at as a country in order to improve what we do. It has an economic benefit, and it may have a greater benefit for some of the environmental concerns that we have.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

I'll just interject a quick question for the finance department officials.

Some of the testimony we've heard and some of the commentary that we've heard borders on or gets right into accusations of incompetence on the part of finance department officials, that you're somehow the gang that couldn't add straight. I think we need to get a response to the comments that you took numbers projected for next year and multiplied them by a certain number, and that this was somehow a simplistic disengagement from what the actual facts of the future might be. I think you need to respond to that.

Mr. Normand, I'll give you the opportunity to do that now.

[Brian Ernewein]

If I may speak to that, I guess if we were incompetent, we wouldn't admit to it.

[Voices]

Oh, oh!

[Brian Ernewein]

As for the numbers—

[The Chair, Conservative, Brian Pallister]

There's not a lot of sense in continuing with your answer at this point.