Thank you, Mr. Chairman.
I would ask the committee members to refer to the written statement and papers that I have tabled, to better understand the very telegraphic points I will make.
My thesis is that it is the implementation of the legislative proposals, and not the existence of the trusts, that will lead to a loss of tax revenue. The attempts to quantify the alleged tax leakage go back to the 2005 consultation paper. That study suffered from fundamental flaws. Because of its many incorrect assumptions, the study overestimated the taxes collected from corporations and underestimated the taxes paid on trust distributions. The updated numbers released by the minister, and earlier by Mintz, are based on the same faulty methodology used in the consultation paper.
The worst source of leakage, according to the minister, is the RRSPs and the pension funds, because he treats them as tax-exempt rather than tax-deferred entities as they are under the law. In a medium- and long-term context, there could only be tax leakage if the present value of taxes paid in the future were inferior to the taxes forgone at the present time. This cannot be, since the yield on trust units is 8% or 10%, while the rate of inflation is about 2%.
The minister says he has to look at the issue from the point of view of the annual budget. This cash accounting method cannot be used to pretend that taxes are not paid and that this causes him a problem. In 2004, Canadians contributed $38 billion to their tax deferred accounts but withdrew $52.5 billion of income fully taxed at their highest marginal rate. There is clearly no leakage even on the basis of the current fiscal year.
The measures contained in the draft legislation will lead to a substantial loss of tax revenue for the following reasons.
The non-tax-deferred investors pay more taxes on trust distribution than they would if the trusts were corporations. This is because their taxes are calculated at the higher tax base and paid at higher-taxed personal rates. If most or all trusts reconvert to corporations, as is clearly the intention of the minister, the taxes collected will be reduced substantially.
Because of heavy double taxation of distributions, RRSPs, RRIF-holders, and pension funds will have to shift their investment to assets with lower yield. This will lead to lower retirement income, year after year, on top of the heavy capital losses they suffered. Less retirement income will lead to lower tax revenue and more pressure on the social welfare system.
In view of this, there is clearly a need to adopt a package of measures to truly compensate people who lost a chunk of their retirement savings. The increase in the age tax credit, worth $150 a year, is pretty useless for a person who has lost $15,000.
Pension income splitting is welcome, but it is highly discriminatory and its linkage with the trust issue is purely artificial. Due to much higher taxation, non-residents will divest away from their trust units and the government will lose the quasi-totality of the withholding taxes presently collected. The minister thinks these investors don't pay enough taxes, so his solution is to make sure that they will pay none.
Most provinces will be affected negatively, not only due to a global lower tax base but also by the fact that trust distributions will be taxed by the province where the trust resides and not by the provinces where the investors reside as is now the case. Provinces such as Quebec, B.C., and Manitoba, which have an active investment community but host few or no trusts, will be losers.
My overall conclusion is that the legislative proposals should be put on hold until, one, a credible study, based on sound methodology, made by a neutral party, is made to determine their impact on tax revenue; two, a set of measures is put forward to truly compensate the losses suffered by persons saving for their retirement—the attitude of the minister is callous; and three, a set of criteria and regulations is proposed to determine which types of enterprises should be allowed to convert and those that should not.
It is the absence of such criteria and regulations that has led to the destructive overkill and the damage that we are witnessing. The minister did not have to destroy the trust sector in order to prevent the undesirable proliferation of conversions such as EnCana, Hibernia, Bell, and Telus.
Thank you, Mr. Chairman.