Finance Committee on Feb. 13th, 2007

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

And the department didn't.

I'll mention the last point and then move on. They exclude deferred taxes, and you argue they ought to include deferred taxes. But as I understand it, at least they should be consistent. Either they should include everything deferred and include deferred taxes, which gives you your number, or they should exclude not only deferred taxes but deferred capital gains, I think it is, which works in their favour. Am I right in thinking that if they exclude everything deferred, which at least would be consistent, again your story wouldn't change very much? Or is that not fair?

[Dennis Bruce]

It might tilt things the other way if they excluded everything. There might be tax gains there. But let me say I believe deferred taxes should be included with respect to income trust accounts, from a tax-exempt account. But on the other side of the ledger, I believe deferred taxes should be included from capital gains as well.

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

Thank you very much.

I would conclude that, going through those things point by point, this is a pretty definitive case, buttressed by at least three other witnesses, unopposed by any government-side witness, and further buttressed by the fact that the finance department continues to refuse to release their numbers, which form the basis for the policy and which are a crucial basis for their policy decision.

Mr. Rosen, my question to you goes to relevance. I'm sure you're aware that both the CCA and the CSA have made recommendations on the reporting of distributions and accounting standards for income trusts. I'm at a bit of a loss as to your role here. Are these not the organizations you should be making your representations to?

[Al Rosen]

No, I believe the tax is closely interrelated with the accounting and financial reporting. We have a serious question here of why the taxation is somehow favouring for years, and currently doing much the same thing of trying to encourage for 10 years, what amounts to Ponzi frauds. This is criminal. We work around the world, and I can easily say that if this had been occurring in the U.S. people would be in jail.

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

That perhaps is important, but it's very distinct from the issues the committee is examining. It seems to me it's more for those agencies I mentioned. In any event, thank you very much.

Thank you, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Thank you.

Next up is Mr. Paquette.

[Pierre Paquette, Bloc, Joliette, QC]

Thank you, Mr. Chairman.

I'd like to thank all of the witnesses for their presentations. You have obviously enlightened us. However, we still do not have all the information we need to make recommendations to the minister with a view to minimizing the impact of the decision taken last October 31.

Mr. Bruce, the last time you were here, you provided some details about the fact that the Department of Finance had excluded legislative changes applying to the period ending in 2010. What exactly are we talking about in terms of numbers? Regarding the Department of Finance's decision to exempt deferred tax plans, what kind of numbers are we talking about here? Could you give us some figures? I think it would be interesting to know what these figures are.

[Dennis Bruce]

If it would help the committee, I have tables that provide this, which were filed as exhibits last time.

[Pierre Paquette, Bloc, Joliette, QC]

That being the case, perhaps I will put the question to Mr. Lapointe.

Mr. Rosen and Ms. Urquhart, both of whom previously appeared before the committee, called into questions the ethics surrounding income trusts. According to Ms. Urquhart, it would be unwise to extend from 4 to 10 years the transition period for income trust unit holders so as to soften the blow and allow them to make some sound choices. In my opinion, this would only encourage older, more vulnerable taxpayers to invest in this type of vehicle and to run the risk of losing their life savings. I'd like to hear your views on this subject and on Mr. Rosen's comments.

[Jean-Marie Lapointe]

If the aim of this committee is to protect retirees from themselves and from dishonest representatives, then that's another matter. If Mr. Rosen believes that criminals are at work, then he should denounce them and file a complaint with the RCMP.

My particular Ponzi scheme involved making investments in an electricity generating project in Manitoba. I don't believe the Government of Manitoba acted dishonestly by conspiring with criminals. It dealt with reasonable individuals and signed a contract of at least 25 years. The project involves supplying clean energy to 41,000 households in Manitoba. We're not talking here about criminals that the RCMP should be investigating. The RCMP has other matters to attend to, but if Mr. Rosen knows of any specific cases, then he should bring them to the RCMP's attention.

One of these “rogues” is set to appear before your committee this afternoon. I'm talking about the President of Pengrowth Energy Trust. This company has been in business for 17 years. Units issued in 1989 for $10 now sell for $20 on the market, even after the meltdown. Shareholders have received $34 and upwards for their units. If you know of any Ponzi schemes like this, please let me know.

This rogue, who is set to meet with investors, will be testifying this afternoon before your committee. He has just purchased ConocoPhillips, a North American company with one billion dollars worth of assets in oil fields that are nearing the end of their productive life. And, do you have any idea of who ConocoPhillips teamed up with to develop oil sands by selling end of line operations to a Ponzi scheme? With EnCana. EnCana teamed up with an American who sold end of line operations to Pengrowth Energy Trust, which you have qualified as a Ponzi scheme.

This businessman, who is said to be honest and who has managed a company founded 17 years ago, a company in the business of serving small shareholders, will be here this afternoon. We invest our money for our grandchildren and for our families, and as the gentlemen was saying, the rate of return on this investment is 15%. This Ponzi scheme has been going on for 17 years. For heaven's sake, give me another 17 years of the same thing.

Thank you.

[Pierre Paquette, Bloc, Joliette, QC]

Mr. Bruce, you are critical of the minister, and justifiably so, for automatically taking this $500 million per year and multiplying it by six, for a total of $3 billion. Does this method of calculation take into account the tax changes which will take effect in 2010? I see that the $192 million figure that you quoted represents $32 million in annual tax losses identified, multiplied by six.

[The Chair, Conservative, Brian Pallister]

Your time has elapsed.

We move now to Madame Ablonczy. Madame Ablonczy, you have five minutes.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Thank you, Mr. Chairman.

Thank you to all of you for attending. We know this is an effort and a work that really helps the committee. We appreciate it.

I'd like to address this issue of lost tax revenue, which Mr. Bruce talked about. The Finance officials are here, and some pretty serious allegations were made, which I think they should respond to. I'm hoping that the Finance officials haven't cooked up some sinister plot to wrongly convince the government that they're losing significant taxes, in order for them to break a campaign pledge and take a big political hit.

I assume there must be some response to these allegations that Mr. Dennis Bruce is making, so please respond and give us your take on what Mr. Bruce said.

I'll leave it to the officials to decide who.

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

I can start. I'd say the same thing as I said at the last committee meeting. In terms of the $3 billion impact of going from four years to ten years, it was calculated based on the corporate tax rate reductions, including the resource tax rate reductions, going from 2006 or 2007 on for six years.

You have to take into account the fact that, as Mr. Bruce indicated, there are probably not going to be any further conversions into income trusts over that period. Also one of the big offsets that reduced our 2006 estimate was the one-time capital gains, which we estimated on conversions and IPOs in 2006. That doesn't occur in other years over the transition period.

So you don't have to have a very significant—in fact you could have a very minor—organic growth rate, and that's consistent with the issuances that have been made even over the past few months on income trusts.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Thank you.

It's interesting that there seems to be such a divergence of testimony between Mr. Bruce, who I understand told us before that he was hired by the trust industry to look at this issue of tax leakage, and the finance department officials, who I assume have some pretty significant resources and corporate memory from over the years and put the discussion papers out. How do you explain this divergence? To people watching, I think it seems a little odd.

[Brian Ernewein, General Director, Tax Legislation Division, Tax Policy Branch, Department of Finance]

I will make a comment in that respect. My colleague is the leading expert in the department on the revenue estimates that have been put together on this. But in some respects, it seems to me that the market has actually opined on this since our announcement. The only change that occurred between the evening of October 31 and the morning of November 1 was the announcement of our tax change. Then the market seemed to reacted with an adverse impact on a couple of witnesses we heard from.

The point I'd like to make is that as we have said, this market impact seems to suggest that our revenue estimates were conservative. If Mr. Bruce is right and the actual revenue effect of this change was much more modest than even we had suggested, then I would have difficulty reconciling this with the impact that the market has shown to have actually occurred.

So perhaps to respond to a question with a question, I'd invite the committee to explore how the actual market effects can be reconciled with our revenue estimates and those of others.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

So you're saying that the market obviously believed the Department of Finance and their calculations, not what the trusts have come up with after the fact?

[Brian Ernewein]

I'm not suggesting that the markets signed on to the Department of Finance over anyone else. I'm really expressing the view, which the Governor of the Bank of Canada articulated when he was here the other day, that you can take the effect, the market impact, as a result of the changes and, by applying present values, try to determine what the tax effects of that were.

From this it would appear that the numbers that the finance department put forward were indeed conservative.

[The Chair, Conservative, Brian Pallister]

Thank you, Madam.

Madam Wasylycia-Leis.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you, Mr. Chairperson.

Let me go to Mr. Rosen first. I'm a bit surprised at John McCallum's suggestion that there's no relationship between what he has documented in possible illegalities and Ponzi schemes and what we're dealing with today, which is the future of income trusts and whether or not the decision made by the government makes sense.

It seems to me that's awfully irresponsible. It would be almost like suggesting that a plane can be cleared for takeoff without making sure it has enough fuel to get to its proper destination. After the sponsorship scandal, I would think the Liberals would be a little more concerned about trying to explore this issue and these allegations.

[Robert Thibault, Liberal, West Nova, NS]

It's an interesting relationship.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

It's a very interesting relationship. There's a pattern here, I think.

Mr. Rosen, you have suggested that something fairly significant and unethical is taking place. I don't want to put words in your mouth, but the legal implications of what you're saying almost seem to be on the scale of the Enron scandal in the United States.

Do you want to comment on that and, at the same time, address your numbers on the financing of paid distributions at 250% of income? Is that occurring regularly in Canada? I think that's relevant to John McCallum's assertion and the findings of this committee.

[Al Rosen]

It's extremely frequent. We've been tracking these trusts for a long time.

We have two major concerns that don't get addressed. One is the Accounting Standards Board in Canada. We're the only country in the world that allows the auditors to set the rules, so it's no great mystery that the rules are loose. I'm in court extensively on these types of cases. So I don't know how we can possibly allow that to happen.

We also allow provincial securities commissions, and I've testified before them many times. There's no point in talking to the RCMP, I'm sorry to say. I've done that 20 times and these cases go nowhere. So we have a situation across Canada where no one is looking at the interests of the investors.

On Mr. McCallum's reference to the securities commission and the document it put out a couple of weeks ago, I will have a response to that in the National Post perhaps as early as tomorrow. It's very clear that nothing is happening in that area.

We sat through the Nortel fiasco; we're now sitting through the income trusts. If you look at my track record, I've called many of these over the last 20 or 30 years. So I'm saying we have a crisis in Canada—the worst I have ever seen. It absolutely shocks me that we're foot-dragging on what is clearly the cause of the problems of the gentlemen here and many others.

No one is taking action. We're working with the class action lawyers because they're quite concerned. I also write every second issue of Canadian Business. Do you think I don't get e-mails, Mr. McCallum? I get tons of them, and they certainly don't support the foot-dragging that's occurring.

We have a major problem here, and passing it off and saying it's the responsibility of the provinces or somebody else is absolutely irresponsible, in my opinion.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

One of the suggestions made by some of the witnesses, including Mr. Bruce and others, is that we can ease the pain and not cause any problems by extending the grandfather clause from four years to ten years.

What's that going to solve, Mr. Rosen?

[Al Rosen]

It's not going to do anything. In fact, the e-mails I get are telling me to find someone who's a bigger sucker to sell these things to. So it would be the worst thing on earth to not clamp down immediately.

I'm sorry, gentlemen, but sell your trusts except for a handful of important ones, because we have not seen the end of the decline in trusts. We have gross inflation in the market.

Let me take one example: Aeroplan. Probably no one else in the room knows that when it was formed out of Air Canada all of the obligations to redeem the points were given to Aeroplan; the cash was not. This is the old joke about the marriage and the split-up: I take the house, my spouse gets the mortgage. That thing is selling for $19 now. They frankly admit that 75% of the distributions are return of capital for fiscal year 2006. In 2005 it was 84%. So why is it at that point?