Thank you, Mr. Chair. I am pleased to return to provide additional evidence on the tax leakage issue.
As stated on February 1, we believe the Department of Finance sharply overestimated tax leakage at $500 million for 2006. Our figure, after making appropriate adjustments to the department's approach, is a tax leakage of $164 million. But today I will focus on addressing the cost of extending the transition period from four years to ten years.
If we look at extending the transition period, HLB calculates $32 million of federal tax leakage per year. The total cost of the six-year extension is $192 million, as opposed to the department's estimate of approximately $3 billion. Notwithstanding identical methodologies, the HLB calculation differs sharply from that of the department.
There are four significant factors at work that I will address in turn.
First, the Department of Finance's exclusion of already legislated corporate income tax changes through 2010 results in an overstatement of tax leakage. The evidence provided by the Department of Finance in its backgrounder, and by the minister in his statement before the committee, makes no reference to the impact of already legislated tax changes. While the minister indicated that the $3 billion estimate is the result of multiplying the department's $500-million-a-year figure by six, no formal written documentation has been provided that explains the department's calculation. That includes the materials provided last week by the Department of Finance.
I recognize that in response to committee questions on February 1, departmental officials stated that projected growth in the trust sector would offset the impact of legislated corporate tax reductions. I find this to be a most extraordinary notion for a sector in which no new conversions are allowed, where constraints are to be imposed on the growth of each individual trust, and where the increase in tax burden is known to be significant under the proposed rules. In fact, very few trusts are likely to remain in the current form over the medium to long term.
Second, the exclusion by the Department of Finance of deferred taxes results in an overstatement of tax leakage. In ignoring the present value of tax revenues and deferred accounts such as RRSPs, the department has quite inappropriately adopted a one-year budgeting framework to analyze a policy proposal with multi-year implications.
We do think the department acknowledges this point in principle by allowing in its calculations tax revenues, from shareholders of corporations, from capital gains that may not be realized until future years, when the shares are actually sold or disposed of. It is inconsistent to not apply the same logic to tax-exempt accounts and include the value of deferred taxes from income trust investors.
Third, the overestimation of tax-exempt unit holders by the department results in an overstatement of tax leakage. In its 2005 public consultation paper, the department used HLB's figures for the proportion of tax-exempt investors. We have since updated that figure. However, we did so shortly after the consultation paper was released. Since then we have collected additional information that corroborates a revised number. The department, however, continues to rely on our out-of-date figure for the analysis.
Fourth and finally, the overestimation of ongoing corporate tax rates in the energy trust sector results in an overstatement of tax leakage. The department's assumption for the effective corporate tax rate in the energy sector has been arbitrarily increased to reflect the favourable market conditions that happened to prevail in 2006. This reasoning, by the way, is a departure from the more appropriate approach the department used in its 2005 public consultation paper.
To conclude, the combination of the four factors I've discussed leads the department to overstate by a factor of about 15 the tax leakage associated with extending the transition period to ten years. In short, the total cost of extending the transition period for income trusts is $192 million, not $3 billion as the department has provided.
I'd be pleased to answer any questions from committee members during our remaining time today or after the session.
Thank you very much for the time.