Thank you, Mr. Chairman.
Indeed, I'm the chair of Pengrowth Energy Trust and, as many of you know, one of the founders of this whole energy trust sector some 18 years ago. We're here this morning to explain why we believe the energy trusts are different.
Mr. Chairman, the energy royalty trust is fundamentally different from REITs and from existing businesses that may have restructured themselves as income trusts, perhaps to obtain premium market valuations. The differences include a long history, the substantial ongoing capital requirements of the sector, and an active business model that is of strategic importance to all Canadians, including significant new capital fundraising within the sector. It has promoted growth, efficiency, innovation, productivity, and minimal environmental impact.
In fact, the royalty trust industry in Canada has become a pivotal part of the Canadian oil and gas industry over the past two decades. Our business model was only undertaken after careful consultations with the Department of Finance, supported by a series of tax rulings that have provided the discipline and framework for our industry over the past 20 years.
Mr. Chairman, energy royalty trusts are highly efficient facilitators of the movement of capital within the oil and gas industry, enhancing productivity and the ultimate recovery of our mature fields. We reward the exploration success of our junior oil and gas companies—as a matter of fact, we've even spawned new exploration companies—and have acquired mature assets from the majors and super-majors. That has freed up capital for other large infrastructure projects, such as the oil sands and the Mackenzie Valley Pipeline, among others.
Trusts are in the forefront of CO2 injection and other technologies that will not only increase the recovery and productivity, but also minimize the environmental impact of the energy industry and the substantial capital requirements for Canada's mature oil and gas industry, including the pipeline and the oil sands, going forward.
The vast amount of capital required for the development of our oil and gas industry is generally not available in the Canadian marketplace, and we must compete for that capital in the U.S. and elsewhere. Capital will seek the highest return at the lowest risk. It doesn't have to come to Canada.
The playing field will not be levelled by the government's proposals. The information that has been presented to this committee is clear, conclusive, and compelling. There is no tax leakage associated with energy royalty trusts compared with traditional Canadian oil and gas companies. Royalty trust unitholders will pay approximately $1.8 billion in current income and withholding taxes on $8 billion of cash distributions in 2006, generating more than 30% of the tax revenue collected from Canadian public oil and gas entities while representing only 16% of the revenue. Indeed, we estimate that the government will lose approximately $1 billion a year in tax revenues if energy royalty trusts are forced to convert back to a corporate structure.
Why is this? The application of a 31.5% tax at the trust level in four years, with no deductions available, is inconsistent with the taxation of oil and gas corporations that are based on net earnings. They have significant deductions, and we all know they pay very low levels of cash taxes. Combined federal and provincial taxes on corporations last year were at 32.1%; the net effective marginal tax rate in the oil and gas industry is only 6.7%. Now, the companies can declare dividends, but as you know, in the oil and gas industry they do not pay significant amounts of dividends.
Taxes imposed upon energy royalty trust distributions are based on cashflow, and cashflow is approximately twice the level of earnings. Distributions are now about 80% of cashflow, relative to a very low level of payout of earnings as corporations.
So cash taxes for the major independents in Canada average about 5% of EBITDA, compared with 18% for the trust industry, and substantially more taxes are paid on a proportionate basis by investors in the royalty trust industry.
We talked earlier about the MLP example in the United States. In 1986 and 1987, considerable review was conducted by the House of Representatives and the Senate in the United States. They found that they exempted REITs and energy trusts, and they exempted energy royalty vehicles because of the security of supply issue and because they were an established vehicle for raising capital in a capital-intensive business. Mr. Chairman, I would submit the same applies here in Canada. Energy-related vehicles were exempted and allowed to pass through income.
We believe there's a clear and compelling case for grandfathering Canadian energy royalty trusts, and we encourage you to make that recommendation to the government.
I hope my presentation today opens the door to work together on this very important issue. Thanks for your attention. I look forward to any questions the committee might have.
Thank you.