Finance Committee on April 24th, 2007

[Mark Carney]

You lower the cost of capital by eliminating withholding tax, number one.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Yes.

[Mark Carney]

You accept that.

Number two, in terms of the adjustment to the interest deductibility, level the playing field and achieve neutrality between investment in Canada and investment abroad.

Number three—

[John McKay, Liberal, Scarborough—Guildwood, ON]

But there's no reciprocity on the part of any other nation in the OECD. At least with the issue of withholding tax, there is a reciprocity between us and the United States. You gave away something for nothing.

[Mark Carney]

The interest deductibility is not a tax treaty issue. It is a domestic taxation issue, so it's not something that one coordinates.

To use up more than your seven minutes, I can ask Mr. Ernewein to go through all the measures that other jurisdictions are taking with the same ultimate end of restricting, either through thin cap or through taxation of repatriation, to end up with a very similar situation internationally—certainly all of our major competitors.

I want to make one point, though, if I may on the trust acquisition element. I'm looking at the acquisition premiums paid for those trusts that have been acquired or that have agreed offers. With only two exceptions, they are all at substantial premiums to the October 31 trading date, the undisturbed trust trading date. So it's not a trust tax change that has resulted in this.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Carney, what is the difference between a low-tax jurisdiction and a tax haven, in 25 words or less?

[Mark Carney]

Mr. Ernewein?

[Brian Ernewein]

For this purpose—a low-tax jurisdiction when talking in the context of interest deductibility—what matters is that there's a low-tax jurisdiction with which we have a tax treaty. That's what makes a double dip work.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So Ireland is not a tax haven?

[Brian Ernewein]

Its tax rate is lower than ours.

[John McKay, Liberal, Scarborough—Guildwood, ON]

It's a low-tax jurisdiction? Barbados would be a low-tax jurisdiction, not a tax haven?

[Mark Carney]

For clarification, that is the terminology of the Auditor General.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I'm glad you're clarifying that.

[The Chair, Conservative, Brian Pallister]

Thank you.

Mr. Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

Well, here we go again, another day of Liberals standing up for a corporate tax holiday and the Conservatives standing up for broad-based tax fairness. I certainly hope the viewers are paying attention to that.

Mr. McCallum made this point on Friday that he's alluded to, about subsidies for farmers and therefore subsidies for corporations—between which, of course, there's no correlation. Our agricultural industry suffers from more than a decade of poor planning and leadership, and our corporations are actually doing quite well in Canada; hence the support required for our farmers.

Specifically, yesterday the Toronto Star made a point that I think is relevant to the discussions today. It said:

Although it makes no sense to allow companies to claim tax breaks against income on which they pay no tax... Dion seems to have it backwards. If a Canadian firm can cut its Canadian tax liability by exploiting the deduction for interest costs on tax-exempt investments made in the U.S., wouldn't the company be more inclined to expand its operations there instead of at home?

In addition to that, you also made the point that Canadian corporations are not overly leveraged. So this isn't a benefit they're exploiting to that great an extent anyway, really. They're not borrowing a lot of money; therefore, they're not deducting a lot of interest.

I think this argument flies in the face of common sense. If you can borrow money in Canada against Canadian assets and invest it elsewhere in a lower tax jurisdiction and then bring the income back into Canada and pay no tax on it, this is not going to encourage the creation of Canadian jobs.

Would you concur with that, Mr. Carney?

[Mark Carney]

The policy of the government is that having neutrality across those two jurisdictions makes the most sense, so that corporate decisions are made for business reasons as opposed to driven purely by tax considerations.

[Dean Del Mastro, Conservative, Peterborough, ON]

Right.

You talked about a very broad-based approach to taxation—tax fairness, as we call it. it was outlined in “Advantage Canada”, and we spoke very specifically about improving Canada's overall competitiveness by reducing the overall tax rate.

It's very difficult to march back the overall tax rate if we don't have a level playing field, if we don't have tax fairness, isn't it? We'll have some companies that are playing by the rules paying quite a bit of tax, and that will mean that if you have others not paying their fair share, then you can't lower the rate. Isn't that correct?

[Mark Carney]

That is correct. The government would like to lower rates for companies, whether they are principally active in Canada or principally active internationally.

[Dean Del Mastro, Conservative, Peterborough, ON]

Okay, that's great.

I'm going to touch a little bit on the income trust issue, because that's the other point that they seem to be bringing up across the way fairly often: pandering to interest groups.

The income trusts have actually rebounded very substantially. There was an article in today's National Post that indicated that the index is now virtually where it was on October 1 last year, and there is kind of a green light to buy Canadian income trusts because of the advantages and some of the hot buys that are going on in income trusts. Do you see this as an industry that's rebounding and adjusting to the new tax environment that's there?

The other thing--and I don't know if the department has a view on this--is the increase in the value of traditional corporate shares, and the overall increase in the TSX, which has been extraordinary. These two are not unrelated. Money has gone from income trusts into traditional corporate shares, pushed up the TSX. Well-diversified portfolios have benefited from this economic activity, haven't they?

[Mark Carney]

Those are very good points.

Just to put some numbers around those, the income trust index, as a whole, relative to October 31, is off 6.6%, so it has come back quite strongly, as you indicated. The TSX, as a whole--which I would remind members is a $2 trillion market now--is up 10.4% since October 31. So there has been substantial capital appreciation across a wide range of financial assets in Canada.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you. I have nothing further.

[The Chair, Conservative, Brian Pallister]

Thank you.

Committee, I propose that we have another round of four-minute questions, and then at 12:30 we move to dealing with the votes on these estimates. I hope that meets with your approval.

Mr. Pacetti, we'll continue with you for four minutes.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you.

It's not the line of questioning I wanted to start with, but thank you for appearing before us, Mr. Carney.

Can you give me those numbers again? You're telling me that the trust sector has gone back up to the value it was at on October 31 by taking out the REITs?

[Mark Carney]

The trust capped index, the S&P/TSX capped trust index, as of yesterday, closed at 154, versus 164.9 on October 31. That's 6.6% down relative to October 31. So it's come back.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Right. And you removed the REITs because of course the REITs are not exempt from the income trust fiasco.