Finance Committee on May 28th, 2007

[Lorne Calvert]

Yes, but affected in Saskatchewan's case will bring our total to zero.

If this is a matter of equity and if equalization is based on fiscal capacity, I would appreciate an explanation from the Conservative members of Parliament of how it is that my very good friends and neighbours to the east, in Manitoba, for instance, will receive $2 billion under this regime next year, and the province of Saskatchewan--similar population, similar geography, similar economy--will receive zero? That's the effect of the cap on Saskatchewan. It brings us to zero. This simply cannot be fair.

[Robert Thibault, Liberal, West Nova, NS]

As we're running short, I want to point out one thing. This is a quote:

...anything less than substantial compliance with our commitment will cause us no end of political difficulty during the next federal election. ...there is very little “wiggle room” for the Conservative government and its Saskatchewan MPs on this issue.

This is Brian Fitzpatrick, a Conservative member from your province. Surely he's in contact with you and offering his assistance and partnership with you to fight this move with the federal government.

[Lorne Calvert]

The answer is no. And I understand Mr. Fitzpatrick has decided not to seek re-election.

[The Chair, Conservative, Brian Pallister]

Thank you, Monsieur Thibault.

We continue with Madam Ablonczy now for four minutes.

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

Thank you.

I thank all the panellists for bringing important perspectives before this committee. It's very helpful.

I think the hot topic right now is you, Mr. Calvert, as Premier of Saskatchewan, and I think we all regret that there is this difference of opinion between the federal and provincial levels about transfers to the provinces. I think Canadians are kind of unhappy with having a sort of “he said, she said”.

What I guess I hear you asking for is transfers from the federal equalization program that would give Saskatchewan a greater fiscal capacity than some provinces that are not receiving transfers from the program. Is that correct?

[Lorne Calvert]

What we are asking for, and have consistently asked for, is fairness, the fairness by which other Canadians have been treated over the course of time. I ask you, therefore, is it a fair measure of fiscal capacity, as governed by equalization pay-out, that our friends in Manitoba will receive $2 billion and the people of Saskatchewan will receive zero of these federal entitlements? Remember, these entitlements are provided by the people of Saskatchewan. They're being provided by the resources that belong to the people of Saskatchewan.

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

Mr. Calvert, I want you to have your say, but I also want to get to the issues that I think are important, because I think you're right, the issue is fairness. The fact of the matter is—and you know this and it has been bandied about—that if what you are asking for is given to Saskatchewan, it would be really unfair to other provinces who are not receiving any money from the equalization program. You know that. I know that. The equalization program, by its very definition of “equal”, is a program to allow provinces to have equal fiscal capacity.

The fact of the matter is that you say there was no mention of a cap when this was discussed in election rhetoric. But there was no mention that there would not be a cap either. I think it's fair to say that a reasonable person would not assume that any province, even one as deserving and wonderful as Saskatchewan, would be able to access a program in such a way that it would create unfairness in that program, that it would give Saskatchewan a higher fiscal capacity than provinces that are not receiving anything from the program.

Here we have—and I think you're proud of this—an economy in Saskatchewan that's very hot right now. In fact, your finance minister is proud of that. I'm sure you are. The equalization program is to help provinces whose economies are not so hot. And of course, in addition to the equalization program, there is a whole raft of federal transfers, which really enrich Saskatchewan. I won't take time to read them, but you're aware of that.

So my question is can you tell Canadians across the country why you would want to use a program that's supposed to make provinces equal to make you more equal, to have an unfair advantage because of that program?

[Lorne Calvert]

The question that begs to be asked is in the formulation of this program. How does one determine the parameters of fiscal capacity? Are you arguing that Saskatchewan's fiscal capacity is greater than Ontario's? Is that the argument? Have we a program in place that defines that where Saskatchewan is today has a greater fiscal capacity than the province of Ontario?

Reasonable people living in Yorkton, Saskatchewan, look next door to our neighbour and good friends in Manitoba. We see a similar economy. We see very similar population. We see a very consistent prairie experience. How can a formula that you would describe as “fair” provide for their citizens $2 billion, by which they are able to provide education, health care, and child care and so on--

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

So are you saying that the O'Brien formula, the ten-province formula, and the recommendations of this expert panel are somehow flawed, that they don't give a fair result? Is that what you're taking issue with, the panel's recommendations?

[Lorne Calvert]

If the outcome is that the resource revenues that belong to the people of Saskatchewan to build for their future are being taken from them—

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

But they're not being taken from them, Mr. Calvert. You know that.

[Lorne Calvert]

They are being taken from them. You need a course in equalization.

[The Chair, Conservative, Brian Pallister]

Thank you, Ms. Ablonczy.

Thank you, sir.

We'll conclude now with Mr. McCallum. You have about three minutes.

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

Thank you, Mr. Chair.

I welcome the guests. I find this embarrassing, because we're not giving the premier enough time. We're also not giving the others enough time. I will, however, focus on the premier. I apologize to the other guests.

It has been said that a successful budget should be out of the new cycle in three days. I think this is approximately day 70.

[An hon. member]

It's a minority Parliament.

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

Mr. Premier, I also noticed that in the budget document it speaks to the point that this budget will bring an end to intergovernmental disputes and allow governments to focus on the things that matter to Canadians. The language in the speech was even more flowery, that we are into a brand-new era of no more wrangling.

You've been a premier for some time. Can you explain how anyone could possibly think that wrangling would ever be over in a federation, and how could this government, having broken its promise to so many provinces, conceivably have thought that at the time of the budget?

And since I'm somewhat embarrassed, you don't have to answer that question. You have about two minutes to close in any way you see fit.

[Lorne Calvert]

Let me close with my own apologies to our colleagues here from the child care community and from the CLC and working people. We share some of the very deep concerns that have been brought to this table and to this committee today from the child care community. The termination of the agreement that we had in place with the former government has significantly impacted our ability to deliver early childhood education in the province. So I regret as well that they haven't had as much opportunity.

In terms of building a strong Canada, there will always be disagreement. It is the nature of our country. Our budget, by the way, disappeared from the headlines in four days. It is the nature of Canada because we are a confederation of provinces and territories. When you can strengthen a province or a region, you are strengthening the nation. When you are handicapping a region or a province from building for their future, you're handicapping the future of the nation.

I believe this country is built on fairness, equity, and trust, and when a national government makes a promise to its citizens, when a national government makes a promise to the people of Saskatchewan, where I come from, you'd better keep your promise. It is how we build a strong federation; it is in that fairness, equity, and trust. And this, committee members, has shaken the trust in my province in this national government.

I would like to see this national government restore that trust. I would like to see the members from Saskatchewan who represent us in this Parliament spend more time explaining Saskatchewan in Ottawa and explaining Ottawa in Saskatchewan. But fundamentally, I would like to see, for the benefit of the people of Saskatchewan, this promise kept, because it makes a significant difference for our future.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir, and to all panellists for your participation today.

We'll suspend only briefly while the next panel of witnesses comes forward.

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

Mr. Chair, I think your ruling has actually done a great disservice to the other witnesses, and I would invite the committee to reflect on our agreement that we had a while back and ask the committee whether they would like to see the witnesses, Mr. Weir and Ms. Lysack, back at another time so that they can be properly interviewed by the committee. So I'm making that a motion before the committee.

My colleague Mr. Thibault is seconding it.

[The Chair, Conservative, Brian Pallister]

Sure.

This panel is dismissed, however. You may make yourselves comfortable, apart from the rhetoric that's going to go on here momentarily. Thank you again.

Is there any discussion? Seeing none, I will call the vote on the motion.

(Motion agreed to)

[The Chair, Conservative, Brian Pallister]

We'll invite the panel members to take their seats and recommence.

I'll also, to satisfy the terms of the motion we just discussed, invite the representatives from the Child Care Advocacy Association of Canada and the Canadian Labour Congress to come back. I won't ask you to present again, but I appreciate your making yourselves available to answer any questions committee members may have. Thank you for your willingness to be flexible with our committee.

For the members of the second panel, welcome; we appreciate your being here. I know you were instructed, but I will remind you that you have five minutes to make your presentation. I will give you an indication when you have a minute remaining, so as not to cut you off too quickly, and then we'll move to questions.

Beginning our presentations now, Chris Conway is here with Real Property Association of Canada.

Mr. Conway, welcome to you, and five minutes is your time.

[Chris Conway, Manager, Government Relations, Real Property Association of Canada]

Thank you, Mr. Chair.

My name is Chris Conway. I am the director of government relations for REALpac, the Real Property Association of Canada.

We represent most of the TSX-listed real estate companies, including real estate investment trusts, otherwise known as REITs.

Our members own approximately $150 billion in real estate across Canada, and we see ourselves as both the property market's lobby group and the capital markets group from real estate.

We also have several different vehicle types in our membership: real estate corporations, pension funds, life companies, banks, and large private owners.

Today I'll be speaking exclusively about REITs and the changes to the REIT rules contained in Bill C-52. I would like in particular to comment on the written technical submission we have sent to the committee for consideration.

By way of background, REITs have been specifically enabled in Canada since 1994 and have existed in the U.S. since 1960. REITs are becoming a global phenomenon, as many Asian and European countries now have REITs. Throughout the world, REITs are a very common and growing phenomenon for investors. This is because they allow small investors to access passive rental income from big-ticket real estate assets.

We continue to be grateful for the existence of the REIT exemption and the work the government and the Department of Finance have done to address initial Canadian REIT industry concerns arising out of the October 31 announcement and the draft language released in December 2006. Most of these issues were addressed in the budget motion prior to the introduction of the bill.

Our purpose in suggesting further minor items is to make sure the technical language contained therein allows the majority of existing Canadian REITs to continue operating and competing in the Canadian marketplace without regulatory uncertainty or accidental restrictions. As it is, the wording creates several operational problems. Wording changes are suggested to enable the budget bill language to better achieve what we believe to have been intended all along.

In preparing this submission, REALpac undertook significant consultations on behalf of Canada's REITs. We've reviewed many of the national law firms' and national accounting firms' public analyses of the REIT legislation. We've convened a meeting of REALpac REIT members and several of their advisers to analyze the technical language. We have drafted and circulated many successive drafts of possible changes to selected tax lawyers and tax accountants in national firms.

The result has been our written submission to the committee and suggested wording changes to the bill. Our intention is to seek these changes on a consensual basis prior to the bill's becoming law. We would be pleased to work with all stakeholders on these changes.

In addition to our technical concerns, there are two policy issues raised in our submission. The first is the foreign property ownership limits. The second is the lack of inclusion of hotels and nursing homes in the new REIT rules.

Regarding the foreign property rules, there is no solid policy rationale we're aware of for preventing Canadian REITs from owning more foreign property. All major industrialized countries allow unlimited ownership of foreign property. It appears that this is because allowing REITs to own foreign property brings in more tax revenue. The more a REIT can earn by holding properties abroad, the more it pays out in distributions to unitholders, which in turn are taxable, either domestically or through withholding tax for foreigners.

Hotels and nursing home REITs would not qualify under the new rules. We would like to point out that the U.S. REIT rules, now and for some time, have accommodated hotels and lodging REITs, and under the February, 2007 draft bills, health care and seniors' home REITs are now being included.

We have advocated two potential solutions. The first is either a slight relaxation of the REIT rules to permit hotel and nursing homes to qualify, or a fully taxable subsidiary model, such as exists in the United States. It now appears that Australia is also moving in a similar direction to allow these types of REITs.

REITs allow small investors to participate in large investment-grade real estate by purchasing REIT units. If hotel and nursing home REITs are not allowed to exist, not only are we less competitive with other jurisdictions, but we will remove the small investor from the picture.

Ultimately, it's important to have cross-border synergy in our capital markets. We do not want other countries' REITs being stronger than our own.

In conclusion, REITs allow a greater amount of capital and institutional investment to flow into real estate. We have a strong and stable capitalized public real estate market now with real estate investment trusts. There is a lot of money flowing into hotels, nursing homes, new office buildings, new industrial parks, and new multi-family developments. Making the changes we have requested will help ensure that Canadian REITs remain strong and competitive.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. Conway.

We'll continue with George Kesteven from the Canadian Association of Income Funds.

Welcome, Mr. Kesteven. You have five minutes, sir.

[George Kesteven, President, Canadian Association of Income Funds]

Good afternoon.

Thank you very much, Mr. Chairman and members of this committee, for giving me this opportunity to speak to you today on behalf of the Canadian Association of Income Funds.

The Minister of Finance's stated intention last October 31, with the introduction of the so-called tax fairness plan, was to level the playing field, stop future conversions to income trusts, and stop tax leakage, no matter how small. What the government has done does not amount to tax fairness, but rather the wholesale destruction of a valuable structure in the Canadian economy.

To date, the unintended negative consequences of this move have been the following:

First, to give a boost to the U.S. growth of master limited partnerships, MLPs--the U.S. equivalent of Canadian income trusts--by eliminating any competition.

Second, to destroy billions of dollars of investor value. Many of these investors invested based on a promise made and subsequently broken by Prime Minister Harper.

Third, to tilt the playing field in favour of private equity, foreign equity, and pension funds, none of which pay taxes to governments, federal or provincial.

Fourth, to make it difficult for Canadian trusts, especially resource trusts, to access capital. This makes them prime targets for takeover.

Fifth, to facilitate the takeover of close to 15 trusts in the last six months, with more than 20 announcing that they are currently on the block at fire sale prices.

Mr. Chairman, as Premier Calvert said earlier today, it is not tax fairness to break a promise made to millions of Canadian investors. It is also not tax fairness to impose a 31.5% tax when corporations effectively pay only 5% to 10%.

The playing field has not been levelled when the income trust sector has been severely disadvantaged, compared to the situation of corporations, by the elimination of non-resident investors and through the double-taxing of pension funds and RRSP holders. It is not tax fairness when Canadian investors have been disadvantaged and cut off from an investment vehicle that provides them with cashflow needed for retirement.

As far as the issue of tax leakage is concerned, it is our contention that federal and provincial tax revenues will not be increased in any way under this bill. Many governments will actually experience reduced revenues in the end.

Permit me to highlight for you the federal government's own documents of October 31, in which it forecasted zero tax revenue through 2011 from this tax. Copies of this have been provided to the clerk. It makes all the more curious the fact that the finance department has promised a new joint committee with the provinces to share in the revenue stream when none is expected over the four-year transition, and little if any is expected into the new regime as the sector is bought out or converts to corporate status.

With respect to Bill C-52 itself, we urge this committee to address clear gaps in the current drafting:

First, how will income trust be treated in legislative terms during the transition period? Currently these rules appear only in guidelines that are, in essence, a news release that can be changed at the whim of the government.

Second, there needs to be a legislative framework in Bill C-52 to facilitate conversion to corporate status on a tax-deferred basis, similar to the existing subsection 85(1) of the Income Tax Act, as well as the ability to eliminate the remaining trust vehicle in a tax-efficient manner.

We respectfully submit that the finance committee follow its own advice to the government of earlier this year in its report on income trusts by producing a separate piece of legislation that is comprehensive and that includes the guidelines and conversion rules, and is not so broad as to have application to partnerships that are not listed on the public exchange. Only then would all parliamentarians and Canadians have a clear opportunity to see this issue on its own merits, and properly address the income trust issues in this bill.

We continue to be committed to working consultatively and collaboratively with all levels of government to achieve a tax system that is fair for all.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Kesteven.

We conclude with a presentation from Robert Michaleski, from the Canadian Energy Infrastructure Group.

Welcome to you, sir. Five minutes is yours.