Finance Committee on May 28th, 2007

[George Kesteven]

I think it's important for people to realize that capital markets are dynamic, they're not static. And what's going on with this particular legislation is not only poor public policy, but it's atrocious implementation. The atrocious element of the implementation is that it continues to create more and more uncertainty, because as income trusts, we don't know what we're going to be allowed to do for the next four years, and that's where the problem comes into play.

If this bill passes as its existing structure is set up, there are going to be problems with going forward, because the income trusts don't have enough guidance to know what it is they're allowed to do and what they're allowed to be, essentially. For instance, one of the clear indicators is that we don't have a road map for conversion to a corporate structure. There isn't any detailed enabling legislation in this legislation to tell us what to do, how to do that, what we're allowed to do, when we're allowed to do it, and what the tax implications would be. So that's where there's a problem. That's why it's so urgent that we get clarity in this legislation going forward, so that the capital markets know what to do and how they should respond.

[Chris Conway]

I would say the same thing as Mr. Kesteven said. Capital markets are usually very quick to react. Regarding real estate investment trust funds, for instance, we noted some hotels and retirement homes were about to be purchased. In some cases, the estimates caused a sharp drop in price. Some groups made applications to purchase. We will very likely see things change in six months or in a year or two. Perhaps there will no longer be any REITs for hotels or retirement homes in Canada. This is what is happening now.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

The Conservative government may have changed its mind. That is what probably caused the situation. However, we must also make sure that we have the best possible tax base. This is why, regardless of the fact that the government changed its mind despite its previous commitment, we must choose the alternative that will provide the best tax base.

Mr. Weir, do you have any comments on this?

[Erin Weir]

Yes, of course.

I recognize that this committee has relatively little ability to change amounts of money in the budget, and I recognize that the Bloc is committed to supporting this particular budget. And I suppose that's why I've tried to focus my presentation on issues that can be dealt with by this committee and that can be dealt with after the budget. The first thing is to get this tax-back guarantee out of Bill C-52. That aspect of the bill really purports to tie the hands of future Parliaments and really reduces the ability of elected representatives to make decisions about how to allocate resources in the future. So that's one concrete thing I would ask for--some amendments in that area.

The other concrete thing is--

[The Chair, Conservative, Brian Pallister]

I'm sorry, Mr. Weir, I have to cut you off. Mr. Crête's time has elapsed, plus.

We'll continue now with Mr. Del Mastro, for five minutes.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

Thank you, panel.

What a remarkable statement to begin with by Mr. McCallum. Today the leader of the opposition came out and demanded a complete moratorium on foreign investment and takeovers in Canada. Mr. McCallum started off by saying that he can't believe anybody would move to limit foreign investment. My goodness, sometimes the double-speak from the Liberal Party is absolutely shocking.

Having said that, I would like to ask a couple of questions.

Mr. Kesteven, recently we've seen that markets in Canada, whether the TSX or even the income trust index, have moved up sharply. Investors, especially those who followed good, sound investment principles, with well-diversified portfolios, are doing very well.

In fact, you said that no stability was brought forward, no clarity. The finance minister went to great lengths to bring clarity. The only lack of clarity is coming from the Liberal Party, as it continues to put forward motion after motion on this.

The government has put this in the budget; we intend to move forward on it. We have the support of the Bloc, of every single province in the country, and of people such as David Dodge from the Bank of Canada, who said the long-term effects of not acting.... Let me quote him, because I don't want to be inaccurate. John, you're going to enjoy this:

By giving incentives that led to the inappropriate use of the income trust form of organization, the tax system was actually creating inefficiencies in capital markets, inefficiencies that, over time, would lead to lower levels of investment, output and productivity.

That may be what the Liberal Party wants, but it's not what our government wants.

So having said that, the finance minister laid out all the criteria for the period leading up to 2011. What part of this isn't clear enough? I would like to get clarity, so that people can understand and do proper planning. I would like to understand what part of that is not clear.

[George Kesteven]

Two particular elements are ambiguous. One element deals with the fact that we think we're being told to become corporate entities, but there's no structure in place. This is similar to subsection 85(1) of the Income Tax Act, which defines a share-for-share exchange on a tax-deferred basis. We have no detailed legislation to back this up and provide the road map for this issue.

Secondly, the wording of the legislation is ambiguous, such that it basically says—and we like to call it tax legislation through news release—that if the government deems to change the rules midstream, they have the right to do so. Obviously we would think that due process is supposed to be involved in changes to the Income Tax Act. We would expect this would be part of the legislation as well.

We are very concerned about the ambiguity in those two elements.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

Mr. Michaleski, you had a broader question on the oil industry. I would like to ask you a broader question on the oil industry, since that window has been opened.

The Liberal Party brought forward a private member's bill, C-288, that proposed to bring in Kyoto measures by 2012, which is a very short timeframe. The broad speculation, particularly in Alberta, is that this would absolutely devastate the oil industry there, since they would not be able to meet this timeframe. Would you care to comment on that?

[Robert Michaleski]

I'm not going to profess to be an expert on environmental or Kyoto-related matters, sir. I'm speaking on behalf of our infrastructure group. But I think anything that causes damage to the industry will certainly have an impact on us longer term, in the sense that likely there will be less product for us to transport to export markets. So clearly anything that's going to cost the industry more will translate into less production and less transportation, and that will have a negative impact on us.

[The Chair, Conservative, Brian Pallister]

Mr. Del Mastro, you have about 45 seconds left, so keep it to Bill C-52, if you can.

[Dean Del Mastro, Conservative, Peterborough, ON]

Okay.

Ms. Lysack, I appreciate that you have come back before the committee again. The government made a very significant commitment in this budget for funding space creation. We have not seen that funding, certainly not in the Ontario budget anyhow. I'm curious: has there been any thought afoot to suggest that we may take early learning and roll it in under education?

I've got schools closing in my riding, and I don't understand why early learning isn't part of education. Why aren't the provinces making this a bigger priority? We have certainly given them a lot of capacity. Do you have any thoughts on that?

[Monica Lysack]

Actually, I think—

[The Chair, Conservative, Brian Pallister]

There are five seconds remaining. You can have a brief time to respond. That question deserves a long response, but just a few seconds, please.

[Monica Lysack]

I think you've reduced the capacity by about $1 billion. Certainly provinces and territories have the opportunity to make choices about that. In Saskatchewan, for example, early learning and child care is under the Ministry of Education.

[The Chair, Conservative, Brian Pallister]

Thank you very much. That was a good job of briefly doing justice to the question.

Mr. Martin, welcome, sir. Over to you.

[Pat Martin, NDP, Winnipeg Centre, MB]

Thank you, Mr. Chair. I appreciate it. Thank you for this opportunity.

Thank you to the witnesses.

I have followed the whole income trust issue with great interest over the years. In fact, in 2005 I put forward a motion that the government should do exactly what it has done.

Let me quote an article from the Winnipeg Free Press in June 2005. Someone said:

Whole industry sectors are becoming tax fugitives by restructuring themselves as income trusts. We need to be clear with Canadians about the implications of income trusts. When corporations do not pay their taxes citizens pick up the tab in the form of higher taxes, more service fees, and cuts to social programs.

It's long been held that these flow-through entities are a way of wholesale tax avoidance. Wouldn't it be safe to say that most corporations restructuring themselves as income trusts do so to avoid taxes? Am I completely off base here, or is that pretty much it?

[George Kesteven]

Absolutely incorrect.

[Pat Martin, NDP, Winnipeg Centre, MB]

That's been the experience in my reading. Most of the companies that I came across said this certainly is a motivation.

We've seen Murray Edwards, as an investor in the oil patch, commenting on this very thing. There was another name I was looking for. At the shareholders meeting when they were voting on whether to restructure, they were more or less saying, “We can't believe that the government allows us to do this, but seeing as it's legal now, we better do it, because it can't last forever.”

Even Mr. Edwards was saying that the government will have to nip this in the bud sooner or later, because it's simply bad public policy.

[George Kesteven]

There is a tax transfer that occurs. Taxation doesn't take place in the hands of the corporate entity; it takes place in the hands of the unitholders who receive the distributions.

In most cases, they pay at a high marginal tax rate, perhaps as high as 46%. I would hardly say that tax leakage is occurring, when they're paying a 46% tax rate on those distributions.

[Pat Martin, NDP, Winnipeg Centre, MB]

I don't think you could win the argument about tax leakage, sir. We have the charts put forward by the Library of Parliament about exactly how this happens. We have a fairly good understanding of this.

As they say, the first casualty of war is the truth, and that's what I'm more concerned about. There's an unprecedented lobbyist campaign going on. I don't know who's paying for it, but some of the highest-priced lobbyists in the country sit there in the back rows of meetings like this with their meters going.

I can only assume that Mr. Boudria is not doing this because he's interested in income trusts.

There's an overwhelming lobby of self-interest going on here to hang onto this last tax refuge. We can't understand it as ordinary Canadians.

Even as a trade unionist who used to sit on a union pension investment fund.... Everybody knows that in the long run, it's bad. It's short-term gain for long-term pain. It sucks the lifeblood out of business.

If everything flows through to the unitholders, if the whole purpose is to suck all the profits to the unitholders and avoid paying taxes, who is going to reinvest, grow a company, and create jobs?

[George Kesteven]

The governance model for the income trust is significantly different from that for corporations. You're comparing apples and oranges. The governance model in income trusts is such that, yes, the majority of the cashflow is paid out to the unitholders.

If management wants to pursue an acquisition opportunity, a development opportunity, or a major capital obligation, they must go back to the capital markets and fund that directly out of the markets. They have direct accountability to the capital markets.

In a corporate model, they retain the cashflow as retained earnings. In a lot of large corporate entities, this essentially becomes the hobby fund of management. They don't necessarily have the same direct accountability—

[Pat Martin, NDP, Winnipeg Centre, MB]

If they are going to grow their business, I think they'd be better off.

[George Kesteven]

They don't have the same direct accountability to their shareholders. The unit holders of a trust actually are in a very good position because governance is very strong, such that management must come back to the market when they want capital.

[Pat Martin, NDP, Winnipeg Centre, MB]

Do I have a moment left?

[The Chair, Conservative, Brian Pallister]

You have about 40 seconds, sir.