Thank you very much. The Canadian Association of Income Funds has been before this committee on several occasions in the last year, and we're glad to be here again regarding the income trust policy announced on October 31, 2006.
Bill C-52, the first Budget 2007 implementation bill, which contained the income trust legislation, did not in fact address significant implementation issues that require immediate attention. It is to address these issues that we appear before you today.
However, the committee should also be aware that the damaging consequences of the government's actions continue. Since October 31, 2006, there have been more than 42 transactions that involved the selling, merging, or acquisition of income trusts with an enterprise value in excess of $31 billion. The majority of these transactions by dollar value involved foreign buyers of Canadian assets. Most have gone into the hands of private equity and pension funds. Virtually all of these entities will pay little or no tax to either to the federal or provincial governments.
In addition, ordinary Canadians are frozen out of participating in the potential investment benefits of not only our own natural resources but also a diverse and entrepreneurial business trust sector. Many small and medium-sized Canadian businesses have had their access to capital severely impaired. This makes them vulnerable to takeover and leaves them powerless to compete.
At best, the estimates of tax leakage at the time this bill was put forward were $500 million at the federal level and potentially $300 million at the provincial level. Together that makes $800 million. In 2006, the trust distributions from the sector totalled $16 billion. To recover totally would have required a tax rate of no more than 5%; instead we are faced with 31.5%.
Let me now turn to our technical recommendations. The following sets out some of the issues and deficiencies, although this list is not intended to be exhaustive.
No certainty or legal clarity has been given in the legislation for the transition period in the guidelines issued December 15. This clarity is urgently needed in some form, whether through the release of further policy guidance or another mechanism available to the government.
For example, under the existing guidelines, it is not clear whether issuing equity to replace debt--convertible or not--that was outstanding as of October 31, 2006, will be considered growth for the purposes of the guidelines, and whether equity issued to replace outstanding lower-tier debt will be excluded from the growth in equity capital.
In many circumstances, a trust has borrowings and lower-tier entities in which it has a direct or indirect interest, and such debt should be considered the same as replacement of the debt of the trust.
Also, no legislative framework was included in the legislation to facilitate conversion back to corporate status on a tax-deferred basis, similar to other tax-deferred rollover rules that already appear in the tax act.
By opposing the high level of statutory corporate tax rates on trusts, and especially on the distributions, the government has clearly signalled the elimination of the trust sector. There was no legislative mechanism in the bill to eliminate the remaining trust vehicle in a tax efficient manner after conversion to a corporation.
Such rules are necessary to remove uncertainty and provide an orderly transition. Furthermore, the trust rules have such breadth of application as to bring within their ambit non-publicly traded units under certain circumstances, which surely could not have been the intent.
This matter has been brought to the attention of the Department of Finance by this association, a host of income trusts, and the joint committee of the CICA and the Canadian Bar. We urge this committee to move quickly on recommendations to rectify these issues so the businesses can make informed decisions during the transition period.
We welcome the direction of the reduction in the corporate tax rate in the economic statement. Within this paradigm we are anxious to sit down with the government and find an appropriate resolution to the damaging consequences outlined today within the government's stated corporate tax policy. CAIF is ready to sit down with the finance department as soon as possible.
Thank you.