Mr. Speaker, it is a pleasure to speak to this motion, a motion relating to a matter that would be a significant issue in the next election. The motion basically reads that the government should repeal its 31.5% tax regime on income trusts and replace it with a 10% tax to be paid only by foreigners. It proposes a refundable tax credit to Canadian residents.
The reason for changing the tax on income trusts from 31.5% to 10% is that it would result in about two-thirds recovery of the $25 billion that were wiped out in the investment value of those saving for their retirement, particularly retired seniors. Its consequences would be to minimize the loss to Canadians who did invest in trusts, to preserve the strengths of the income trust sector, to create tax fairness by eliminating any tax leakage caused by the income trust sector and, finally, to create a neutrality by eliminating any incentive to convert from a corporation to an income trust purely for tax purposes. Tax avoidance is the issue.
Are income trusts bad? If we look at the proposal of the government we see that real estate investment trusts are exempt from this 31.5% tax. The reason being is that they are mature businesses and passive businesses in the sense that they are not subject to the ebbs and flows of the marketplace. Companies that purchase strip malls and lease them out would be an example of a REIT.
Therefore, income trusts as an instrument are not a bad thing, notwithstanding what some members in the House have suggested. The issue has to do with tax leakage. It has to do with the differential between the taxes collected from both the corporation and an individual where someone had invested in a dividend paying corporation, compared to those who invest in income trusts. Income trusts themselves do not pay the tax directly. The amounts are fully taxable in the hands of the investor.
There is probably a big question mark here with regard to tax leakage. I had an opportunity to participate in the finance committee hearings where the finance minister appeared to present his calculations of how much this leakage was and how it was calculated. That did not exactly happen. The finance minister basically said that there was a $500 million leakage in 2006 and that the government was deferring the implementation of this tax until 2011. He said that if we were to multiply that by six years we would get $3 billion. All of a sudden the government will be out $3 billion.
That was not very much detail. However, the finance minister was the first to speak. We then had testimony from experts who came forward. HDR|HLB Decision Economics, Inc. probably raised the most questions which did not get answers. HDR had worked with the finance department to go over the elements of the so-called tax leakage. There was no disagreement in the vast majority of the elements that would be included in the computation of such a leakage.
However, there are at least four that are significant and substantial. First, in determining the $500 million a year loss of tax revenue to the government because of the existence of an income trust, the finance minister failed to take into account legislated tax changes passed by Parliament and coming into force in the year 2007. If there are changes in the tax code coming in 2007, we simply cannot take the estimated leakage of 2006 and multiply it by six. It is just absolutely wrong. The finance minister made a mistake.
The second item had to do with income trusts that were purchased through a pension plan, an RRSP or sitting in a registered retirement income fund. The finance minister and the Department of Finance decided to assume that the Government of Canada received absolutely no taxation revenue from pension plans, RRSPs and RRIFs who invested in income trusts.
What a foolish assumption. If every investment in income trusts were made through pension plans, RRSPs or RRIFs, that means the assumption of the finance minister of Canada is that income trusts generate no taxation revenue at all; it is totally zero this year, next year and for all time. The assumption is that there is no tax revenue. Obviously that is ludicrous.
HDR went on to describe how the estimate of the taxation burden by energy companies was much greater than it actually was. In fact, it was substantially lower.
There are a couple of other items that I will not go into because a 10 minute speech is not long enough to do the subject justice. The bottom line is that HDR concluded, based on the work it had done, that the actual tax leakage was only about 5% of what the finance minister had told Canadians in the finance committee. The annual leakage estimated by the finance minister was $500 million. Five per cent of that is a token amount, relatively speaking, and certainly not enough to have the consequences that the minister knew, or ought to have known, would occur should he move forward with this 31.5% tax.
As we know, within two days after the initial blip and everything had settled down, $25 billion of the investment value of investors was wiped out totally. As of today, instead of it being 11% of the loss of the value, it has recovered a little to 10% because the business continues to work and the value of the stock or the income trusts will go up. However, for all intents and purposes, the loss as a result of the proposed 31.5% tax is a permanent loss, a permanent impairment in the value of the investment.
When the finance minister made that announcement on Halloween, the Halloween massacre as it is referred to, of last year, he also announced pension income splitting for pensioners. When a government makes a major decision on the taxation of investments, why would it also bring another change in the taxation of Canadians at the same time which are actually unrelated? I will demonstrate how.
Only 30% of seniors actually have pension plans, RRSPs or RRIFs, which means that 70% do not. Of the 30% of the seniors who receive a pension, about one-quarter are widows and single persons, which reduces the 30% down to 22.5%, and of those, because the other spouse may already be at the lowest possible rate, there is no benefit in transferring or splitting income. According to Yves Fortier, a former senior official with the Department of Finance, he said that would bring it down to only 16.7% of seniors receiving a pension who will benefit from pension income splitting. On top of that, if many of the remaining seniors receiving a pension were in low paying jobs they are at the lowest brackets, and those kinds of things bring it down.
Mr. Fortier's analysis, a reputable individual, not a political person, concludes that only 12% to 14% of all seniors would benefit.
It gets worse than that. Does anyone know why? It gets worse because the people who are investing in income trusts are people who have no pensions. Income trusts is an investment vehicle that provides a regular cash flow for seniors to pay their bills.
In a low interest rate scenario economy, people needed an instrument like income trusts to provide them with a cash flow that was not just equivalent to a dividend but a full distribution of the earnings of the entity, in this case being income trusts. Income trusts play a very important role in terms of retirement planning and operations of Canadians.
The bottom line is that pension income splitting really only benefits those who have pensions, not the ones who have income trusts. It is a non sequitur. The finance minister has made a grave mistake and he will pay for it in the election.