Jack Mintz says Flaherty's tax leakage numbers have a "serious flaw"

From: Jack Mintz
Date: Tue, 28 Nov 2006 09:00:16 -0500
To: brent.fullard@rogers.com



"I do want to point out that there is a serious flaw in some analyses especially on the taxation of pension and RRSP accounts. Finance was not right to treat the impact as zero." wrote Jack Mintz


So does Dennis Bruce, who is free of the many conflicts that prevent Jack Mintz from making the above private statement into a public declaration:

Independent economists discredit govt tax leakage claims -

OTTAWA, Feb. 1 /CNW Telbec/ - In remarks delivered to the House of Commons Finance Committee Thursday, Dennis Bruce, Vice President of HLB Decision Economics Inc., provided data and supporting documentation to discredit the Department of Finance's tax leakage claims.
"The department is sharply overstating tax leakage," said Mr. Bruce

HLB Decision Economics, an Ottawa-based independent consulting firm that
provides analytical consulting services to industry and governments worldwide,has been working on behalf of the income trust sector to develop a comparative analysis of taxes generated under the income trust structure versus the corporate structure.

Mr. Bruce told committee members that his firm worked with the Department of Finance as it prepared the federal government's 2005 consultation paper on the tax effects of income trusts. Specifically, HLB was asked by the department to develop a common methodology and assumptions for deriving tax leakage estimates.

Mr. Bruce said that HLB and the Finance Department achieved consensus on the methodology with one exception - they disagreed on whether to include deferred taxes. Deferred taxes are derived from distributions, capital gains, and dividends received in tax exempt accounts. While they are not immediately taxable, they are taxable upon withdrawal from such accounts.

"The discussions that you are hearing about deferred taxes reflect confusion about budgeting convention versus policy analysis," said Mr. Bruce."While federal budgeting is done on a current basis, federal policy analysis is done on a life-cycle basis. Accounting for the life-cycle effects of tax changes, namely deferred taxes, is appropriate in the consideration of tax policy."

Mr. Bruce went on to outline the factors that resulted in the differences between HLB's tax leakage estimates and the tax leakage figures put forward by Finance Minister Jim Flaherty. These factors include:


1) The Department's assumed effective corporate tax rate for energy
trusts fails to reflect the reductions in the tax rates for resource
corporations from 2004 through 2006, from 27.12% to 24.12%. This
results in an overstatement of tax leakage of $84 million;

2) The Department's figure for income trust units held in tax exempt
accounts is overstated. Derived from data from surveys, Statistics
Canada, interviews and Scotia Capital Markets data, the percentage of
units held in tax exempt accounts is 31 percent, less than the
Department's 38 percent estimate. This results in an overstatement of
tax leakage of $125 million;

3) The value of deferred taxes is excluded from the Department of Finance
analysis. This results in an overstatement of tax leakage of
$80 million; and,

4) The Finance Department's atypical inclusion of the impact of limited
partnerships, which reduces the tax leakage to $45 million.

5) The impact of future legislated tax changes post 2010 has not been
accounted for. Doing so reduces the ongoing federal tax leakage after
2010 by $232 million.

Mr. Bruce stressed that the discrepancies between HLB and the Finance
Department led his firm to conclude that the Finance Department is "sharply
overstating tax leakage."

Specifically, HLB concluded that:

- Federal tax leakage for 2006 was $164 million, not the
half billion dollars stated by the Department; and,

- Ongoing tax leakage, post 2010, after taking into account legislated
tax changes, is $32 million per year, about five percent of the
Department's figures.



For further information: Dennis Bruce, Vice President, HDR - HLB
Decision Economics Inc. (613) 234-0080; Cell: (709) 632-1708