Monday, May 4, 2009

I ain’t the broken record on tax leakage. Jim Flaherty is.

Anyone, who may now attempt to argue that “leveling the playing” field isn’t about tax leakage, needs to reread Jim Flaherty’s testimony at the Public Hearings (below).

Flaherty’s testimony is a constant rant about the tax leakage he alleges exists and uses as his rationale for imposing this completely arbitrary 31.5% tax.

In the absence of proof of alleged tax leakage, the arbitrary 31.5% tax can only be concluded as serving the ulterior motive of killing income trusts at the behest of corporate managers who were acting in OPPOSITION to the wishes of their owners, the shareholders. The income trust tax was the means by which these corporate managers USED GOVERNMENT to SABOTAGE their owners and all taxpayers and the economic sovereignty of this country. Anyone who thinks otherwise, please inform me of such.

Is this what the Liberals stand for? The NDP? The Bloc?

I, on the other hand, am constantly focused on tax leakage for the mere fact that it is the sole justification in the minds of Canadians for this tax. Refute the existence of tax leakage and you refute the need for this tax. Period. All the other arguments are spurious and inane. For example, now that the world knows what a real Ponzi scheme consists of, we don’t hear much from those two yahoos. Urquhart and Rosen about the nonsensical claim that income trusts are Ponzi schemes, especially given that Manulife’s Income Plus would better qualify as a Ponzi Scheme given that Dominic D’Alessandro thought he could sell synthetic derivative investment products and NOT HEDGE THEM.

How utterly ironic (or is it moronic?) that the Harper/Flaherty brain trust was taking its advice on income trusts fron people like Dominic D’Alessandro who had a clear conflict of interest and wanted to direct investments that were being made into Canada’s REAL economy (income trusts) and replace them with a bunch of junk food synthetic investment products for the sole purpose of creating a fee stream for Manulife out of thin air.....literally, given that Dominic took his greed to the ultimate, by not hedging this derivative nonsense called an investment for retirement.

Unlike the narrow self interests of corporate managers, the goal of Canadian taxpayers is not to preserve one business model versus another per se, but rather to preserve the corporate tax base. If the tax base is unaffected , then why would taxpayers want to see their fellow Canadians lose investment choice and $35 billion of their life savings?

Hence the lie about tax leakage needs to be exposed for the fraud it is. Meanwhile these corporate managers will have to compete for a living, instead of having a co-opted government kill their competition.

If the effect of blindly killing income results is any other outcome other than stopping alleged tax leakage, then it should be rejected as NOT being in the interests of taxpayers. It was obvious from the outset that the income trust tax was going to create a major loss of tax revenue to ALL TAXPAYERS. This may not have been obvious to the Eric Reguly’s and the Andy Willis’ of this world, but what the hell do they know about corporate finance or the dynamics of the Canadians capital markets. At least they were honest enough to admit their mistake and call Flaherty’s income trust tax a “disaster” , view here

This is because the income trusts were vulnerable to takeover through non-tax paying structures from the very moment that Jim Flaherty announced his income trust tax.. It took me about five minutes to figure that out and I am sure it was apparent to many other in shorter time than that. This is exactly what has now occurred, with some $!00 billion in trust tax related takeovers and the resultant loss of over $1 billion in ANNUAL TAX LEAKAGE......all in the name of stemming a PHANTOM tax leakage problem of HALF that amount. As such, think of Jim Flaherty’s Great Canadian Giveaway Sale as a 2 for ! Sale, in which $2 is lost for every $1 in phantom tax revenue. If the three Opposition parties continue to sit on their hands as they are all presently doing, this 2 for 1 sale will soon become a 15 for 1 sale, and Flaherty’s phantom tax leakage of $500 million a year will become REAL tax leakage of $7.5 billion per year. Smart guy.......all of them.

Meanwhile, anyone who is presently allowing their thinking to be corrupted by the notion that “leveling the playing” isn’t and/or wasn’t about “tax leakage”, needs to take a good long read at Flaherty’s testimony of January 30, 2007 before the Public Hearings of income trusts.

What part of revisionist history would argue that leveling the playing field wasn’t about tax leakage?

WARNING: This is intended for adult viewing as it contains many scenes of gross distortion, fallacious arguments and logic and many hyppcritical and fundamentally misleading working assumption, but it does contain endless repetition about the need to “level the playing field” in order to deal with “tax leakage”

Hon. Jim Flaherty (Minister of Finance): Thank you, Chair.

I'm pleased to be here this morning and I'm pleased to be the first witness at the hearings you're having on the tax fairness plan. I'm accompanied this morning by Robert Wright, the deputy minister; by Mark Carney, the senior associate deputy minister and G-7 deputy for Canada; by Bob Hamilton, the senior assistant deputy minister of the tax policy branch; Brian Ernewein, general director tax legislation, division tax policy branch; and Denis Norman, senior chief payments financial sector division, financial sector policy branch. All of those folks and we'll hear, certainly from Mr. Hamilton, about the analysis done by the department, after I have an opportunity to make some opening remarks. You'll also see the charts around the room, which we produced in order to try to demonstrate, in an easily readable manner, some of the major issues that are involved in the tax fairness plan.

I'm pleased to have the opportunity,


Monsieur le président, mesdames et messieurs, les membres du comité, je vous remercie de m'avoir invité ici aujourd'hui.


You have received a briefing book, members of the committee, with a copy of my statement, which is, more or less, what I'll follow. A document prepared by the Department of Finance outlining our revenue estimates and calculations, and a series of charts illustrating the growing trend toward trust conversions in foreign ownership of energy trust units. I'm pleased to be the first witness, as I said. Make no mistake, the decision that was taken on October 31 is all about fairness for Canadian taxpayers.

In the first instance, fairness for Canadian taxpayers and their families, who would be asked to pay more and more if we did not implement the tax fairness plan. Fairness within the corporate sector, where the current rules give income trust a tax advantage and distort investment decisions that give income trust better access to capital than entities that are organized in the corporate form. That is, levelling the playing field between corporations. Fairness for Canadian taxpayers who are seeing tax dollars sent out of the country to foreign investors, and as you can see, from the chart over there, in the large energy trusts, 50% of the ownership--

The Chair: Sorry, Mr. Minister. Point of order.

Mr. Pacetti.

Mr. Massimo Pacetti (Saint-Léonard—Saint-Michel, Lib.): Sorry to interrupt, but we have a copy of the speech. It seems to be ten pages long. How long can we expect to have Mr. Flaherty speaking for?

The Chair: I think we'll let him use his discretion. We have him for an hour.

Mr. Massimo Pacetti: So he can speak up to an hour?

The Chair: We'll use our discretion. The fewer interruptions, I expect, the more time available for questions.

Á (1110)

Mr. Massimo Pacetti: I thought we had limited it to ten minutes. I think ten minutes would be more reasonable.

The Chair: Please proceed, Mr. Minister. Thank you.

Hon. Jim Flaherty:

The point I was trying to make before the Liberal member interrupted me, Chair, was that the large energy trusts, as shown on the chart behind the member, are 50%-owned by foreigners, largely Americans, who are only paying a 15% withholding tax.

And I'm sure the member will want to look at that chart and will realize that's a tremendous tax burden being shifted to Canadian individuals and their families in that sector.

The other aspect of fairness, of course, is for Canadians vis-à-vis their governments, and I include not only the Government of Canada, but the government of Quebec and the governments of the other provinces in Canada.

There are letters before you from nine of the provinces. Eight of them specifically support the four-year limitation, as you'll see from the letters. And two of them specifically comment on the tax losses to their governments--$450 million.

In budget 2006, it was $400 million in Alberta. The minister has now written to me, saying it's $450 million. Plus, there is $150 million in the province of Quebec, which you can add to the federal $500 million, giving you a total, of course, of in excess of $1 billion.

I want to take the next few minutes to quickly outline the tax fairness plan, to walk the committee through the numbers and our methodology.

As I indicated in the fall, we estimate the federal revenue loss of about $500 million in 2006. And I emphasize to you this will be a growing figure if we do not act, and that this is a conservative estimate.

I'll also point out the hundreds of millions of dollars in tax loss to the provinces, and I'll talk about the fact that the landscape had changed dramatically, with almost $70 billion in trust conversions taking place in 2006. And that was only in the first 10 months of 2006, before we took action.

I'll also explain why it would be a serious mistake to carve out the energy sector and provide them with a permanent tax holiday. And in that regard, I encourage members to read the letters from the Ministers of Finance of Newfoundland and Labrador, and Nova Scotia with respect to their offshore interests and what it would mean to them were the income trust sector to be active in those developments.

And finally, I want to touch on the need to maintain a four-year transition period in order to avoid billions more in revenue loss, about $3 billion to the Government of Canada; that is, to the taxpayers of Canada. And at least $2 billion to the provinces of Canada; again, to the taxpayers of Canada who pay taxes to the provinces.

I want to say from the outset that it is regrettable that some investors suffered financial losses. Although it was a very difficult decision, it was an absolutely necessary decision for our country and for future generations of Canadians, for our children, and for our grandchildren, and for our prosperity in the future.


Notre Plan d'équité fiscale réalise deux objectifs des plus déterminants. Il rétablit l'équilibre et l'équité du régime fiscal, et il renforce l'économie canadienne, aujourd'hui et pour l'avenir.


The tax fairness plan achieves these goals through a distribution tax on distributions from publicly-traded income trusts with a four-year transition period for existing trusts; an additional reduction in the general corporate income tax rate of .5% point in 2011; an increase in the age credit amount by $1,000 to benefit low and middle-income seniors; and the ability for pensioners to split income beginning January 1, 2007.

Pension income-splitting is a major positive change in tax policy for pensioners and seniors. It significantly enhances the incentives to save and invest for family retirement security.

I want to be clear with the members of the committee and with all Canadians. I have no intention of altering the government's decision, including the four-year transition period for existing trusts.


Je voudrais être clair avec les membres du comité et tous les Canadiens. Je n'ai pas l'intention de modifier la décision du gouvernement, y compris la période de transition de quatre ans accordée aux fiducies existantes.


Canadians are looking for fairness and for certainty and our tax fairness plan provides both. I've said it repeatedly as finance minister, Canadians pay too much tax and this government has already taken steps to reduce their tax burden. Simply ignoring this issue would have resulted in Canadians paying more tax, not less today and for years to come.

Why? Because as more and more companies converted to income trusts, they were shifting their corporate tax responsibilities on the backs of individual tax taxpayers and their families. There was growing trend toward corporate tax avoidance. In fact, in a news release on September 11, 2006, Robert McFarlane, who was the Executive Vice-President and Chief Financial Officer of Telus said this. He said

TELUS is pursuing a trust conversion at this time since it has recently utilized all of its tax assets and a conversion early in 2007 will optimize its future taxable position.

This wasn't an isolated case, but rather a disturbing trend that was moving into the core of our industrial and knowledge-based economy.

Since we took office the landscape began to change significantly. In the first 10 months of 2006 almost $70 billion in new income trust conversions took place or were announced. Chart A shows clearly this trend in income trust conversions and the path we were all on. As you can see on the chart from '03 to '06 the huge increase in 2006 in the first 10 months only of 2006. This represented a clear and present danger to our tax system and our economic structure. Evidence was mounting that we were running a real risk of turning into an income trust economy, an economy where tax avoidance drove business investment decisions and foreign investors stood to make significant gains at the expense of Canadian taxpayers.

Á (1115)


Aucun gouvernement responsable ne pouvait permettre une telle situation. Ce n'était pas équitable, et ce n'était pas juste. Nous devrions agir, sans nous arrêter aux conséquences politiques. C'est ce que nous avons fait en acceptant nos responsabilités et en agissant dans les meilleurs intérêts des Canadiennes et des Canadiens.


As I stated on numerous occasions, we estimate that the federal revenue loss was about $500 million in 2006 as chart B and the supporting material you have received clearly demonstrates. This is the chart over here on my left with the various calculations and the assumptions used to make those calculations resulting in the net loss to the Government of Canada of about $500 million in 2006.

This is a conservative estimate. Now consider what these calculations don't include. They don't include any further conversions by any other companies. We estimate that TELUS and BCE alone would have added substantially more to this total. Widely reported estimates from financial experts, based on information from these two companies themselves, indicated that corporate tax savings over the next two years would have been about $1.3 billion for TELUS and about $1 billion for BCE.

Just imagine what the total would have been had other large corporations like EnCana or large financial institutions that currently pay billions in corporate income tax followed suit. The numbers also don't include provincial tax impacts. During my meeting with provincial finance ministers on December 15, 2006 in Vancouver they expressed serious concerns about the loss of tax revenue and endorsed our tax fairness plan. Letters from most of the provincial ministers, are included in your package.

Here are a few examples of what we received. Carole Taylor, the Minister of Finance of British Columbia wrote:

I believe the measures you propose are necessary to address the policy and revenue impact of converting corporations to income trusts. I believe that without action the continued conversions to income trusts would have led to a serious disruption of the tax system.

The Honourable Greg Salinger, Manitoba's Minister of Finance wrote:

Corporations were increasingly under pressure to convert to income trusts solely as a result of tax considerations, even in instances where trusts were not otherwise the most appropriate form of organization.


Michel Audet, le ministre des Finances du Québec a écrit: « Il était évident que l'avantage dont disposaient les entités intermédiaires persistait depuis trop longtemps et qu'il était nécessaire que des gestes soient posés. »


Now, some critics have questioned these figures. In fact, these estimates are very similar to those made by Jack Mintz of the Rotman School of Business, University of Toronto, and former president of the C.D. Howe Institute.

On October 19, 2006, Mr. Mintz said and I quote: “It is silly to argue that there isn't any tax loss. Everyone knows the reason people go into income trusts is because there are tax benefits. That's the way the law is.”

The methodology used to determine federal revenue loss should also be familiar to the Liberal committee members of this finance committee. That's because it's the very same, identical methodology their own government used in preparing its 2005 consultation report. The revenue loss estimates are based on a sound methodology, and we stand by them. These are conservative estimates. The tax loss number could actually be higher, as chart C demonstrates, which is over in the corner on my left, by increasing the effective tax rate by one percentage point—from 6.6% to 7.6%—the annual revenue impact would jump by over $200 million, to $710 million per year.

You will no doubt hear from some witnesses that there is no real tax loss, and if there were it would be more than made up in the future, through personal income taxes, or withholding taxes on foreign investors, or taxes on differed pension plans or RRSP withdrawals. Think about what you are being told: give income trusts an indefinite tax break now, but get it back some time in the future.

Well, as Minister of Finance, I have a fiduciary obligation to the taxpayers of Canada today, not tomorrow, an obligation to pay for needed social, environmental and economic programs today, not tomorrow. I cannot, and I will not, fund today's programs from tomorrow's revenues.

Á (1120)


Évidemment, les fiducies de revenu avaient l'avantage fiscal particulier dont les sociétés ordinaires ne pouvaient pas bénéficier. Vous les savez, elles le savent, et les marchés aussi.


The market reaction to a policy that levels the playing field between income trusts and corporations, that makes them equal, not worse, shows that a built-in tax advantage existed. Otherwise, the investors would not have reacted the way they did. There would have been no market correction.

For those who, faced with all of this evidence, still claim that we don't know whether there will be a loss of government revenue from income trusts, all I can say to you is this. We have federal and provincial government estimates clearly demonstrating tax losses. Income trust distributions are being sent out of the country to a large number of foreign investors who are reaping a financial windfall at the expense of Canadian taxpayers. The only Canadian tax they are required to pay--that is, the foreigners are required to pay--is a 15% withholding tax. That's one five percent. Far less than the taxes paid by trustholders here in Canada. We have had two of Canada's biggest companies explicitly citing tax considerations as the reasons for announcing plans to convert last year. We know that these same two companies have since renounced their conversion plans since our announcement that any new trusts would be taxed as corporations.

We know that other large firms that were actively planning to convert to trusts have abandoned their plans and we know that groups such as the Coalition of Canadian Energy Trusts must realize that there is a tax loss, otherwise they wouldn't argue that the trust structure does not gives them a lower cost of capital than the corporate model does.

Now, faced with these tax losses, the natural question should be who will pay for all of this lost revenue? Well, your constituents will, of course. The people of Markham-Unionville. The people of Joliette. The people of Winnipeg North, and the people of my riding of Whitby-Oshawa. By failing to implement the tax fairness plan, we would harm our government's books and affect the budgets of every single province in this country. These funds that belong to the people of Canada.

As I pointed out earlier, the provinces are quite concerned about this issue because ongoing trust conversions were costing them millions of dollars and they understand that converting our businesses into income trusts is not the way to build a dynamic competitive economy, the kind of economy that we described in our economic plan for Canada, Advantage Canada. The province of Alberta, for example, estimated in its 2006 budget that it would lose $400 million a year before we introduced our tax fairness plan, as I say. Their minister now has told me, and put it in writing--you have the letter--that it's actually $450 million, according to their current estimates in Alberta.

The Atlantic provinces lost one of their biggest corporate taxpayers when BCE converted Aliant into an income trust. This conversion had a significant impact on their corporate tax revenues and that's referred to specifically by the Honourable Mitch Murphy, the minister of finance for the province of Prince Edward Island, in the letter that you have from him.

Á (1125)


De son côté, le gouvernement du Québec a estimé qu'il aura perdu 150 millions de dollars par année si les conversions de certaines grandes sociétés avaient procéder tel que prévu.


How would it be fair that foreigners would reduce their tax bills through this structure, but not hardworking Canadians, who pay to keep our schools, hospitals and emergency services running? As you can see, the costs of indecision would have been substantial and unfair, not just for our government, but for all governments in Canada.

Our tax fairness plan recognizes that investors, may of whom were seniors, have been affected. We are taking steps to protect investors in four key ways. First of all, we are providing a fair and reasonable four-year transition period before the new distribution tax will apply to existing income trusts; secondly, we are providing generous growth guidelines during this transition period, allowing existing income trusts to actually double in size during the four years; thirdly, we are putting in place this year pension income splitting for seniors and pensioners, a significant improvement to our tax system, worth approximately $700 million per year; and fourthly, we are increasing the age credit amount by $1,000 from $4,066 to $5,066, effective back on January 1, 2006. This measure will provide tax relief for low- and middle-income seniors.

Now, this committee will be urged to make a recommendation to extend the transition period from four to six to eight, or even ten years. I want you to consider, on behalf of all Canadians, the ramifications of that move. A transition extension is actually a policy reversal, it's get through the back door a policy change you can't get through the front door. A longer tax holiday period for trusts would just mean tax unfairness for a longer period of time. It would do nothing for some investors who decided to sell their units between November 1 and today. Most of all, it would create a greater financial burden on Canadian taxpayers.

Extending the transition period from four to ten years would cost the federal treasury approximately $3 billion. It would also cost provincial treasuries. Alberta would lose over $2 billion and Quebec would lose hundreds of millions of dollars.


J'aimerais donc demander au député de Joliette s'il est d'accord pour puiser des centaines de millions de dollars dans les poches des contribuables québécois afin de porter la période de transition à 10 ans.


This isn't how you build a 21st century economy. This isn't how you build a productive future and a better quality of life for all Canadians, the ultimate goal of our economic plan, Advantage Canada. It certainly isn't how our competitors are doing it--not the United States; not Australia; not the United Kingdom. As Peter Godsoe, the former chair and CEO of the Bank of Nova Scotia said on October 23, and I quote,

We are using a structure that the Americans looked at and shut down. The Australians had trusts; they shut them down. The British looked at this and decided not to allow it. What do we know that everyone else doesn't?

Canada's new government agrees. Watching the world go by will do nothing to help future generations whose standard of living will be determined by the investments we make today. Delaying, in other words, only puts off the ultimate goal of this decision, which is, an economy driven by sound business and economic decisions, not by the kind of tax planning and tax avoidance our major competitors have clearly rejected. Let me deal with one final issue, if I may, before I have an opportunity to take your questions. That is, the effect of our decision on energy trusts in particular.

Some, in the energy sector, have called for special rules based on that sector's history with these tax vehicles. I don't agree and I don't believe most Canadians do either. I believe it's reasonable to expect that all sectors of the Canadian economy pay their fair share of taxes. Critics have often pointed to the U.S. energy sector and called on our government to treat energy income trusts the same way the United States does with master limited partnerships or MLP's. First of all, Canada has no intention of mimicking the United States tax code. Secondly, United States MLP's are almost exclusively owned by domestic investors in the United States. In Canada, energy income trusts are, to a considerable extent, foreign owned--50% of the large energy trusts, as you can see on the chart on my right.

Thirdly, structural impediments under U.S. law have the practical effect of limiting the investment of U.S. mutual funds and tax exempts in MLP's. Fourthly, we do not accept that the United States MLP rules will provide a tax advantage as compared to Canadian energy trusts, as the tax treatment of taxable investors under both regimes is effectively the same. Finally, it's important to understand how much more significant the issue with the energy trusts is here in Canada, and that is the size of the markets and the percentage of the markets. The value of Canadian publicly traded energy trusts represents roughly 4% of the TSX market cap. Income trusts alone comprise over 15% of Canadian oil and gas production. In comparison, the total value of U.S. MLP's amounts to less than a third of one percent of the market capitalization of the New York Stock Exchange and NASDAQ. Had we not acted, the energy trust share of the marketplace in Canada would have risen even further. More and more businesses would have asked, why should that company benefit and not mine? Then that $500 million revenue loss would grow because if a company like EnCana opted to become a trust, you're going to be certain that they would not be alone.

Talk to Newfoundland and Labrador, a province with an historic opportunity before it to build prosperity and lift its citizens out of debt and see what they would think about Hibernia, for example, becoming an income trust. This is not a hypothetical illustration. In the case of Hibernia, the federal government has received several proposals to do just that, with respect to Hibernia becoming an income trust. As Mr. Marshall, the province's finance minister wrote to me, and I quote,

The potential erosion of the revenue source resulting from the proliferation of income trusts had been of grave concern prior to your announcement.

Newfoundland and Labrador and Nova Scotia and the federal government all believe, very strongly, that energy projects should pay their fair share of tax. Our government remains committed to tax fairness and fulfilling our commitment in Advantage Canada by lowering taxes further as we prepare our next budget.

Á (1130)


Le dernier budget a réduit les impôts dans 20 domaines distincts. Sans révéler de secret, je peux vous dire que si le gouvernement n'était pas intervenu dans le dossier des fiducies, toutes les réductions d'impôts prévues dans le prochain budget aurait été remises en question.


A few final thoughts to conclude: In the end, our government was faced with a hard choice and now this Parliament is faced with a big decision, to make the tax fairness plan a reality. We chose not only to recognize a growing problem occurring in Canada's tax system, but to fix that problem. We made that decision based not on political calculations as did the previous government, but on principles of tax fairness, balancing the needs of individual investors with the interests of taxpayers and their families. And we acted responsibly and decisively. It is not tax fairness if it is only for a few. And it is not strengthening the economy if the playing field is not level for all businesses in Canada. And committee members should recognize that they can't turn back the clock. There has been a substantial change of ownerships in trust since October 31, 2006; for a number of trusts up to one-quarter of the shares have changed hands. Where there was once speculation as more and more large corporations opted to become income trusts, today there is certainty. Businesses are making their own choices to grow this economy. They're moving on. It's time we all move on in the interests of all Canadians. The result of our decision is clear: a tax system that is fairer for Canadians and that will help make our economy more productive, efficient and dynamic today and for years to come.

Á (1135)


Le résultat de notre décision est clair, nous avons maintenant un régime fiscal plus équitable pour les Canadiens. Ce qui permettra à notre économie d'être davantage productive, efficiente et dynamique maintenant et pour les années à venir.


Thank you for your kind attention.

I would, if I may, Chair, ask Bob Hamilton, the Senior Assistant Deputy Minister of Tax Policy of the Department of Finance, to go over the paper which the department has prepared and which members of the committee have, with respect to the revenue losses to the Government of Canada, the methodology and so on.

1 comment:

Dr Mike said...

Flaherty frames by way of tax losses to make this whole mess palatable to the public.

The public loves terms like fairness , leakage , leveling playing fields as this gives them the feeling that their gov`t is protecting them to the end--the sense of duct tape to stem a leak turns them frantic with approval.

Cudos to Flaherty`s team of spin Docs for sure.

How in hell he conned the provincial powers at be is beyond me.

Of course the image of little Jim with his index finger firmly planted into the hole in some fictional gov`t dyke must have been overwhelming.

Dr Mike