Mr. Kevin Page
Parliamentary Budget Officer
When I spoke the other day with Sahir Khan, Director General Revenue and Expenditure Analysis in the Office of the Parliamentary Budget Office (PBO), he indicated to me that it was the practice of the PBO to pursue matters of its own initiative in cases where such issues were either non-partisan in nature or on matters that were, ideally, referred to the PBO with the backing of a committee. Your office was not in existence at the time of the Finance Committee Hearings on Income Trusts in January 2007. The primary focus of those hearings was supposed to have been an investigation into the central policy rationale of the income trust tax, namely the allegation of tax leakage.
Instead this Public Hearing failed in that goal and the truth about tax leakage was never resolved with the certainty and clarity that such a concept demands, especially given the $35 billion loss in Canadians savings that was caused by this policy. Below is the number one recommendation from the Finance Committee’s report that was supported by the members of that committee
TAXING INCOME TRUSTS: RECONCILABLE OR IRRECONCILABLE DIFFERENCES?
Report of the Standing Committee on Finance
It is imperative that a democratic government be as transparent as possible when levying a new tax so that it can be held to account by its citizens. The Committee, therefore, recommends that the federal government release the data and methodology it
used to estimate the amount of federal tax revenue loss caused by the income trust sector.
This information has not been disclosed to Canadians or Canadian taxpayers at this point in time. Given that this recommendation to disclose and verify the government’s estimates was the recommendation of the Finance Committee I would please ask that you investigate the government’s allegation of tax leakage from income trusts, and do so by invoking the stated wishes of that Committee noted above. You will find that virtually all of the work has been done to answer this question and is readily available from Dennis Bruce of HLB Decision Economics who worked collaboratively with the Department of Finance to create the tax leakage model and analysis. As such, if the Department of Finance is unwilling to co-operate, all the information is available from Dennis Bruce and was published in his report entitled “The tax revenue implications of income trusts” available on line here:
I also refer you to the press release below that Dennis Bruce issued after giving testimony to the Finance Committee in February 2007 in which he points out a number of gross errors in how the Department of Finance calculated their tax leakage numbers that were widely bandied about in the press. The largest error is a methodological one, namely that the Department of Finance is excluding the deferred taxes that are paid by the 38% of income trusts that are held in deferred accounts (RRSPs and pensions).This exclusion of deferred taxes is the difference between tax leakage and no tax leakage, and therefore the difference between policy that has a justification and a policy that fails to have a justification.
I also would like to share with you this correspondence that I received from Jack Mintz on November 26, 2006, in which he wrote:
“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.”
Mr. Bruce can be reached at (613) 234-0080; Cell: (709) 632-1708 or by email at email@example.com
I ask that you investigate this matter of alleged tax leakage of income trusts on behalf of all Canadian taxpayers and the 2.5 million income trust investors, as the Department of Finance is failing to abide by the rules of Accrual Accounting that govern the bookkeeping of the Government of Canada. As such, it is the government’s flawed analysis that is causing alleged “tax leakage” and not income trusts themselves that are causing alleged “tax leakage”. You should also be aware that The Auditor General refused a request from the Liberal Members of the Finance Committee to investigate this matter, making you the last source for government accountability on behalf of Canadian taxpayers.
This information will also be useful for you as you evaluate the benefits associated with the Marshall Plan solution to the government’s income trust fiasco and the resultant erosion of Canada’s tax base caused by that policy
I thank you in advance
President and CEO
Canadian Association of Income Trust Investors
647 505-2224 (cell)
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, who
added that there would be minimal costs associated with a 10 year phase-in of
the new tax on income trust distribution payments.
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
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
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
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
Friday, January 22, 2010
Posted by Fillibluster at 11:40 PM