FINANCE COMMITTEE CALLS FOR CHANGES ON TRUST TAX

REPORT TO THE HOUSE OF COMMONS
ON THE DECISION TO TAX INCOME TRUSTS

RECOMMENDATION 1

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.

RECOMMENDATION 2

The proposal to tax income trusts is of such significance and has had such a devastating effect on Canadian investors that Members of Parliament deserve a clear vote to best represent the interests of their constituents. The federal government should, therefore, separate it from the other sections of the Ways and Means Motion and table it in a stand-alone piece of legislation. The pension income splitting, the 0.5% reduction in the corporate tax rate in 2011 and the increase in the age credit amount should proceed as quickly as possible in their own separate piece of legislation.

RECOMMENDATION 3

Overwhelming evidence indicates that superior and far less damaging alternatives were available to the federal government. The Committee urges the government to consider implementing one of two such alternative strategies:

a)the federal government reduce its proposed 31.5% Distribution Tax on income trusts to 10%. This tax should be instituted immediately and should be made refundable to all Canadian investors. Furthermore, the government should continue the moratorium on new income trust conversions while remaining open to representations from sectors that feel they are well suited to the income trust structure; or

b) the federal government extend the proposed transition period from 4 years to 10 years.

LIBERAL OPINION

Having listened to all the witnesses, the Liberal Members of the Finance Committee believe that the government’s decision to tax income trusts was reactionary and ill conceived and reflects a poorly executed policy initiative.

The Committee heard from witnesses who made investment decisions based on a promise made by the Prime Minister not to tax income trusts, and lost substantial amounts of their savings when the Prime Minister broke that promise. The Liberal Members of the committee believe that the government acted recklessly and as a result ordinary Canadians have suffered unnecessarily.

The Finance Minister was unable to confirm that an impact analysis was conducted on the effect the new tax on income trusts would have on investors. Liberal Members of the committee believe that such a study should have been conducted and the results of that study considered when developing the government’s policy on income trusts.

The Minister of Finance justified the exemption of Canadian Real Estate Income Trusts by pointing out that they were exempted in the United States, but dismissed a similar American exemption for the energy income trust sector as irrelevant. The Liberal Members of the committee are concerned that such a contradictory approach to public policy is dangerous and not in the best economic interests of Canadians.

The Liberal Members of the committee are deeply concerned about the Minister of Finance refusal to release the data that supports his assertions regarding tax leakage, despite the Committee’s repeated requests for it. In the absence of such data, committee Members have had to rely solely on the advice of outside experts, who have calculated the amount of ‘tax leakage’ to be as low as $32 million or 14 times less than the Minister’s estimate.

While 70% of Canadians are not part of a defined benefit pension plan, the Liberal Members of the Committee recognize that income trust distributions provided many seniors with the regular income they require to maintain their lifestyle. There is no other high-yield investment vehicle available to average Canadian investors. (I’m not sure where John wanted the following comment added in, but he did remark: “The contrast of 25 billion market loss is painful and incomprehensible to investors.”

The Liberal Members of the committee recognize that not all corporations are well suited to the income trust structure. That said, several witnesses clearly indicated that certain sectors have used the income trust structure successfully to make reinvestments and increase their productivity. The Governor of the Bank of Canada has suggested that income trusts have been useful as a high yield savings vehicle, especially for seniors, and in contributing to the success and productivity of certain industries, notably in the energy sector.

The Liberal Members of the committee believe that reducing the 31.5 % tax to 10 % and making it refundable to Canadian investors is a better alternative to the plan proposed by the Minister, and the other alternatives discussed in committee. While a ten year “grandfathering” or extension would return some of the value to hurt investors’ portfolios, the former proposal would return far more of that which was lost.

Furthermore, the 10 % proposal would ensure that entities that are well suited to the income trust structure can continue to grow and invest in themselves, while the 10 year phase out would simply delay their death sentence.

As compared to the government proposal, the 10 % tax proposal is clearly superior. Experts agree that it would return some two thirds of the losses suffered by investors, would preserve Canada’s only high yield savings vehicle that is so valuable to seniors, and it would preserve a productivity-enhancing energy-sector. At the same time, expert testimony confirms that a 10 per cent tax that is refundable to Canadians would be enough to capture off shore leakage and ensure tax fairness. The income trust sector would not reduce government revenues or impose a higher tax burden on Canadian households.

Finally, under this proposal the moratorium on new trusts would be maintained for the time being while the government began consultations with sectors that feel they are well suited to the income trust structure. It is clear to the Liberal Members of the committee that the government did not think through the consequences of its ill-advised policy before taking action.

BLOC QUÉBÉCOIS
COMPLEMENTARY OPINION

The report does not take into account the Bloc Québécois’s recommendation

While the Bloc Québécois agrees with the report’s general direction as regards changes to the way income trusts are taxed, it stands firm on its position that the proposed four-year transition period should be extended to ten years. The Bloc maintains that the Conservatives’ election promise not to tax income trusts was irresponsible, given the structure of the Canadian economy. As a result of the Conservatives’ sudden policy shift on October 31, 2006, countless investors, caught by surprise, suffered major losses when unit values plummeted. Given this scenario, the Bloc Québécois would have recommended a transition period of ten years rather than four in order to mitigate the impact on small investors. This impact was artificially inflated by the Conservative’s decision to renege on their election promise.

The trust structure as a tax loophole: a threat to Canada’s economic growth

The Bloc acknowledges the importance of changing the way income trusts are taxed. At the outset, the income trust structure was intended to be used for mature asset classes that required little or no new capital; the reason being that all of a trust’s annual income must be distributed to unitholders, otherwise it is taxed at the highest marginal rate.

Because of the tax rates applicable to income trusts, corporations operating in fields that often require new capital investments started turning to the trust structure. Certain companies decided to convert to income trusts, not out of consideration for long-term growth but in order to take advantage, in the short term, of the beneficial tax rates that apply to trusts.

To avoid seriously compromising Canada’s potential for long-term economic growth, the government should definitely put an end to the open-ended opportunity of corporate conversions to income trusts. The Bloc acknowledges the appropriateness of this measure.

A four-year transition period penalizes small investors who trusted the Conservatives

The Conservatives made an irresponsible election promise that they would not touch income trusts during their term in office. The announcement that two key players, Bell and Telus, were planning to convert to income trusts changed things. The government had to take action, not only to preserve Canada's potential for economic growth, but also to avert what could amount to significant revenue leakages for the federal and provincial governments.

Nonetheless, the Bloc deplores the fact that the Conservatives chose to impose a transition period of only four years for existing trusts, rather than the ten-year period recommended by the Bloc Québécois. Given the election promise that income trusts would not be touched, this investment vehicle continued to be a relatively safe option, at least while the minority government was in power. That is why the value of income trust units remained so high. The Conservatives' surprise announcement, together with such a short transition period, magnified the effect of the market adjustment that struck the income trust sector.

That is why the least that could have been done in this situation would have been to allow a longer transition period, so as to somewhat mitigate the drop in the value of income trust units.

The argument that extending the transition period by six years would involve an enormous revenue loss—in the order of $3 billion, according to the Finance Minister—became unconvincing when we discovered that the Finance Minister was including tax deferred losses associated with RRSPs and RRIFs in this figure. Dennis Bruce, Vice President of HDR-HLB Decision Economics Inc., estimates this tax leakage to existing income trusts at $32 million a year. According to Mr. Bruce, extending the transition period to ten years would result in a federal revenue loss of $192 million. While the actual loss is probably higher, the Finance Minister has grossly exaggerated his tax leakage estimates.

Québec's Finance Minister, Michel Audet, acknowledged this fact in a letter to the federal Minister of Finance, in which he wrote, “In this regard, although until now Quebec has largely been spared tax losses resulting from conversions of corporations to flow-through entities, the conversions announced by certain large corporations that are more prominent in Quebec would have increased these losses to $150 million annually”.

Therefore, the Bloc Québécois believes that, while putting an end to conversions to income trusts, the government has the financial means to extend the transition period from four to 10 years, so as to allow some 2.5 million individuals who have invested in income trusts—thousands of whom are small unitholders—to mitigate the impact of the October 31, 2006 decision.

Double taxation

In general terms, double taxation occurs when the tax treatment of income does not look at whether other taxes have already been applied on this income. Double taxation exists when the tax system is not fully integrated. This is currently the case as regards the distributions and dividends paid to tax-exempt investors such as holders of pension plans or Registered Retirement Savings Plans (RRSPs). The Bloc Québécois recommends that the Finance Minister seriously consider the following two measures in order to eliminate double taxation.

1. A refundable tax credit for withdrawals from registered accounts based on taxes already paid on trust distributions. Withdrawals from registered plans would be taxed as they are now; however, the refundable credit would avoid double taxation.

2. A tax credit for dividends paid by corporations and held in registered accounts. Withdrawals from registered plans would be taxed as they are now; however, pensioners would be entitled to a dividend tax credit, as is currently the case with fully taxable accounts (no tax deferral).

These two measures are designed to resolve the problem of double taxation. In order to completely eliminate double taxation, the amount of the tax credit should be equal to the corporate tax rate or the tax rate applicable to income trust distributions, and should apply to all tax-exempt investors. In short, these two measures would significantly mitigate, if not eliminate, the problem of double taxation described above.

Conclusion:

The Bloc Québécois acknowledges that the decision to tax income trusts at a rate comparable to other businesses is justified, both in terms of Canada's long­term economic competitiveness and in terms of the pressures that the growing number of corporate conversions to income trusts could have had on the public treasury.

However, the Bloc condemns the fact that the Conservatives did not take into consideration the Bloc's recommendation to extend the four-year transition period to ten years for existing income trusts. The Conservatives' decision led to the severe market correction that impacted the income trust sector. In other words, the Conservatives could have backed down on their irresponsible election promise in a responsible manner, but did not.

HARPER'S FOLLY: BITING THE WESTERN HAND THAT FEEDS YOU!

INCOME TRUST TRUTH VOLUME 1, ISSUE 12

ENERGY TRUSTS: MORE IMPORTANT THAN REITS

-- So Why Is The Government Destroying Them With Punitive Measures?

Guest Editorial

By Brent Fullard
President and CEO
Canadian Association of Income Trust Investors (CAITI)

Introduction:

The following is a look at the impact of income trusts (royalty trusts) on Canada’s energy sector from the vantage point of the past, the present and the future. The purpose of this review is not to argue that the energy sector receive special exemption per se like REITs, to the exception of business trusts, since our association’s position following the Public Hearings on Income Trusts is, to quote from our press release:

“Therefore as a result of these hearings, our association is calling for a full repudiation of the Tax Fairness Plan in the name of fairness and good governance. As such, all the existing income trusts should be fully grandfathered and be free of growth constraints. Measures should be taken for a transition period to protect these companies from the takeover frenzy that this policy has induced. Future conversions should be the subject of further study and policy evaluation involving stakeholder input through public consultation.”

Tax Leakage:

No discussion about income trusts can begin without first discussing the claim that income trusts result in a loss of tax revenue, or so called tax leakage. The notion that income trusts cause tax leakage has taken on urban-legend status. The inconvenient truth is that income trusts do not cause tax leakage, in fact the reverse is true. The highly guarded and secretive analysis that the Finance Department performed, to arrive at its assertion of tax leakage, fails to acknowledge ANY of the taxes paid by the 38% of income trusts that are held in RRSPs and retirement accounts.

Proper inclusion of these “deferred” retirement taxes in Finance “tax leakage” analyses would result in a conclusion of tax neutrality regarding income trusts (in other words, they are not a drain on the Canadian treasury). Clearly Finance uses the wrong methodology.

A more definitive and unassailable analysis can be had by looking at what happens to income trust taxation in the real world. BMO Capital Markets performed such a real world exercise by looking at all the businesses that converted to income trusts in the period since 2001. There were 126 such businesses as detailed in the attached file. Here are the summary results:

Average Taxes Paid Before Conversion to Income Trust: $3.3 million x 126 = $415.8 million

Average Taxes Paid After Conversion to Income Trust: $6.1 million x 126 = $768.6 million (excluding deferred taxes)

Average Taxes Paid After Conversion to Income Trust: $9.8 million x 126 = $1,234 million (including deferred taxes)

Therefore this comprehensive real world analysis demonstrates the vastly more effective tax generation associated with businesses formed as income trusts versus businesses formed as corporations. The tax raising effectiveness, for the government, is improved by a factor of 3 times for all taxes when a corporation converts to an income trust (and 1.8 times if, like the Finance Department), one totally ignores the present value of deferred retirement taxes.

Cost of Capital Advantage of Income Trusts:

As graphically demonstrated above, income trusts do not cause tax leakage. As well, in today’s protracted low interest rate environment, Canadian retail investors prefer a business that is organized as an income trust relative to the same business structured as a corporation.

There are many reasons for this, the primary one being that these investors are seeking monthly income at returns higher than those generated through investments in GICs, bonds or high yielding sticks. Further, these very investors are more comfortable with the management discipline associated with trust managements having to meet monthly distribution payments to unitholders.

This investor preference manifests itself in higher market valuations for income trusts (certainly before the government’s onerous income trust tax announcement, anyway). This is the market’s decision. As a result of this valuation enhancement, income trusts have a competitive advantage in the form of a lower cost of capital. This is an important strategic advantage that allows income trusts to compete on a global basis, where cost of capital advantages can be a significant cost advantage.

Most important, this cost of capital advantage has been conferred on these companies by the capital marketplace and not through any “tax loophole” as the Finance Minister is so fond of saying, which implies it is being subsidized by Ottawa. Saying so amounts to a patent falsehood, as the absence of tax leakage can hardly support the existence of a tax loophole.

Income Trusts and Canada's Energy Sector: Past:

Before the emergence of the trust sector, many of Canada's intermediate oil and gas companies were being acquired by international corporations, predominantly from the U.S. The expansion of the Canadian energy trust business halted this tide of foreign takeovers and has actually reversed the trend. In the five years ended 2005, trusts purchased over $8.9 billion of oil and gas properties from foreign-owned corporations. Pengrowth's recent acquisition of assets from ConocoPhillips will push this total close to $10 billion. This is made possible by income trusts’ competitive cost of capital and income trusts’ ready access to capital markets (before Mr. Flaherty’s actions).

Income Trusts and Canada's Energy Sector: Present:

At present 20% of Canada’s oil and gas production is produced by Canada’s 31 oil and gas royalty trusts, representing more than 1 million barrels of oil equivalent per day. The combined market capitalization (pre Flaherty ) was almost $100 billion.

In 2005, the oil and gas trust sector generated over 30 percent of the tax revenue collected from publicly traded Canadian entities in the oil and gas sector while representing 16 percent of the revenue. In 2006 the energy trust sector will generate payments of an estimated $5.7 billion to governments in Canada including royalties, property and capital taxes, and the estimated $2.4 billion in personal taxes to be paid on distributions to trust investors.

In 2006, energy trusts reinvested approximately $7 billion of capital into Canada’s Western Sedimentary Basin, and operating and administrative expenditures were expected to total almost $6 billion annually.

Mr. Flaherty’s new income trust tax regime is designed to shut down income trusts. In that regard, it is certain to succeed. In doing so, however, the Finance Minister’s actions have left all 250 income trusts highly vulnerable to hostile takeover.

Most of this takeover activity will be foreign based and largely driven by foreign private equity investors. This takeover frenzy has already begun and will multiply in intensity once the Minister’s TFP proposal is passed into law.

Flaherty’s misguided policy announcement has created what is known in the business as an “event driven” buying opportunity for foreign private equity interests. This is where an event artificially depresses the value of a publicly traded security to a level below its true worth.

Mr. Flaherty has inflicted this possible fate on all 250 income trusts. True value in this context usually means the value that a private equity fund or other investor would be willing to pay for the business. And in the normal course, income trusts traded at their true value until recently.

However, the Finance Minister’s actions have created an artificial discount, one that foreign private equity funds are keen to exploit as they scour the world looking for just such opportunities. Private equity is flush with capital, and ready deployment of capital is their only major constraint. And Mr. Flaherty has handed them a $200 billion capital deployment bonanza. Canada’s incredibly lax takeover rules, and the 8% decline in the Canadian dollar since Halloween, just makes this task even easier and more lucrative for them.

Upon purchasing these vulnerable income trusts, these foreign buyers will return them to corporate form and in doing so achieve two advantages. First as corporations they will now be free of the arbitrary growth restrictions that Mr. Flaherty has imposed on income trusts as the second leg of his trust crackdown. Second, these foreign investors will structure their investments in the form of debt in order to take full advantage of the corporate deductibility of interest. As such, these debt interest payments will be made from pre-tax cash flows and will flow to foreign tax jurisdictions free of any Canadian taxation.

That is, these newly acquired business entities (as corporations) will be structured in such a way, so as to not pay a cent of tax to the Canadian government.

This is a strategy known as “income stripping”. The consequence of this inevitable outcome is that it will create tax leakage for the Canadian government.

This is the ultimate irony of Mr. Flaherty’s policy to combat alleged but non-existent tax leakage from Canada’s income trusts. The very policy that was designed to stem the non-existent tax leakage will itself induce tax leakage -- through a hollowing out of a growing and vibrant sector of the Canadian economy via foreign takeovers.

Income Trusts and Canada's Energy Sector: Future:

As noted above, the emergence of income trusts in Canada resulted in a repatriation in ownership of Canada’s energy sector while at the same time creating a “triple bottom line” result. However, the Finance Minister’s new policy will make Canada’s existing energy trusts vulnerable to foreign takeover and eliminate this triple bottom line result in the process.

Furthermore much of these strategic energy infrastructure assets are likely to fall into US hands. Beyond that, we are leaving other sectors of Canada’s energy sector more vulnerable to foreign takeover as well. For example it was just recently announced that Western Oil Sands is putting itself “in play” and looking to maximize shareholder value.

Western Oil Sands is the 20% owner and operator of the Athabasca oil sands project that produces 155,000 barrels of oil equivalent a day and is currently expanding its scope. Western Oil Sands is a corporation, not a trust and has a market value of $5.5 billion.

Thanks to Jim Flaherty’s destruction of the energy trust market, Western Oil Sands is no longer able to convert itself into a trust as a value maximization/disposition strategy -- even though this conversion alternative would have led to a high level of ongoing Canadian ownership.

Secondly, because of the restrictive growth constraints on existing trusts imposed by Mr. Flaherty, Canadian Oil Sands -- which is an existing energy trust, and which has been an aggressive consolidator of interests in oil sands -- will not be in a position to acquire Western Oil Sands’ 20% Athabasca interest -- even though Canadian Oil Sands is a majority Canadian owned income trust.

As a result, Western Oil Sands is now easy prey for foreign takeover and at prices lower than would otherwise have had to be paid. The plight of Western Oil Sands provides a real time example of how the elimination of income trusts will ultimately cause ongoing dilution to the Canadian ownership and control of Canada’s strategically important tar sands reserves.

As acknowledged in a February Barrons report on Canada’s vast Western energy reserves: “Asset prices in Canada are expected to soften now as the trusts’ access to lower-cost capital dissolves. This means U.S. producers can compete for assets in the region again. Now in play, the trusts are up for grabs by traditional US producers.”

One has to wonder how premeditated such an outcome is in light of the fact that the The Security and Prosperity Partnership of North America agreed to between Stephen Harper, George Bush and Vincente Fox in June 2006 had identified as its top priority the North American Energy Security Initiative. Its mission statement states that “a secure and sustainable energy supply is essential for our economic prosperity in North America”.

Whose prosperity? Whose security? That of the good old U.S.A.?

Other Unintended Consequences:

Whenever major changes are made to government policies without consultation of affected parties, unintended consequences result. In this case, these include:

Massive capital losses to millions of individual investors, on the order of $35 billion, and the associated lost tax revenue;

Reduced or lost income for millions of investors, many of whom depend on this income to live and maintain a decent standard of living in retirement;

Flight of Canadian investment capital to other markets, which offer sought after income-trust-like investment attributes, such as US High Yield Market, US Tax Free Minicipal Bond Market and US MLP market

Loss of confidence in the integrity of the Canadian Capital markets on the part of Canadian and foreign investors, resulting in a dramatically weakened Canadian dollar and a loss of foreign and domestic investment capital

A ripple effect of reduced income for economic spending and lost investment value for millions of Canadians, including charitable organizations;

Exposing Canadian corporations to leveraged buy-out groups seeking to acquire intermediate-sized corporations;

Loss of head office jobs as management control leaves the country;

A shifting of focus from implementing improved, energy-efficient optimization methods on existing developed pools to less energy-efficient, grassroots mega projects. This in turn imposes tremendous strain on infrastructure, available labour and project costs; and

Ultimately reduced production and lower recovery of Canada's oil and gas reserves.

Only in Canada, you say? Tis a pity!

THE JACK & JUDY SHOW -- Courtesy ManuLife & Power Corp.

INCOME TRUST TRUTH VOLUME 1, ISSUE 11

THE NDP: THE GRAND ILLUSIONISTS

How the righteous have fallen! Once the bedrock of Canadian idealism and social justice, the federal NDP, under the leadership of Jack Layton, have turned themselves into “just another political party” ­-- pursuing electoral advantage in any way possible. And that includes a quasi coalition with probably the most right-wing government in Canadian history, the Conservative Party of Stephen Harper.

The latest initiative from the Layton/Harper duo is the draconian plan, announced by the Conservative Finance Minister, to kill off income trusts, mainly at the expense of Canada’s seniors and mainly in order to generate even greater profits for giant Canadian financial mutual-fund interests like Manulife and Power Corporation.

Bay Street’s interests must be served, it would seem, by Mr. Harper and Mr. Layton.

For more than a decade, quality income trusts provided a viable high-income investment alternative for retirees seeking the enhanced income stream needed to cope with today’s ever-escalating costs of living (e.g., increasing realty taxes, higher electricity and heating bills, increasing property and car insurance costs, and higher fresh-food prices). And by providing that alternative, income trusts inadvertently drew large sums of investment money away from the mutual fund industry, depriving traditional mutual fund companies of the generous management fees and profit margins which fueled their unseemly annual profit statements.

In other words, income trusts were getting in the way of influential Bay Street interests. And who could best quash the audacious interlopers, and punish the rebellious seniors who had strayed from the money-sucking mutual fund alternatives provided by Bay Street and had turned instead to the generous yields provided by productive income trusts? Why, of course, Stephen Harper and the political party of Bay Street, along with…um, well, what do you know…Jack Layton, and his compliant NDP parliamentary caucus.

For Jack and his complacent fellow NDPers, political survival had obviously trounced idealism and social justice on the issue of income trusts. After all, who cares who gets hurt in order to avoid a damaging election defeat (for the NDP), as long as it’s the most vulnerable segments of the population (cash-strapped seniors) who can’t fight back -- those lacking the massive financial assets and political influence of such socialist stalwarts as Manulife and Power Corporation.

In fact, sometimes it seems that Jack Layton isn’t even leading the NDP anymore. Lately, the loudest and least able voice in the caucus, Judy Wasylycia-Leis, seems to be running the show. And that’s even though everything that the abrasive one knows about income trusts likely wouldn’t even fit on the head of a pin, while everything she doesn’t know about income trusts could easily fill a twenty-volume encyclopedia.

None of which stops Judy Wasylycia-Leis from presenting herself as one of Canada’s foremost experts on income trusts. Yet, anyone minimally versed in the accounting intricacies of income trusts can’t stop from wondering whether she has a clue regarding what she’s talking about.

For example, in October 2006 Ms. Wasylycia-Leis reported and endorsed the results of an "independent" study, "Income Trusts: Heads I Win, Tails You Lose," conducted by financial hobbyist, Diane Uruquart.

Since then, both of the above self-appointed trust experts have pushed the study's conclusion that occasional unanticipated reductions in income trust distributions (usually in the case of badly managed trusts) reflect a structural weakness inherent in trust securities as a class.

According to the dynamic duo, a key concern for trust investors should be that trusts fail to differentiate between the sources of cash used by trusts for distributions (income paid to the investor) in terms of how much of that cash is actually a return of the cash invested by trust holders when originally buying their shares.

The impression given by this study (and by later misrepresentations to the media by Ms. Wasylycia-Leis in particular) is that what is really the exception to the rule among a few struggling income trusts is generic to all income trusts -- which it isn’t.

The few bad trusts chosen for study (usually business trusts) have been selectively culled for their deficiencies, while the researchers (and Ms. Wasylycia-Leis) fail to present the real way most traded flow-through entities (such as income trusts) generate net earnings or growth. The excellent track record of the majority of income trusts is ignored, in order to focus on the few losers whose unfortunate deficiencies are then used to demonize an entire investment class.

As the more responsible researchers at the non-partisan iTrust Institute have noted:

”(a) During 2006, there were more than three times as many distribution increases as decreases by income trusts. There is little difference in statistics when REITs are excluded;

(b) Approximately three quarters of income trusts and flow-through entities have not had a reduction in distribution in the past two years and, furthermore, pay cash returns to investors that are less than operating cash from continuing operations;

(c) The high frequency of cash distributions unique to Canadian income trusts generally increases returns relative to market-related risk for investors. This kind of cash return to investors offers such informative and economic value to investors seeking transparency in managerial practice that there is increasing demand by sophisticated foreign investors to own Canadian flow-through securities. There is demand to own Canadian income trusts despite the economic dampening impact of new taxes on recipients of distributions from income trusts.

Comprehensive factual studies show very different findings with significant implications compared to those presented in the expert independent study that was publicized as if part of the NDP Finance Critic's position on income trusts and the Party's stated reason to support Conservative tax policies.”

In other words, the NDP has misrepresented the very core nature of how income trusts operate, in order to rationalize a decision of political expediency to support a right-wing Conservative government in its efforts to exploit vulnerable retirees and other investors for the sake of increasing the already obscene profits of Bay Street’s largest financial institutions.

Stephen Harper, Manulife, Power Corporation and…Jack Layton? Strange bedfellows indeed!

CAITI TO LAYTON: WAKE UP, JACK!

CAITI LETTER TO JACK LAYTON, NDP LEADER, FEB 15/07

Conversation: Follow Up Call Requested
Subject: Follow Up Call Requested

Hon. Jack Layton Leader of the NDP Party

Mr. Layton

I have copied this e-mail to Don Francis, a retired scientist with a PhD in Chemistry. Don's family helped found the CCF and have supported the NDP for 67 years. Don and I have met with Judy Wasylycia-Leis and each of us have given expert testimony at the Public Hearings on Income Trusts.

I am also copying the members of your Caucus, as these are matters that should be of great interest to them in the upcoming election that is close at hand.

Thank you for taking the time to speak with me last Friday. I sensed some of the points I raised with you did resonate, in particular the inevitable "hollowing out" effects of the Conservative's income trust taxation on the Canadian economy. This "hollowing out" has already begun. Attached is a file of the announced takeovers that have been occurred as a sole result of this policy. 250,000 Canadians are employed by income trusts. 20% of Canada's oil and gas production is controlled by Income Trusts. Virtually all of Canada's oil and gas infrastructure assets are held in Income Trusts. Income Trusts are the only businesses engaged in the injection of greenhouse gases into mature oil fields to stimulate energy recovery. This is a rare win-win for business and the environment.

I could go on forever about the benefits of trusts, but I won't. I hope you had the opportunity to read the materials I provided to you, in particular the piece entitled; The Inconvenient Truth about Trusts.

One thing is abundantly clear from the hearings is that income trusts do not cause tax leakage. If they did, why are the conservatives hiding their analysis? See attached blacked out documents received under the Access to Information Act. This is a sad day for democracy, transparency and accountability in Canada. By supporting the Conservatives you are explicitly condoning this shameless behaviour and these wreckless outcomes.

When we spoke on Friday, I predicted that an inflection point was close at hand and would occur on Tuesday, when for the first time average Canadians would give testimony at the public hearings. Their testimony was powerful, compelling and well informed. I respectfully submit to you that these average Canadians are better informed on this matter than your party's Finance Critic.

As to my prediction about an inflection point, I could not have been more accurate, as the Liberals came out with their own policy position on Tuesday, which has four stated policy objectives:

-minimizing the loss of savings for Canadians who invested in income trusts;

-preserving the strengths of the income trust sector, notably a high yield instrument for savers and for the energy sector;

-creating tax fairness by eliminating any tax leakage caused by the income trust sector,

and

-creating tax neutrality by eliminating any incentive to convert from a corporation to an income trust purely for tax purposes.

Who could possibly not agree with these policy goals?

Keep in mind, Canadians have lost $35 billion in their hard earned savings with no supporting evidence provided by Flaherty and/or the Department of Finance.

The Liberals will achieve these policy objectives by imposing an immediate 10% tax on income trust distributions that is refundable to Canadians. Therefore the net effect of this is to raise the withholding tax paid on distributions to foreign investors from the current 15% to an effective 23.5% and to leave Canadians whole. This effective increase in the tax foreigners pay is a simple way of doing so without the need for Canada to renegotiate its withholding tax treaty with the US and others.

I would like to arrange a follow up call with you to discuss these and any other issues you may have about the reasons behind why your party thinks supporting the Conservatives on this policy is the correct thing for Canada and Canadians or the reasons why I feel this policy is not the right thing for our country.

Thank you,
Brent Fullard
President and CEO, Canadian Association of Income Trust Investors
www.caiti.info
416 486-2224

THE TWO STOOGES (ROSEN & URUQUART) STRIKE AGAIN!

FINANCE COMMITTEE HEARINGS [THIRD DAY]

by Harry Levant, Income Trust Research
February 15, 2007

The purpose of the third set of hearings was to primarily hear from individual investors, of which 4 were called and all testified strongly against the proposed tax legislation. Dennis Bruce was the one expert witness for the trust side and he again pointed out the errors in the governments tax leakage calculations. The government has still not provided anything beyond the blacked out numbers to justify their tax leakage claims. One individual witness advised that just two days before appearing he was contacted by one of the expert witnesses who railed on him for an hour about the evils of income trusts. He suggested this amounted to a form of witness tampering.

The trust opponents did not call individual investors but rather relied on expert testimony from Al Rosen and Diane Urquhart. Their testimony focused on capital depletion, comparison of US Master Limited Partnerships to Canadian income trusts and tax leakage through registered plans. Rosen focused on a report dated November 16, 2005 which was authored by he and Uruquhart titled "The Worst is Yet to Come". A copy of this report is located at:

http://www.sipa.ca/library/Documents/ARC-Report-WorstYet-FullReport-20051123.pdf

INCORRECT TESTIMONY (BY ROSEN & URUQUHART)

I reviewed the report at the time and found clerical errors as well as the failure to distinguish between amortization of intangible assets and depreciation of physical assets. The latter issue requires much more disclosure than is provided in the report.

Two issues [for concern] in the report are their clear misunderstanding of the difference between an income trust structure and corporate structure using an Income Deposit Security or stapled unit structure, and their proposal of a 10% tax on income trusts.

Comments on both of these issues are warranted as the former weakens Rosen’s status as an expert witness and the 10% tax proposal is entirely different from their most recent testimony.

In his testimony, Rosen specifically named Medical Facilities Income fund as a trust that was paying distributions far in excess of its capabilities. He made this claim in the November 16, 2005 report, and then again at the finance committee hearings.

Medical Facilities is not organized as an income trust, rather they are organized as a corporation paying distributions comprised of interest and dividends. To arrive at net income, the interest component of the distribution is deducted which requires that it be added back in order to calculate distributable cash. Mr. Rosen has deducted the interest component twice in the calculation of distributable cash and as a result arrives at his incorrect answer.

As an expert witness and a leading forensic accountant, he should have been able to figure out the legal structure of Medical Facilities and the process for correctly calculating distributable cash.

INCONSISTENT TESTIMONY

The second issue with the November 16th report, prepared by them, is the recommendation for a 10% tax on income trusts along with improving of the dividend tax credit for corporations. In their recent testimony, they failed to mention these recommendations and provided testimony bordering on the sensational, suggesting trusts were Ponzi schemes and should be investigated by the legal authorities. The following is a direct quote from their November 16, 2005 report:

"….However the estimated 14% loss caused by full tax parity objectives could be mitigated by taking a blended approach of imposing a 10% federal and provincial combined tax on business trusts and improving the dividend tax credit for public corporations…"

Rosen and Urquhart were present as expert witnesses and the failure to understand legal structures and to disclose key recommendations made in previous reports is cause for concern regarding their testimony.

TORIES PONDER NAME CHANGE: THE PINOCCHIO PARTY

Welcome to the wacky world of Canada's Conservative Party, the gang that couldn't calculate straight. Read on for a Bloomberg report on the recent Commons testimony by respected HBL economist, Dennis Bruce. Mr. Bruce's testimony, as an independent, non-partisan witness, confirmed that Finance Minister Jim Flaherty either lied outright, or responded in panic to a Bay Street myth, when he declared war on seniors and income trusts on Halloween Eve 2006.

Remember that Bruce's firm was originally hired by the Finance Department a few years ago, to study whether there was any tax leakage from income trusts. And when HLB came up with a different conclusion than Finance bureaucrats wanted -- namely that there was NO appreciable tax leakage created by income trusts -- his report was conveniently lost, never to publicly resurface again.

This week, Mr. Bruce testified before the Commons Finance Committee with a grave threat hanging over his head. Prominent Conservative MPs had already hinted that his firm, HBL Decision Economics, would never get another contract from the federal government if Mr. Bruce were to continue to insist that Finance bureaucrats had fudged their figures on trust 'tax leakage' and that the Finance Minister had either erred or dissembled on Halloween Eve when he referred to a national crisis of massive tax leakage from income trusts.

Despite the threats, Mr. Bruce refused to accede to the Tory party line and insisted that Finance bureaucrats had over-exaggerated the amount of tax leakage from income trusts because of faulty calculations on their part.

Of course, Canada's bungling Finance Minister probably already knew all this from day one, since the Finance Department has had the HBL report hanging around for years. But then again, how could the tiny imperfect Little Napoleon cast himself in the guise of the Saviour of Canada if he were to tell the real truth about trust 'tax leakage'?

How could he please his friends in the mutual fund industry and other Bay Street corporate opponents of income trusts if he were tell the truth about the real reason the Harper government decided to kill income trusts once and for all?

No wonder the Tories are rumoured to be considering renaming themselves the Pinocchio Party -- in honour of all the lies disseminated by their leadership about greenhouse gases and income trusts.

Would you buy a used political promise from these dissemblers?

To find out the story behind the story on the lies and distortions of Canada's tiny, imperfect Little Napoleon, check out the following Bloomberg report on the testimony of economist Dennis Bruce before the Commons Finance Committee.......


CANADA OVERESTIMATED TAX DELAY'S COST, ECONOMIST SAYS
-- Finance Minister Overestimated Trust 'Tax Leakage' By 2.8 Billion Dollars!

By Greg Quinn

Feb. 13, 2007 (Bloomberg) -- Canada would lose C$192 million ($164 million US), far less than the C$3 billion the government estimates, by delaying an income-trust tax for 10 years instead of four, said Dennis Bruce of HLB Decision Economics.

"The HLB calculation differs sharply from that of the Department,'' Bruce, who has studied income-trust taxation for the industry as well as the government, said during testimony in Ottawa today to the House of Commons Finance Committee.

The finance department left out some corporate tax cuts and deferred tax revenue when calculating how much the federal government would lose by extending the delay for another six years beyond 2011, he said.

Opposition lawmakers last week opened hearings into Finance Minister Jim Flaherty's Oct. 31 decision to tax income trusts for the first time, starting in four years. Income-trust executives, investors and some legislators want a longer grace period. They also want some energy industry trusts to be exempted from the tax.

Trusts are often the only source of funding available in Canada for some oil and gas companies, Pengrowth Energy Trust Chief Executive Officer Jim Kinnear told the panel today.

"Energy royalty trusts are highly efficient facilitators of the movement of capital within the oil and gas industry,'' Kinnear said. "There is no tax leakage associated with energy royalty trusts, compared with traditional Canadian oil and gas companies.'' Pengrowth, based in Calgary, is an investor in Canadian oil and natural-gas resources.

Tax Losses

Flaherty, 57, testified Jan. 30, saying he had to act because trusts may be costing C$1 billion a year in tax losses. Extending the four-year delay to a decade would cost the federal treasury C$3 billion, he said [although HLB Decision Economics estimated the total cost to the federal treasury to be only 192 million dollars, 2.8 billion dollars less than the Finance Minister's estimates] ....

Nuff said. The Pinocchio Party it shall be.

HAS CANADA'S LITTLE NAPOLEON MET HIS POLITICAL WATERLOO?

The Liberal Party has stepped up to the plate and hit a political home run with a centrist proposal to clean up the financial and socio-political mess created by Canada's tiny imperfect Finance Minister, Jimmy 'Little Napoleon' Flaherty -- a mess created when he recklessly declared political war on seniors and income trusts last Halloween Eve.

The ball is in Little Jimmy's court now, and the political fate of the recently-greened Big Brother regime of Commandant Harper now hangs in the dissembling Minister's tiny, chubby, incompetent hands.

What's a blustering politico, in way over his head, to do?

A recent blog entry by MP Garth Tuner says it all:


WHAT ABOUT IT, JIM?

by Garth Turner, MP

Dave Marshall is an income trust investor who stood with me in a Parliament Hill media conference two weeks ago, as I tried to bring to Ottawa some of the faces of people whose lives were chewed up by the minister of finance. He and his wife live in a modest brick bung with an ancient Ford pickup out in front, and have not had a holiday in thirty years.

Today Dave found himself back on the Hill, this time in front of a House of Commons committee where he said, in part, “Mr. Harper and his finance minister took a sledge hammer to our savings and income. Overnight we lost over 20% of our retirement savings and a big chunk of our future income.

During the last election campaign, Mr. Harper said and I quote, ‘A Conservative government will protect seniors and not tax income trusts.’ Because of that very statement, I took him at his word and decided to vote for his party. As it turns out, one of the biggest mistakes of our lives was believing in Stephen Harper.”

In case you’re wondering, it is not easy to go in front of 12 MPs, lots of official-looking officials, spectators and TV cameras, and admit you’re in a pickle because you lost a fifth of your retirement savings. The income trust investors – all 15 of them – who came to Ottawa to join me, showed remarkable courage in simply showing up. After all, the media establishment in this country had already written them off.

There has been virtually no editorial support for these people, mostly because they happen to be seniors, and investors in assets most do not understand. You can get a sense of the prevailing sentiment yourself by reading comments on this blog – where trust investors are called “greedy” and pilloried for putting their savings in things now deemed to be “excessively risky.”

But Dave is neither greedy nor a risk-taker. Like most of the people who bought trust units, he was after a living rate of return, and, moreover, he thought Stephen Harper would protect him. That, he now knows, was a very costly mistake. Collectively, these trust investors – the preponderance being Dave’s age, with no chance ever of making this money back – have lost a stunning $25 billion thanks to the bombshell Oct. 31 announcement by Jim Flaherty that Ottawa would tax income trusts. In fact, the news was so draconian that the entire income trust industry was that night dealt a death blow.

In the House of Commons, Flaherty has refused to agree to my demand to somehow compensate these people. He turned down my suggestion to allow a one-time write-off of these losses from taxable income, and rudely ignored my request to even apologize. Listening to him dismiss me in Parliament, I was keenly aware that a Minister of Finance can brush off one independent MP without even breaking stride.

But the tide may have turned a little on Tuesday.

The Liberals have now issued a policy on income trusts – which could return as much as two-thirds of losses to investors. Stephane Dion and finance critic John McCallum unveiled a plan to drop Flaherty’s 31.5% tax on trusts to just 10%, which would be paid by the trust companies, and refunded to Canadian residents. The plan is sound, because while it redresses a wrong to the little guys like Dave, it does not burn down an entire sector. Income trusts would be maintained and capped at their present number. The more modest tax would offset lost government revenues and put trusts on a level tax playing field with conventional corporations.

It’s a sound and simple plan, and Flaherty will be callous indeed if he dismisses it out of hand. The facts, after all, are clear: (a) Thousands of people bought income trusts last year precisely because Stephen Harper had made an election promise not to mess with them and (b) hundreds of companies converted into trusts for exactly the same reason.

As I said last October, and again standing with Dave and the others two weeks ago, the government has a moral responsibility to help these people, and to repair a $15 billion hole in the investment business. Any claim to be accountable to Canadians, while screwing them out of their life savings at the same time, is a farce.

If Jim Flaherty is the honourable man I believe him to be, he will show so on Wednesday.