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.
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