CONSERVATIVE GOVERNMENT’S DECISION ON INCOME TRUSTS WRONG!
-- COMMONS STANDING COMMITTEE ON FINANCE
Ottawa – The Conservative government must immediately follow the Finance Committee’s recommendations to implement a fully-refundable 10 per cent tax on income trusts in place of its destructive 31.5 per cent tax, Liberal Finance Critic John McCallum said today.
“The 10 per cent plan is good public policy that would help investors hurt by the Conservatives’ broken promise, level the tax playing field, protect an income stream that seniors have come to depend on, and help to prevent the decimated income trust sector from being bought up by foreign interests,” said Mr. McCallum. Mr. McCallum was referring to a report tabled today by the Standing Committee on Finance, which urges the government to drop its proposal for a 31.5 per cent tax on income trusts beginning in 2011. The report advocates the implementation of a 10 per cent tax – fully refundable to Canadian investors – in place of the highly destructive Conservative plan. This follows a similar recommendation put forward by Liberal Leader Stéphane Dion on February 13.
The 10 per cent plan has received support from both the Canadian Association of Retired Persons and the Canadian Retired & Income Investors' Association. Both RBC Dominion Securities and BMO analyst Gordon Tait have confirmed that such a plan would return two-thirds of the $25 billion that investors lost the day after the Conservative announcement. CIBC World Markets called the plan a “balanced approach” to income trusts. “Prime Minister Stephen Harper gave his word that he would not tax income trusts and when he broke that promise $25 billion of investors’ money went up in smoke. Now it’s time for Mr. Harper to swallow his pride, listen to the advice of the Finance Committee and Canadians, admit that his policy is wrong, and move to do what is right for Canada,” said Mr. McCallum.
The Committee report recommended that the Conservative government:
• Table any legislation dealing with tax income trusts in a stand alone Bill;
• Release the data and methodology it used to calculate the tax leakage it has alleged occurs due to the income trust sector; and
• Consider the 10 per cent plan and extending the phase-out period to 10 years.
Mr. McCallum also noted that the NDP has supported the Conservative government’s policy on income trusts, despite the number of low- and middle-income Canadians who depend on these investments for income. “The NDP must realize that they have an opportunity to live up to their motto and actually get results for people by endorsing the 10 per cent plan,” said Mr. McCallum.
For more information contact: Office of the Hon. John McCallum Liberal Finance Critic (613) 996-3374
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An Exercise in Illogicality: The New Democratic Party Dissenting Opinion to the Report of the Standing Committee on Finance "Taxing Income Trusts: Reconcilable or Irreconcilable Differences?."
"Expert Evidence"
On page 53, the New Democratic Party state:
"We have concluded, based on the expert evidence presented to the
Finance Committee, that our longstanding position of phasing out income trusts is appropriate public policy and that the taxation of such trusts is required."
From this statement, it may be assumed that the New Democratic
Party are referring to the "expert evidence" of Al Rosen and Dianne Urquhart.
"Sound Public Policy"
Furthermore, on page 53, the New Democratic Party state:
"It also points to the recklessness of continuing to put partisan political gain on this issue ahead of promoting sound public policy-a course currently being enthusiastically pursued by the
Liberal Party."
From this statement, it may be assumed that the New Democratic
Party are referring to the Liberal Party's proposal to tax income
trusts at 10% as "recklessness."
How does the New Democratic Party reconcile this 10% tax as
"recklessness" when Al Rosen and Dianne Urquhart themselves put
forward a 10% tax proposal in their report on income trusts
entitled "Business trusts: The worst is yet to come" and also in
their submission of April 7, 2006 to the Minister of Finance they
recommend a "new modest tax on business trusts":
"Our research report recommends that the Department of Finance
achieve tax parity by a blended solution of a new modest tax on
business trusts and a modest increase in the dividend tax credit.
A new tax on business trusts would stem the tide of business trust
conversions and the litany of financial reporting, valuation, and
marketing abuses occurring in this sector of the market: An increase in the dividend tax credit would encourage many corporations to raise their dividend payout ratios as a way of boosting shareholder value. This would save current unitholders the professional fees for income trust conversions, and still provide income-seeking investors with an effective alternative to business trusts. The $5 billion estimated damage to current business trust unitholders from the new modest tax, would largely be offset by the expected increase in valuation of the common
equities held in typical retirement accounts due to the dividend tax credit increase."
http://www.fin.gc.ca/consultresp/flwthruent_5e.html
Finance Committee Hearings
The third and final round of the finance committee hearings on the
proposed income trust taxation were held with one expert witness and four private investors appearing for the trust side and two expert witnesses for the opposing side. The outcome of the hearing has been for the Liberals to propose a revised trust taxation proposal.
Finance Committee Hearings
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?
In a review of the report at the time there was 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 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 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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