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FINA Committee Report

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Dissenting Opinion —
The Conservative Party

With the introduction of the Tax Fairness Plan on October 31st, 2006, the Government of Canada took decisive action to restore fairness to the tax system. On November 7th, 2006, the House of Commons voiced its support for the plan with the adoption of Ways and Means Motion No. 10 and the Standing Committee on Finance also reiterated its support for the motion when it decided to hold hearings to study the Tax Fairness Plan.

The Conservative Party believes the preponderance of evidence presented at Committee provided overwhelming support for the Tax Fairness Plan and further justification for the Government’s decision. At its own political disadvantage, the Government showed leadership in leveling the tax playing field. The decision of the Liberals and Bloc to take advantage of this report to advocate a radically different set of recommendations is, in our view, not based on the evidence or the greater good of Canadians.

THE WEIGHT OF THE EVIDENCE

The Liberal–Bloc report fails to reflect the majority of evidence presented to the committee. The Conservative Party is of the opinion that certain witnesses who spoke against the plan are overrepresented in the report (i.e. Gordon Tait, BMO Capital Markets analyst) relative to those speaking in favour of it (e.g. David Dodge, Bank of Canada Governor). The Liberal–Bloc recommendations exhibit a disregard for the facts presented by the overwhelming majority of independent analysts and public representatives, including the highly respected forensic accountant Al Rosen, every single provincial finance minister, and federal Department of Finance officials.

Furthermore, the report includes inflammatory and unsubstantiated editorial statements. We regret that the Liberal–Bloc report chose to include such evidence.

We want to state that in our opinion the actual committee proceedings do not provide the basis for the Liberal–Bloc recommendations.

OPENNESS AND TRANSPARENCY

The Minister of Finance appeared before the Committee to provide a detailed accounting of the estimated federal revenue lost due to income trusts (along with the release of extensive background material).

The Liberal’s preferred witness, Dennis Bruce, Vice-President, HDR | HLB Decision Economics, only further underlined the inconsistency of their position. While in government the Liberals rejected Bruce’s methodology, and affirmed that a $300 million annual tax leakage existed. Now, relegated to opposition, the Liberals have seemingly embraced what they once derided as flawed. Even Liberal Finance Critic John McCallum initially supported the Government’s plan, stating, “It was absolutely the right thing, and we had started on this track to protect the tax base, to ensure tax fairness and to work for the productivity of the nation.” [1]

Solid evidence was presented in support of the key principles of the Tax Fairness Plan.

TAX LEAKAGE

The case for tax leakage was strongly made in person by the Minister of Finance of Canada, the Provincial Treasurer of Prince Edward Island, and in written submissions from all provincial finance ministers.

As highly regarded independent analyst Diane Urquhart pointed out, the assertion that there was no tax leakage is not based on objective fact:

The income trust tax plan removes tax advantages, and where there are tax advantages there is by definition government revenue leakage. If there were no tax advantages, there would not be this aggressive income trust lobby to reverse the income trust tax plan. If corporations had less combined business and personal taxes, then income trusts would be rushing to convert back to corporations to achieve these relative tax advantages. [2]

Governor of the Bank of Canada, David Dodge agreed:

What has happened since the October 31 announcement is that we’ve seen something like a $20–billion or $25–billion reduction in the market value of these trusts. It has not been even, of course, across all trusts. So what does that represent?… It can only represent two things: number one, the present value of all the future taxes that the government would have lost; and number two, the inefficiencies that were there by organizing some businesses in the form of trusts that should have been organized in the form of corporate businesses. [3]

The current government used the same methodology employed by the previous Liberal government in 2005. Add an additional $70 billion in conversions in 2006 and any questioning of the existence of tax leakage, now $500 million a year at the federal level, is more about political opportunism than providing an objective analysis.

TRANSITION PERIOD

Many witnesses, including every provincial government, supported the 4-year transition period.

When Andrew Teasdale, Total Asset Management Research & Investment Rights Consultancy, was asked what the advantage of extending the transition period beyond the four years would be, he replied, “I can’t really see any advantage at all.” [4]

Finn Poschmann of the CD Howe Institute also supported the decisive action to have a 4-year transition period:

The honeymoon (transition) period… is very much an exercise in line drawing and judgment. I don’t think there’s any way around that. The four-year period is a reasonable adjustment frame for corporations or affected trusts to rearrange their affairs. To let it drag on would let the problem fester unnecessarily. [5]

The Bloc, together with the Liberals, has taken a position that is detrimental to the interests of Quebecers. As the Minster of Finance stated:

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. I would say to the Member for Joliette, are you in favour of a wealth transfer of hundreds of millions of dollars from the pockets of Quebec taxpayers by extending the transition period to 10 years? [6]

The Government of Quebec clearly stated such measures would be highly injurious to the province’s fiscal capacity: “Extending the transition period could only increase governments’ tax losses and perpetuate inequitable business tax treatment.” [7] The Conservative members applaud the federal government for its awareness of the concerns of the provinces, including Quebec.

The recommendations in the report represent a return to uncertainty and indecision. Changing the rules would be unfair to those investors who acted based on the Tax Fairness Plan.

THE NEED FOR DECISIVE ACTION

The income trust landscape changed dramatically in 2006 as evidenced by a rapid increase in the number and size of conversions. The committee heard from witnesses that corporations were converting for tax reasons rather than business reasons. This required decisive action to level the playing field. The Liberal–Bloc plan, a 10% tax, would permanently entrench a tax disadvantage for corporations and would continue a shift in the tax burden to individuals. The Liberals latest income trust policy, their third in two years, has already been identified as “politically funky stew.” [8]

As the Governor of the Bank of Canada observed:

For the income trust sector to deliver the efficiency benefits through its enhancement of market completeness, it is absolutely critical that the tax system provide a level playing field… a step was taken to level the playing field and it was a step absolutely in the right direction. [9]

Clearly, the trust structure began to lead to unintended and unforeseen consequences in 2006. The consequences were bleak according to Domenic D’Alessandro of Manulife:

In time, if left unchecked, the income trust sector would spread to encompass the core of our economy, and I don’t think that would be a good thing for Canada… I do applaud the government for dealing with an important issue. [10]

Jeffrey Olin, Managing Director, Ontario, Head of Investment Banking, Desjardins Securities Inc. added:

Many business models may not be best suited to a trust structure but they may be drawn to the structure simply because of the tax savings. As a result, trusts may have less internal capital available to pursue growth initiatives or reinvestment in capital expenditures. This could be quite detrimental to the long-term interest of the entity or the economy in general. [11]

The committee heard from witnesses such as Kevin Dancey, President and Chief Executive Officer, Canadian Institute of Chartered Accountants, stating that the Tax Fairness Plan was the right response:

The tax system was not neutral, as there was a significant incentive to use a trust, rather than a corporation, for tax purposes, and business structure should be created and selected for good business reasons, not for tax reasons… there was tax leakage with respect to both the units held by tax-exempts and non-residents, and this leakage was growing. The next issue is whether the solution proposed on October 31 was the right one. In my view, it was an important step in the right direction that had to be done now… it levelled the playing field between corporations and trusts; and second, it addressed the tax leakage issue. [12]

It is not credible to suggest that every provincial government from all political stripes, every finance department in the country and a broad range of experts are wrong. We find it puzzling that the Liberals and Bloc would reject the weight of evidence and point to the New Democratic Party’s unwavering support for doing the right thing in supporting the Tax Fairness Plan.

CONCLUSION

The Minister of Finance made a difficult but necessary decision on October 31st, 2006. The Liberal–Bloc report appears to take a contrary view simply to avoid being seen to support the government. In doing so, they do a disservice to taxpayers and the country.

The Government’s decision is about leadership and above all, fairness: fairness for Canadian taxpayers who would otherwise shoulder an ever increasing share of the tax burden while seeing tax dollars sent out of the country to foreign investors; fairness within the corporate sector where the current rules give income trusts a tax advantage and distort investment decisions; and fairness for federal and provincial governments, who would be less able to pay for important programs such as health care, education, pension splitting for seniors, and of course, to address the Fiscal Imbalance, if the Finance Minister did not act.

The rapid and unexpected trend towards trust conversions was creating economic distortion that threatened Canada’s long-term economic growth and productivity. Left unchecked such corporate decisions would result in billions of lost revenue for the federal and provincial governments to invest in the priorities of Canadians and weaken the corporate community’s connection to the social fabric of the country.

Recommendation
The federal government implement the Tax Fairness Plan as outlined in Ways and Means Motion No. 10 — including a 31.5% tax on income trust distributions, a four-year transition period for existing trusts, and pension income splitting for seniors — adopted November 7th, 2006 with the support of the majority of the House of Commons.

Standing Committee on Finance
Diane Ablonczy, M.P., Parliamentary Secretary to the Minister of Finance
Dean Del Mastro, M.P.
Rick Dykstra, M.P.
Mike Wallace, M.P.

[1]
“Question Period”, CTV, 5 November 2006.
[2]
Standing Committee on Finance Evidence (No. 64, 1st Session — 39th Parliament), 13 February 2007, pg. 1
[3]
Standing Committee on Finance Evidence (No. 60, 1st Session — 39th Parliament), 1 February 2007, pg. 9
[4]
Standing Committee on Finance Evidence (No. 59, 1st Session — 39th Parliament), 30 January 2007, pg. 21
[5]
Standing Committee on Finance Evidence (No. 64, 1st Session — 39th Parliament), 13 February 2007, pg. 18
[6]
Standing Committee on Finance Evidence (No. 59, 1st Session — 39th Parliament), 30 January 2007, pg. 4
[7]
Letters of Support From Provincial Finance Ministers”, 25 January 2007.
[8]
Vieira, Paul. “Should be ‘embarrassed’”, National Post, 15 February 2007.
[9]
Standing Committee on Finance Evidence (No. 60, 1st Session — 39th Parliament), 1 February 2007, pg. 4
[10]
Standing Committee on Finance Evidence (No. 60, 1st Session — 39th Parliament), 1 February 2007, pg. 3
[11]
Standing Committee on Finance Evidence (No. 60, 1st Session — 39th Parliament), 1 February 2007, pg. 5
[12]
Standing Committee on Finance Evidence (No. 60, 1st Session — 39th Parliament), 1 February 2007, pg. 6