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Finance Minister Rejects Call to Exclude Energy Trusts in Tax Plan

Canada's Minster of Finance Brian Flaherty put politics aside on Tuesday, holding firm to a plan to begin taxing the distributable cash of income trusts in four years. The minister, who at times sparred with members of Parliament during hour-long testimony, also soundly rejected calls to exclude oil and natural gas income trusts from the proposal.

Flaherty and members of his staff testified before the House of Commons Standing Committee on Finance in Ottawa concerning the controversial Tax Fairness Plan, which was unveiled last October (see Daily GPI, Nov. 2, 2006). Despite occasional sniping by legislators and members of the audience, Flaherty offered a spirited defense of the plan.

"Regardless of the political consequences, we had to act, and we did," Flaherty said. "We are acting in the best interests of Canada." He said there is pressure on Parliament and on him to alter the tax plan or dismiss it outright. However, "I have no intention of altering the government's decision, including the four-year transition period. Clearly, income trusts have a special tax advantage that regular corporations do not enjoy. They know it, you know it, and the market knows it."

Flaherty also did not waiver in his opinion of whether energy income trusts should be exempt from the plan.

"It would be a mistake, a serious mistake, to carve out the energy sector and give them a tax holiday," he said. Flaherty suggested that before the lawmakers considered exempting energy income trusts from the taxation plan, they should speak with provincial leaders in Alberta, Newfoundland, Labrador and Nova Scotia about what effect the exemption would have on their economies. "I think it's reasonable to expect all sectors of the economy to pay their fair share."

Using "conservative estimates," Flaherty showed the committee charts to explain how Canada lost C$500 million in tax revenues in 2006 because of the way income trusts are now structured. The estimate, he said, did not include "millions" that were lost in provincial tax revenues, nor did it include the taxes that would have been lost if telecommunications giants Telus Corp. and BCE Inc. had proceeded with their plans to convert to income trusts.

The minister estimated that nearly C$70 billion of Canadian assets was converted to income trusts in the first 10 months of 2006. He said there was no doubt in his mind that the growing trend to convert to income trusts would continue without a more equitable tax scheme.

"Just imagine what the total would have been if a large company like EnCana had followed suit," he said. EnCana, the country's largest producer, had been poised to spin off C$20 billion of its mature natural gas assets into an energy income trust last year; it has since dismissed that plan (see Daily GPI, Nov. 7, 2006).

Flaherty acknowledged that it was "regrettable" that many investors suffered financial losses following his announcement last October. In the days following the announcement to begin taxing income trusts, the Toronto Stock Exchange suffered huge losses -- especially the energy trusts.

However, the "growing trend toward tax avoidance" is "a clear and present danger to the economy," he said. "This is a difficult but necessary decision for our country and our future generations...for our children, our grandchildren, for our prosperity in the future. This plan accomplishes two critically important goals. It restores balance and fairness, and it strengthens the Canadian economy, now and into the future."

Flaherty urged legislators to reject a proposal to extend the transitional period for taxation to 10 years from four. A longer transition, he said, would cost Canada at least C$3 billion in additional lost tax revenue. Alberta, home to many of the energy income trusts, would lose another C$2 billion over that period.

"Delaying only puts off the ultimate goal of this decision," Flaherty said.

The Ministry of Finance is "taking steps to protect investors" through the four-year conversion. It also recommends "generous" growth guidelines over the next four years to allow existing trusts to double in size, said Flaherty. Included in the transition is a pension adjustment for seniors, worth about C$700 million a year, and an increase to the benefits program effective Jan. 1, 2006 to provide tax relief to low- and middle-income seniors.

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