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Energy lobby cheers Liberal hearings on income trusts

The debate over Finance Minister Jim Flaherty’s crack down on tax loopholes for incomes trusts has officially been reopened.

A parliamentary finance committee voted on a Liberal proposal to examine the reasoning and methods that led up to the Oct. 31 announcement to tax distributions on trusts. Hearings with finance department officials and expert witnesses will begin on Feb. 2.

Experts will be called to challenge the validity of the government’s decision on trusts. The length of the four-year tax holiday being offered to trusts will also be examined, as will the government’s refusal to grant exemptions to energy trusts.

Expert witnesses will include representatives of the Coalition of Canadian Energy Trusts, a lobby group made up more than 40 energy-related trusts.

“We congratulate the Finance Committee on this decision,” said Sue Riddell Rose, co-chair of the Coalition of Canadian Energy Trusts in a release.

“It was unnecessary for this government to destroy existing trusts and the hard-earned savings of Canadians in order to prevent future trust conversions. Furthermore, the government’s claims of tax ‘leakage’ are inaccurate. In the case of energy trusts, the government will collect less tax under the new proposed legislation than it has in the past.”

On Monday, True Energy Trust became the first casualty of the income trust decision, announcing it would convert back to a corporate structure. True Energy converted to a trust in 2005. The company is a member of the Coalition of Canadian Energy Trusts and will maintain its unofficial position until a vote finalizes the details of the conversion in March.

“The government’s announcements have resulted in management and the board of directors revisiting the long-term strategic direction of the trust. Based on this review of the alternatives, conversion back to a corporation before 2011 has been determined by management and the board of directors as the best opportunity to enhance unit and asset value over time,” the company said in a release on Monday.

Flaherty’s refusal to grant an exemption to energy trusts and his claims of huge tax leakage from income trusts, which pay profits out to investors in a way that avoids most corporate taxes, will also be under examination.

Liberal MP John McCallum, who pushed for the session, even though Parliament will not resume sitting until January 29, said he feared an election might be called before the committee had a chance to scour the legislation.

“I believe it is sufficiently urgent that we would not want to wait until the time of the budget,” McCallum told the committee.

The Liberals have been slamming the minority Conservative government for back-tracking on an election promise when they announced on October 31 they would tax income trusts in 2011.

The renewed debate gives them a chance to play up the “broken promise” card ahead of a federal election, widely expected in early 2007.

Flaherty unveiled a draft bill on the matter on December 21 and will present a final bill “by the time of the budget,” Diane Ablonczy, parliamentary secretary to the finance minister, said on Wednesday. She declined to specify further on the timing.

Regardless of what the committee hearings find, the income trust bill is almost guaranteed to pass unchanged in the House of Commons. The Bloc Quebecois clearly stated it would support the legislation even though it backed the Liberal move to hold hearings.

But McCallum suggested the whole issue could be up for rethinking once an election is called. “Things can change quite quickly in politics and I think we might be in an election before the bill is passed.”

NDP MP Judy Wasylicia-Leis called Wednesday’s meeting a “circus” and “political grandstanding” and the Conservatives said it would prolong uncertainty on the future of income trusts.

“This has re-injected a very disturbing and alarming note of doubt and instability into this key issue and its going to hurt investors again,” said Ablonczy.

Canadian investors lost some $20-billion after Flaherty’s surprise Halloween tax announcement, which triggered a 300-point plunge in the Toronto stock market.

Emily Mathieu
National Post

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