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The federal government intends to stick to its guns on its plan to tax the distributable cash of income trusts, federal Finance Minister Jim Flaherty said Tuesday.

"I have no intention of altering the government's decision, including the four-year transition period," he said in testimony to the House of Commons Standing Committee on Finance, which is holding a hearing Tuesday on the government's proposal to tax the cash distributions of income trusts. Mr. Flaherty announced the controversial plan on Oct. 31.

He added that the government won't heed the energy sector's calls to exclude oil and gas income trusts from the proposed tax legislation.

"It would be a mistake to carve out the energy sector," he said.

He estimated that the trust structure cost the federal government about $500-million in tax revenues in 2006 alone, adding, "This is a conservative estimate." He noted that this figure doesn't include "millions" in lost provincial tax revenues, nor does it include the taxes that would have been lost had telecom giants Telus Corp. and BCE Inc. proceeded with their plans to convert to the trust structure. He said Alberta estimates that it would lose $450-million a year in tax revenues if the tax break for trusts were to continue.

He said an extension of the tax holiday for trusts to 10 years from four, as proposed by some trust advocates, would cost the federal government $3-billion in additional lost tax revenues. He said it would cost the provinces another more than another $2-billion.

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

Some opposition committee members and public witnesses at the hearing complained that the finance department still wasn't providing the complete details of the calculations that went into their tax-leakage estimates, and questioned the integrity of Mr. Flaherty's data.

"These numbers from Finance are all over the map," said Liberal MP John McCallum.

Both Mr. McCallum and George Kesteven, president of the Canadian Association of Income Trusts, said the government's assumed tax revenue losses from the conversions of Telus and BCE was flawed. They said the two companies have indicated that by retaining their traditional corporate structures, they will be paying little or no corporate taxes over the next few years as a result of using their existing tax credits.

Mr. Kesteven said the government still has provided "no clear data" to back its tax-leakage claims. "The fact is, there is no tax leakage," he said.

"There is not a leakage issue here," agreed Cameron Renkas, income trust analyst at BMO Capital Markets.

But other witnesses, such as financial analyst Diane Urquhart, insisted that the leakage issue is real. "There are permanent government tax losses . . . when you do the proper analysis," she insisted.

Mr. Flaherty said "it is regrettable" that some investors were hurt by the government's decision to end the tax holiday for trusts.

The finance minister butted heads with Mr. McCallum, who asked pointedly whether the finance minister had received any studies on the likely impact to investors before he decided to crack down on trusts. Mr. Flaherty attempted to respond, but avoided giving a direct answer, prompting Mr. McCallum to interrupt repeatedly to demand that he answer the question. "I take it, then, that the answer is no?" he finally said.

"Of course there would be a negative impact," a frustrated Mr. Flaherty responded. "I did not look forward to that.

"But you have to act in the best interests of the whole country."

Liberal MP John McKay estimated that the proposed trust legislation had wiped out $30-billion to $35-billion of "hardworking Canadians' savings," based on lost values of trust units on the Toronto Stock Exchange since the day Mr. Flaherty announced the proposed tax change.

The Conservative government had made a pre-election promise not to impose new taxes on the income trust sector, but Mr. Flaherty said the government was forced to change its mind as a result of an acceleration in conversions to the trust structure, as well as increasing numbers of companies in "active, knowledge-based" areas of the economy. He said the finance department began having "serious discussions" internally last July regarding its growing concern about trusts.

But members of the Bloc Quebecois criticized the government's flip-flop on its position on trusts, saying that investors and companies had jumped into the sector last year as a result of the Conservatives' election pledge, thus accelerating the growth of the trust sector.

"Were the increased conversions part of the irresponsible promise you made?" asked Bloc MP Thierry St-Cyr.

Mr. Flaherty rejected suggestions that energy trusts be treated similarly to the master limited partnerships that exist in the United States, which receive beneficial tax treatment. He noted that the Canadian energy trust sector represent a much bigger market than U.S. MLPs.

"I think it's reasonable to expect all sectors of the economy to pay their fair share," he said.



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