These are excerpts from a 251-page pdf file CompleteReportDec2006FINAL.pdf in the folder D:/commodities/stocks/ of my computer hard drive. This is a response of the Energy Trust coalition to Jim Flaherty's Oct 31, 2006 (Halloween Trick) announcement that distributions would be taxed at 31.5% at the source (before distribution).
(1) There is "No Federal Tax Leakage"
- All evidence indicates that the tax take from energy trusts is substantially greater (from 1.7 to 2.2) than from conventional equity corporations.
- Energy trusts collect 16% of revenues but pay 30% of tax.
(2) "Energy Trusts are the ideal model for Canada's mature hydrocarbons basin."
- Conventional light oil production (excluding tar sands) has been decreasing at 3.4% per year since 1997; gas production has been flat since 2000.
- The amount of oil and gas extracted per well has decreased drastically since their peaks in the 1970s.
Oil
1974 - 95 b/d per oil well; SUM = 1.70E06 barrels/day; No. wells = 17,900
1994 - 30 b/d per oil well; SUM = 1.25E06 barrels/day; No. wells = 41,700
2006 - 17 b/d per oil well; SUM = 1.00E06 barrels/day; No. wells = 58,800
Natural Gas
1972 - 1.50E06 ft3/d per gas well = 250 boe/d; SUM = 7.0E09 ft3/d = 1.17E06 boe/d; Wells = 4,700
1997 - 0.34E06 ft3/d per gas well = 57 boe/d; SUM = 16.0E09 ft3/d = 2.67E06 boe/d; Wells = 47,100
2006 - 0.13E06 ft3/d per gas well = 22 boe/d; SUM = 16.8E09 ft3/d = 2.80E06 boe/d; Wells = 129,000
- The 20 or so "Senior" equity O/G corporations have been fobbing off their depleting wells and fields onto the energy trusts, which have invested substantial money and effort to increase production from these fields. The "Junior" corporations (as they grow) have been selling their developed wells and fields to the trusts and reorganizing to do more exploration.
Category -- Number Production Distributions (Taxes)
Senior ------ 20 ---- 43% ------ Yes --- (4.4% gross; 11.4% EBITDA)
Foreign ----- ? ----- 23% ------ No ---- (0%)
Trust ------- 31 ---- 18% ------ Yes --- (10.3% gross; 19.4% EBITDA)
Intermediate ? ----- 5% -------- No ---- (0%)
Junior ------ ? ----- 11% ------- No ---- (0%)
- Although the Seniors do pay dividends these are only about 12.4% of their earnings or 1.8% of gross revenue; whereas the Trusts distribute 137% of their earnings (about 60% of their cash flow) or 25% of gross revenue. The Foreign, Intermediate and Junior categories do not issue dividends.
(3) Tax-deferred accounts; seniors; RRSPs:
- The PricewaterhouseCooper (PwC) submission indicates that the owners of the trusts are 39% taxable Canadians, 39% tax-deferred Canadians and 22% non-residents. (Non-residents pay a 15% withholding tax on their distributions).
- A chart by Gordon Tait indicates that tax-deferred RRSPs gain the government at least 1.7 times on a present value basis. After 35 years, $100.00 in an RRSP growing at 6.5% per annum would be worth $906.23; whereas the $45.00 tax loss of the government discounted at 3.5% (inflation + ?) would be worth $150.01. This yields $756.22 of extra taxable income, which at 46% yields $347.86 for the government.
- The withdrawals from RRSPs always exceed the contributions:
In 2003, $48.6E09 (out) - $34.5E09 (in) = $14.1E09 surplus
In 2004, $52.5E09 (out) - $38.1E09 (in) = $14.4E09 surplus
- The "tax leakage" prognostications of Jack Mintz (CEO of CD Howe think tank) and Lalit Aggarwal are based on erroneous and self-serving assumptions and calculations.
- The effective tax on income trust distributions associated with RRSP and RRIF withdrawals will become 61%, if the 31.5% tax-at-source is imposed.
(4) Quotes from 251-page pdf file:
"Flow through structure of income trusts creates needed transparency for effective and disciplined capital investment."
Gordon Tait quotes:
Marcel Tremblay of Enerplus Resources Fund (ERF.UN) initiated the income trust concept.
"Trusts have shifted parts of the Canadian economy out of the hands of the few and into the hands of the many."
"Without an income trust market, this type of investment opportunity would be lost to all but institutions and wealthy investors in Canada and to private equity investors abroad."
"The strength of a trust is that the debt owners and share owners are one and the same: trust unitholders."
In 126 businesses which converted from equity to trusts between 2001 and 2005, the government collected 2.2 times more revenue from trust distributions then from the equity corporations before conversion.
"Corporations have many more ways of sheltering income from taxation than do individuals."
"Only charities and crown corporations are tax-exempt".
"Since interest from corporate bonds is not double taxed, trust distributions should not be either."
After discussing the conflict-of-interest between management and shareholder as illustrated by Enron, WorldCom, Tyco, Hollinger, etc., the PricewaterhouseCooper submission states:
"A key benefit of the income trust structure is that managers and unit holders are more efficiently aligned to an effective and transparent monitoring system -- cash."
"Income trusts have proven to be an effective tool for circumventing double taxation."
(5) Will Zuzak conclusion:
[Even though all trusts are required to be at least 50% Canadian-owned, I acknowledge that there is, indeed, tax leakage from the 22% of trust units owned by non-residents subject to a 15% withholding tax. (This appears to be a loophole specially created to allow the International Money Mafia -- aka organized crime -- to launder their ill-gotten money!) One obvious solution is to have a variable withholding tax increasing from 15% to 50% as foreign ownership approaches 50%.
- I conclude that the income trust structure is in fact, as well as in principle, far superior to the equity corporation structure that is presently ruling the "market economies" of the world.]
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Archived as CompleteReportDec2006NOTES.doc 2007-01-08