Since Finance Minister Jim Flaherty's announcement on Oct. 31, 2006 that income trust distributions would be taxed at 31.5% at source, the major justification for his Halloween Trick has proven to be erroneous. There is no tax leakage.
BMO Capital Markets analysed all 126 companies that converted to income trusts since 2001 and found that tax raising effectiveness was increased by three times from $415.8 million to $1.234 billion per year (including deferred taxes in RRSPs). This comprehensive real world analysis demonstrates the vastly more effective tax generation associated with businesses formed as income trusts versus businesses formed as equity corporations.
All such analyses support my contention that, rather than killing income trusts, qualified equity corporations should be allowed, and even encouraged, to distribute a portion of their stable cash flow untaxed to their shareholders/unitholders, who would then be taxed at normal individual rates.
The issue of income trusts is even more critical in Alberta, where Energy Trusts have become very important players in the extraction of oil and gas from the Western Canadian Sedimentary Basin (WCSB). The 31 or so Energy Trusts produce about one million barrels of oil equivalent per day (boe/d) or about 20% of the total oil and gas produced in Canada.
The amount of oil and gas extracted per well has decreased drastically since their peaks in the 1970s. (See attached graphs from pages 26 and 27 of CompleteReportDec2006FINAL.pdf) In 1974, there were 17,900 oil wells producing on average 95 barrels/day for a total of 1.7 million b/d. In 2006, there are 58,800 oil wells producing 17 b/d for a total of 1.0 million b/d.
In 1972, there were 4,700 gas wells producing 250 boe/d for a total of 1.17 boe/d. By 2006 the number of gas wells increased 27-fold to 129,000 wells, while output per well decreased 12-fold to 22 boe/d for a total of 2.80 million boe/d. (Note: One boe/d = 6,000 cubic feet of natural gas.) Conventional oil production (excluding the tar sands) has been decreasing at 3.4% per year since 1997; whereas gas production has been flat since 2000. Because of the lower production per well, exploration and drilling costs per barrel (and per boe) have sky rocketed.
The 20 or so "Senior" equity Oil/Gas 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. In addition, the Energy Trusts have been repatriating foreign-owned assets back to Canadian control. Since 2001, they have raised more than $20 billion in public markets and spent $27 billion in acquiring oil and gas properties. (See attached graphs from page 6 of CanaccordIncomeTrusts20061102.pdf)
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. The tax revenue generated by the Energy Trusts per unit of production far exceeds that of the equity corporations.
The Alberta Royalty Review Report dated 18 September 2007 and archived at
http://www.albertaroyaltyreview.ca/panel/final_report.pdf
clearly indicates that the oil reserves in the bitumen of the Alberta Oil Sands dwarfs the remaining conventional oil reserves in the Western Canadian Sedimentary Basin by a factor of 100. However, although 24.1% of the easily recoverable oil reserves in the WCSB have been largely depleted by the big oil companies, the very large remaining reserves (61.8%, but costly to recover) will continue to be the lifeblood of Alberta's oil industry for many more years. The figures for natural gas are similar. (See pages 47 and 48 of the above-mentioned report.)
The Energy Trusts have been at the forefront in applying sophisticated techniques to enhance the recovery from these depleted oil and gas fields. For example, in its submission to FINA, ARC Energy Trust indicates that in a particular field in Weyburn "CO2 flooding should improve the recovery from 30% to approximately 45% -- an incremental 130 million barrels for the total pool". (See attached page 175 of CompleteReportDec2006FINAL.pdf .)
In my opinion, past provincial and federal governments, as well as the oil and gas industry itself, have been irresponsible in not ensuring maximum recovery of these non-renewable resources. Upon discovery of a new field, one would expect a detailed plan of recovery to be submitted to and approved by the relevant provincial government before exploitation could commence. Furthermore, provincial governments should ensure funding for research and development into new sophisticated recovery schemes, which might involve physical, chemical, biological, temperature (including nuclear energy) and robotic techniques.
In my opinion, the evidence in favour of Energy Trusts and against Jim Flaherty's 31.5% tax levy is overwhelming.
The question then arises, if the evidence is so clear cut and overwhelming, why did Jim Flaherty and the federal government decide to kill income trusts, in general, and Energy Trusts, in particular? Why did all the provincial finance ministers support this assassination? Why did Shirley McLellan in Ralph Klein's cabinet quote a tax loss to Alberta of $400 million in March 2006 and her successor Lyle Oberg in Ed Stelmach's cabinet raise that figure to $450 million? Both figures are obviously untrue.
Why did Jack Layton of the NDP and his energy critic, Judy Wasylycia-Leis, support a measure which is certain to lead to further impoverishment of the ordinary working Canadian and to increased foreign control of Canadian resources? This is contrary to the interests of the typical NDP voter.
Why did Stephen Harper appoint Mark Carney, who is adamantly opposed to income trusts, to be the new governor of the Bank of Canada when the present governor, David Dodge, retires? According to the 11Oct2005 issue of the Globe and Mail,
https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20051011/RTRUSTMAIN11
Mr. Carney was at the forefront of efforts to kill income trusts even during the reign of Ralph Goodale. The article further states that Mr. Carney "earned his spurs at Goldman Sachs in the 1990s in the firm's Moscow office, where he advised on the privatizations that, for better and for worse, transformed Russia's state-owned industries into private enterprises".
I am of Ukrainian origin and am, thus, particularly sensitive to the machinations of the Oligarchs in Ukraine and the Russian Federation. In my opinion, what happened there during the 1990s with their privatizations was a crime against humanity. The so-called "shock therapy" promoted by the "Harvard elite" resulted in the looting of the country to the benefit of criminals (who salted all their ill-gotten gains in foreign bank accounts) and to the detriment of the ordinary people. Is Jim Flaherty (and now Mark Carney) contemplating a similar fate for Albertans and the rest of Canada?
Several studies have shown that for the past twenty years the rich have been getting richer and the poor getting poorer in Canada, as well as in many other parts of the world. Politicians and economists complain that Canadians are going into debt and not saving enough in their RRSPs for their retirement years. Income trusts with their high and reasonably stable yields were perfect investments for RRSPs. Why remove this option for young working Canadians to invest in Canadian resources and Canadian-owned enterprises. Is this equivalent to "coupon clipping"? Why force them to invest in foreign countries, or in equity corporations, or in penny stocks? Is this not equivalent to playing "the slot machines and casinos"?
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Dr. William Zuzak, Ph.D.,P.Eng. is a retired physicist in the fields of nuclear energy and controlled thermonuclear fusion. He lives in Edmonton, Alberta.
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