During the second day of Finance Committee public hearings on income trust tax “losses”, two analysts questioned the methodology and assumptions used by the Minister of Finance and his Department to calculate there is a loss of corporate taxes due to the existence of income trust securities.  Confronted with new low estimates, Finance Department personnel attempted to articulate the method to their findings.  And ultimately, the contradicted the authoritative presentation of that method shown two days earlier by Finance Minister Jim Flaherty. Unfortunately, the Minister was supposed to be using information provided by the same staff who contracted him.

Research analyst at BMO Capital Markets, Gordon Tait, presented his research that considered taxes paid by corporations and their investors before and after converting into a trust.  He not only questioned estimates by the government, he said that BMO found that tax revenues increased under the trust structure.

Mr. Tait made news prior to his testimony because his requests for details about the government calculations only raised more questions.  The information he received included large areas with blacked-out numbers.

These extraordinary points may not get the kind of media coverage they could well deserve as comments from David Dodge pulled focused. And it all followed statements by an economist from a consulting firm that triggered discussion about the veracity of Finance estimates.

The vice president of HDR/HLB Decision Economics, Dennis Bruce outlined his firm’s analysis that was described as using the same methodology as the finance department.  For 2006, HDR/HLB found the trusts might cost $164 million in lost taxes.  That is a fraction of the half a billion dollars that Finance claims it had lost. Neither amount was close to the $1 billion a year loss, that Finance Minister Jim Flaherty proposed to steal headlines on the day of his testimony to the Committee.

Mr. Bruce had an equally prescient point.  He suggested that the tax loss would really only be $32 million if other legislated taxation was considered in future years.

Intrigue began as the officials from the Finance department suggested their estimates for future years had indeed taken into account these legislated tax changes. Statements in the second day of hearings contradicted testimony from Mr. Flaherty on the first day.

The Minister said his department estimated that if it extended the deadline for proposed taxes on income trusts from 4 to 10 years then the additional tax loss for Revenue Canada would explode to $3-billion. At that time, Mr. Flaherty was questioned by Thierry St-Cyr, a Bloc Quebecois MP, who wanted to know how the large number was determined.  And the Minsiter of Finance Minister said the number for the 2006 leakage was multiplied by an additional six years.

Committee members then raised concerns about the competency of findings and estimates from the department.  One representative at the meeting suggested that, “If we were incompetent, we wouldn’t admit it.”