The following is a partial transcript from the Don Newman show Politics on CBC Newsworld, from Monday, Sept. 22. His guests, Conservative Finance Minister Jim Flaherty and Liberal finance critic John McCallum, a former bank economist, were debating the new Liberal plan to reinstate some of the special tax considerations accorded income trusts.

Don Newman: Now it has been almost two years since Finance Minister Jim Flaherty surprised and angered a lot of investors by announcing the Conservatives would go back on their own election promise not to tax income trusts.

Well, today as part of their platform  the Liberals say that if they are elected they'll scrap that tax. But, immediately replace it with a smaller one of their own that's refundable for Canadian residents.

Could this move pay dividends for the Liberals at the ballot box?

To debate the two plans are Jim Flaherty, from his riding in Whitby, Ont., and Liberal finance critic John McCallum in Toronto.

Mr. Flaherty let me ask you first, what is your reaction to what the Liberals are proposing now?

Flaherty: Well, it's the fourth or fifth proposal. When they were the government they were going to get rid of the loophole for income trusts and then they chickened out on that and after they leaked it, of course, the markets gyrated. We all remember that BlackBerry incident.


Conservative minister Jim Flaherty in the House of Commons

And then in the House of Commons, they came up with various proposals from time to time.

Now, they don't propose to eliminate the tax. They just propose to keep it less, which will keep an uneven playing field for Canadian corporations.

Why should a Canadian corporation, formed as a corporation, have a tax disadvantage to a Canadian corporation operating as an income trust?  It doesn't make any sense.

In fact, they're talking about a moratorium. That is, maintaining the status quo that we've created.

So their so-called new plan is sort of a half-baked idea but that's like the other ones they came up with on income trusts.

McCallum: The first point is that we have had this plan for over a year so it's not a new plan. What happened was that  Stephen Harper came in, broke his promise on income trust, raised taxes, caused $25 billion of people's hard-earned savings to go up in smoke.

There was no logical foundation, analytically, for what he did and the result has also been disastrous for government revenues because what you have is ordinary Canadians no longer investing in income trusts but the big guys, the private equity companies and the pension funds, are raking up income trusts and paying no tax.


Liberal finance critic John McCallum on Monday at the release his party's campaign platform. (CBC)

So the consequence is (a) the government gets less tax revenue because private equity and pension plans don't pay tax, and (b) you have a distinctly unfair situation where ordinary Canadians are denied the right to invest in income trusts where the big guys are. So that is a distinctly un-level playing field.

And what we have said we would do for over a year is that we would scrap their punitive tax, which is designed to destroy income trusts and which will raise no revenue, and instead we will have a 10 per cent tax refundable credit for Canadian citizens, which will restore part of the loss in wealth that the government's action has implied.

It will preserve income trusts as a savings vehicle for savings and it will stop this rash of takeovers by private equity companies who pay no tax, so therefore it will also produce more revenue into the system.

Flaherty: Well, a lot that was said there, most of it's wrong.

Tax fairness is actually quite logical. I am surprised that McCallum doesn't accept that. Why should one form of company in Canada pay less tax than another form of company. That's not a level playing field.

Income trust lost all this money. Not true. The income trust index on the Toronto Stock Exchange was up 14.5 per cent with redistributions reinvested, as of early September.

The only people that lost money in income trusts were people that lost it early on when they panicked and they sold.

Now, a lot of brokers are not making the kind of money that they were making pushing this product back in the years that it was being pushed.

The other thing is, quite frankly, for the good of the Canadian economy we had to make sure that this passive type investment did not become the rule of the day. We had Encana, we had some of our banks, we had Telus, we had BCE all intending to become income trusts.

Those are passive investments. We need a dynamic reinvesting of capital in Canada, especially now and, thank goodness, we made that decision two years ago given the economic turmoil that we have in the world today.

Canada's in good shape in part because of that decision.

Newman: John McCallum, do address that part because it seems to me back in 2006 that Telus, BCE, the banks, at least in some of their business models, were going to spin themselves off into income trusts.

Basically the entire tax structure, the commercial and business tax structure in our country would have been changed and a lot of Canadians didn't think that was a good idea.

McCallum: Look, first of all Mr. Flaherty's got his numbers wrong.

I checked the index today and it's absolutely not the case that the trust sector has rebounded from the time that Mr. Flaherty cut them off at the knees and, on your question, Don, the point is that Mr. Flaherty used a bomb when he could have used a surgical instrument and, had he consulted, he might have discovered that.

He could have stopped banks from becoming income trusts. He could have stopped BCE  from becoming an income trust and he could have consulted Canadians to come up with a good solution.

Instead, what did he do? He dropped a nuclear bomb on the whole industry, causing it to go up in smoke, causing $35 billion to be lost and create this [situation] where he deprives ordinary investors of the right to invest in an income trust type asset but retains that privilege for the big guys, the private equity and the pension funds.

Now, if ever there was tax unfairness, it is precisely that. You give the privilege to the private equity and the pension funds and you take that privilege away from ordinary people who have lost $35 billion.

He did not need to do that. He could have put a moratorium on new income trusts. He was not capable of using a surgical instrument, which is what the situation demanded.

Newman: Two points there, Jim Flaherty. But go to the one about private equity and people who don't pay tax still getting into the income trusts while other Canadians can't.

Flaherty: They pay through other forms and they have their structure…

Newman: No, but that's the argument. Excuse me for interrupting but wasn't that the argument about income trusts in the first place. People were just playing …

Flaherty: No. The fundamental tax fairness argument is now the law in Canada and which the Liberals sort of dallied around with in terms of how they'd vote in the House of Commons is that with active corporations doing business in Canada there should not be a loophole that lets one form of corporation not have to pay the level of taxation that another form does.

That's basic tax fairness. It was supported by the government of Canada. It was supported by Parliament. It was supported by every province that supported exactly what we decided we were going to do when we did it back in October 2006.

The Liberals are really out on a limb on this one trying to bring something back that they were going to do themselves back in 2005 but they messed it up.

McCallum: He didn't answer the question.

Newman: You say there could have been a moratorium in 2006, John McCallum, and I take it you are considering a moratorium now if you became the government again.

Where is the fairness in a moratorium and why can only some companies turn themselves into income trusts, why can't all companies turn themselves into income trusts?

McCallum: First of all, Mr. Flaherty did not answer your question. What about the big guys in private equity and pension funds who have access to this type of investment and the little guys who don't.

I will acknowledge that once you drop a nuclear bomb on something it's difficult to put all the toothpaste back in the tube. But what we are going to do is we are going to consult, that's a word that Mr. Flaherty doesn't understand.

He should have put a moratorium and consulted to come to an appropriate solution and not a nuclear-bomb solution, which damaged so many individual Canadians and hit their hard-earned savings.

We will put in place our refundable tax. We will then hold consultations with the sector and with experts to figure out the way forward in detail.

That is the way you do something. You consult. You don't drop a nuclear bomb and get this disaster of unfairness for the little guy.