Further to today's stories in Post and Globe (any others?) on Finance's extension on and exemption granted to U.S.-based foreign investment entities. Has everyone gone through the material thoroughly by now? Could it be that this will turn out to be merelyl a Pyrrhic victory? One contact I neglected to reach yesterday and who was insightful in the earlier columns certainly still has his doubts and finds the package still highly flawed.

I agree. While this is a major "practical" victory, there are theoretical problems with this legislation which can come back to haunt us someday.

For one, this is still too wide a net. Imagine if the authorities assumed that everyone outside Canada is a criminal, and then offered pardons only if individually a person can prove otherwise.

What if stock strength shifts from the U.S. to another country (for example, Germany). In that case, we may want to purchase sector ETF's that trade on the Frankfurt DAX, or Germany-based mutual funds .

In this case, it is not sufficient to use Canadian or U.S.-based funds. For example, in the 80s when Japan was king, some of the Japanese close-ended funds would take a big dip if the DJIA drops during the day, even if Japan had closed higher overnight.

It is the job of Ottawa to identify possible tax-cheating vehicles (wherever they may be). They are unable or unwilling to do this, so instead they slap a punitative tax on all off-share trusts. In other words, we are punitavely taxed because the taxation people are unwilling/unable to do their job properly in the first place.

I agree that the steps they took are great but it still poses lots of problems for investors holding other closed end funds, Canadian based foreign stock funds, and holding companies that don't fall into the def'n of a RIC. As IFIC points out in its letter, many funds wouldn't even be able to comply with Finance's complex proposal. So I think the progress so far is good, but it's not over.

What if stock strength shifts from the U.S. to another country (for example, Germany). In that case, we may want to purchase sector ETF's that trade on the Frankfurt DAX, or Germany-based mutual funds .

Reader1, this is a very good point. In one of my conversations with the people at the Finance Dept. it was inferred that the reporting standards in Germany and the UK were not considered acceptable. Thus ETF’s and funds etc. from those countries would not be exempt and would be subject to the “mark to market” rules.

A proper and further analysis of this legislation is in order but we really need a motivated group of experts to identify the problem areas.

Any ideas on who that may be ?

From article by Jonathan Chevreau, September 8, 2000, Financial Post “Ottawa exorcises phantom gains tax”

Bowing to multiple protests, the Department of Finance granted a year's reprieve to investors in the affected securities. It extended the Sept. 1 commentary deadline to Dec. 31 and carved out a number of U.S.-based exceptions.

Good article Jon. Still a lot of question though aren’t there ?

I see you learned your homework, cbg1.

Yes, there are many questions. Let me clarify the Spindler quote about accounting profession getting 80% of what they wanted. He meant individual investors: in fact, the corporate world and tax advisors and accountants still think this thing is full of holes and ought to be rethought from the ground up.

Yes, there are many questions. Let me clarify the Spindler quote about accounting profession getting 80% of what they wanted. He meant individual investors:

Jon, for once the little dogs get to eat before the big dogs :-).

in fact, the corporate world and tax advisors and accountants still think this thing is full of holes and ought to be rethought from the ground up.

They have my complete support on that one. Where have the accountants / tax advisors and mutual fund industry been hiding anyway ? How come it took a bunch of amateurs to bring attention to this nonsense and why are they so slow out of the gate on this one? The original submission date may have been extended but no one knew that until yesterday ! These are supposed to be the experts ? Good grief...

From Jon’s article today: Victoria-based tax lawyer Blair Dwyer says it will still be necessary for tax professionals to understand the U.S. tax code. It is "disconcerting to have Canadian tax law depend on the provisions of U.S. tax law, because now Canadian taxpayers will have to check U.S. tax law in order to determine whether an investment qualifies for exemption under Canadian tax law," he said.

Blair is right but it is not only the US tax code but the tax codes of many other countries as well, UK, Germany, France etc.. Very few people have a good handle on our own tax system yet alone all the others.

This legislation still creates incredible complexities for the legitimate international investor and will most likely be ineffective at stopping the sophisticated tax cheat.

I see you learned your homework, cbg1.

Shakespeare, a little knowledge is a dangerous thing :-)

Eric Kirzner describes the ruling as "good news for index units" in his piece in FP Investing today (C10, Sept 11). He and Richard Crofit use index units as their "investment vehicle of choice" in the FPX indexes (Financial Post indexes.)

Or try the direct link here:

Watch for yet another column on this topic Tuesday, D1, looking at the criticisms of international corporate tax experts.

From article by Jonathan Chevreau, September 12, 2000, Financial Post

“Experts decry tax tinkering”

Allan Lanthier, Montreal-based director of international tax for Ernst & Young (Canada), doesn't mince his words in calling for the Department of Finance to go back to the drawing board. This comment was made after last week's modifications to June's version of the proposed legislation:

"I find the package fundamentally flawed, and in need of a complete revisit, both from a policy standpoint and to address the hundreds of errors and anomalies in the draft legislation itself," said Lanthier. "This patchwork approach of identifying a few, isolated issues in a package rife with others just does not cut it."

I second that motion.

And from reader E.S.:

I think that some people have misintrepreted Revenue's apparent change of heart. This goes along with the overregulation of society esposed by Hillary Clinton. When she tried to push universal medicare in the states it failed miserably. Her only regret was that she didn't do it step by step. In other words, conquer your enemies by baby steps. In the case of the taxation of FIE's, Revenue had much smaller goals than was apparent by their actions. I think they wanted `x' but asked for 150 % of 'x'. Now they appear as consultive and listening to the people, because they pulled back. I appears that it is nothing more than a con game. I will bet you that there is some devious scheme buried in the legislation that no one has picked up yet. Finance is full of dyed in the wool socialists. I have communicated with several of them. They want no less than total income redistribution for Canada. So much for truth in government.

From Daniel McDonald, Ph.D. FCA Pres., McMutual Fund Report Inc. (with permission)

To:

jchevreau@nationalpost.com rcarrick@globeandmail.ca croftfin@aol.com

congratulations re:EFT

You financial commentators/journalists have done a great job informing the investing public about the tax threat to EFT's.

Investors and other, including yours truly have written thoughtful objections to the Ministry of Finance with good results.

NOW, NEXT

Some enterprising commentator/journalist will interview the editors of the business sections of our national newspapers to see why there is so little data on EFT's for use by investors. Not even price quotes! Surely they are asleep at the information/news switch. Hint look at www.amex.com/asp/option_index_tracker_asp

Some innovative editor will suddenly get a good idea and be the first on the block to publish daily closing prices for EFT's and the enterprising commentator will pat himself on his back and perhaps even get a raise from the editor for his good idea.

Then a really clever and really innovative editor will decide to publish rate of return data on the EFT's. Then investors will be able to compare the performance of EFT's with similar mutual funds.

For example consider the following 3 month annualized rate of return to September 8 XIU TSE60SP 53.7% Green Line Cdn Equity Fund 23.8% HSB Equity 43.7%

And some commentator/journalist will write a story saying this type of information is useful to investors.

Perhaps our much protected mutual fund industry will then begin to feel pressure to reduce their MER to a reasonable level.

Yours for useful investor information.

After reading many of the comments on this legislation, I now realize that while a victory, it falls far short of what it should be.

My feeling is that this legislation should not apply to ANY legimate investment vehicles. It should be up to the CCRC to explicitly state which trusts are unacceptable in their eyes, rather than which get an exemption.

How can they justify firing a shotgun into a crowd because there may be a bad guy there.

Furthermore, it should not matter how those trusts are purchased. These days, I believe it is common sense to go to those brokers with the lowest commissions, and these U.S. brokers will not issue any T5, etc.

I always try to stay invested as long as my short-term models are positive, however, there are many reasons to believe that this 11-year U.S. bull market is running out of steam. As investors, we need the freedom to purchase assets in any country of our choice without the fear of being unfairly taxed.

I've been slowly trying to digest all of the threads and newspaper articles concerning the 7Sep news release.

If I understand correctly,

(a) we're reasonably sure that all US-based ETFs and US-based mutual funds (e.g. Vanguard) are RICs and thus will be exempted.

(b) but it's not clear if closed-end funds, HOLDERs, and certain stocks like BRK are considered to be RICs.

Is this the correct interpretation?

What should we do next? Wait for the next round of proposals? Lobby Ottawa regarding (b) now that we have their attention?

I'm "all ears" :-)

My impression is closed-end funds trading on exchanges other than the U.S. or Canada will continue to be subject to the phantom gains tax regime. I presume that means a closed end fund trading on NYSE is exempt but that one trading in London, UK or Tokyo is not. The situation still seems ambivalent on HOLDRs and Berkshire Hathaway. It appears that the legislation was NOT designed to target individual U.S. stocks. Allan Lanthier at E&Y would know: you linked to his site at www.bylo.org, did you not?

Hi Bylo, welcome back.

we're reasonably sure that all US-based ETFs and US-based mutual funds (e.g. Vanguard) are RICs and thus will be exempted.

Yes, that is how I have interpreted the information in the press release. The important criteria being the country of origin and the RIC definition. If the vehicle is a “U.S. based Regulated Investment Company” it is exempt.

but it's not clear if closed-end funds, HOLDERs, and certain stocks like BRK are considered to be RICs.

It was my understanding that companies such as BRK and the closed-end country funds that trade on the NYSE are not exempt but I have not confirm this as fact. I did hear that Microsoft would be exempt.

I think we had great success with the small area of the legislation that we targeted. Since the press release I have been taking pleasure in that accomplishment but I have a nagging suspicion the job of fixing this legislation is far from done.

I think the changes are inadequate and that the legislation is still fundamentally flawed. The legislation is worded so broadly that by default most foreign investments funds/ETF’s are automatically included unless specifically exempted. The approach should have been from the opposite direction. Define and identify the real problem vehicles and specifically target them in isolation.

As far as I know we cannot buy any of the new (Non-US) ETF’s coming on stream on the main international exchanges because they would be caught by this absurd legislation. That is a real shame and several years from now we will all consider this very limiting.

Defferal of capital gains in funds and ETF’s purchased on foriegn exchanges anywhere in the world should be a no-brainer. I hope someone is at least working on this modification.

What should we do next? Wait for the next round of proposals? Lobby Ottawa regarding (b) now that we have their attention?

It would be hard for us to recreate the earlier excitement and momentum with another campaign. I hate to say it but I think it is up to the many professionals groups that were so noticeably absent in round one to take the ball now and run with it in round two.

What do you think ?

This would appear to me to be a pure tax grab by Rev Can. And it flies completely in the face of the apparent move to further reduce Cap Gains tax in Canada.

Is it possible that they are just testing the waters in both directions now to see how far they can go in each? Give a little - take a lot. They have always wanted more revenue, regardless of what they say. And offering to take less has only come up in pre-election scenarios, often to be dropped after a successful election campaign.

Anyone remember the Red Book promise re the GST?

I think everyone should jump on this one. And I suspect the Mutual Fund industry should be front and centre. Not slow and late like recently. After all, who's next if not them?

GregA

cbg1,

It was my understanding that companies such as BRK and the closed-end country funds that trade on the NYSE are not exempt but I have not confirm this as fact.

That too is my "understanding." How do we confirm this?

we cannot buy any of the new (Non-US) ETF’s coming on stream on the main. international exchanges because they would be caught by this absurd legislation.

Is that important? It's hard to imagine that the equivalent of any but the most obscure ETFs that would be launched overseas wouldn't soon be listed in New York. After all, the US is the largest market for the likes of BGI and SSgA. (Note that even i60s are now available in the US as iShares even though Canada is a small player on the world market cap stage.)

Defferal of capital gains in funds and ETF’s purchased on foriegn exchanges anywhere in the world should be a no-brainer.

The problem with such a blanket exemption is that if someone started an ETF in a "tax-haven" country (e.g. in the Carribbean) then under local tax laws the ETF would never have to pay out distributions in respect of any income.

The reason for the US exemption is that their tax regime is similar to ours and that their authorities share information with ours. That's apparently not the case in countries like the UK and Germany, let alone "tax-havens."

Bylo:

IMO, it's very important to be able to buy ETFs on any global exchange. There are several reasons for this, for example, it's doubtful that fine-tuned country ETFs will be sold in the U.S. (for example, German real-estate sector ETFs).

You also said "The reason for the US exemption is that their tax regime is similar to ours and that their authorities share information with ours. That's apparently not the case in countries like the UK and Germany, let alone "tax-havens."

Using that line of reasoning, any foreign investment that does not supply information in the format that CCRA wants is presumed to be guilty of being a tax avoidance tool. That would be similiar to the government assuming that every car is a robbery get-away car.

Using that line of reasoning, any foreign investment that does not supply information in the format that CCRA wants is presumed to be guilty of being a tax avoidance tool.

So why do you think Finance introduced the "Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities" in the first place?

So why do you think Finance introduced the "Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities" in the first place?

Probably since they felt that "non-compliance" was high in this area ..... hey, not my word, OK?

OTOH, if in fact many were dumping $$$ offshore and NOT declaring the income then this is somewhat akin to the issue many years ago of investors who either did not declare income on T-bills or declared the "income" as capital gains ...... note that the result of this area of "non-compliance" is now to force financial intermediaries to report the gross PROCEEDS of the sale and therefore force the taxpayer to declare a huge capital gain or income unless they have paperwork to establish the cost base or purchase cost ...... "guilty 'til proven innocent"? you bet.

Too bad that in many cases like this the issue is well engaged (or protested) yet in the end, CCRA sets up rules that are better focused and that ultimately reap more tax dollars.

Warren.

Note that even i60s are now available in the US as iShares even though Canada is a small player on the world market cap stage.

Bylo, although both are Canadian index investments there is a signifigant price diference 0.17% vs. 0.84% MER and they track different segments of the market.

Canadian product: S&P/TSE 60 Index, iUnit I60’s (XIU) MER 0.17%

American product: MSCI Canada Index, iShare Canada (EWU) MER 0.84%

cbg1,

At least with the US, while there are significant differences in accounting (taxation of dividends, calculation of capital gains, etc.) our systems are more similar than they are different.

Finance was at least savvy enough to align our accounting and reporting practices with those of the most important global market. I often read how the Canadian and American rules are much more transparent than other countries and that this gives our markets added credibility.

However BGI has an iShare that also tracks the S&P/TSE 60, IKC. Granted its MER is 50 bp, not 84 bp, and that's still 3x that of XIU. Note also that IKC is denominated in US$ not CA$.

Ahhhh, Bylo I had no idea there was a US S&P/TSE 60 (IKC) I mistook your reference to a Canadian iShare to be the EWU. I had been thinking recently how hard it is to keep up with the onslaught of new products. Thank-you once again for keeping me up-to-date.

Presumably if BGI US thought there was a market for them they would introduce iShares for emerging markets and for Asia/Pacific.

It can’t be long before BGI has nothing but these two segments left to work on.

My point is that it was hard enough to get Ottawa to exempt (we hope!) US securities. Finance explicitly mentioned the UK and Germany as two countries whose tax laws differ significantly to ours (e.g. low or no capital gains tax.)

I certainly do not understand the intricacies of the various tax and reporting procedures and could not begin to intelligently argue this subject with the people at Finance. I do feel a basic change in process is in order, identify specific problems rather than casting a net so wide it potentially catches both the good and the bad. The US was a good example of just how far off track well meaning legislation can get.

I’m not in any hurry to rattle Mr. Martin’s cage again either. He still hasn’t responded to any of the letters we sent him in August.

Did you or anyone else ever get a written response from Mr. Martin either directly or from one of his staff ?

This idea of ruling everything off side and then giving specific exemptions for those that are not is nothing new to our Federal gov't - it's been used in areas such as "justice" before, too. It is wrong to classify a group of individuals/products as "criminals" because a few actually are. Ain't socialism grand??

Did you or anyone else ever get a written response from Mr. Martin either directly or from one of his staff ?

It is my impression that Mr. Martin and his staff did not responded in writing to any of the hundreds of letters that were sent. Some individual MP’s did acknowledge the correspondence but mine was not one of them.

Curious behavior for politicians especially in an election year.