The original thread is getting lengthy, so I'll start posting reader e-mails about this issue here, as I get permissions. Here's the first: Subject: FW: Draft Legislation re: Taxation of Unrealized Foreign Capital Gains

Mr. Reed, Please read the following e-mail to the Dept. of Finance. While I realize that this is your summer break, the bureaucrats in the Dept. of Finance continue their efforts to collect more tax revenue to support your government's wasteful spending habits. I would strongly urge you to represent the tax payers of your constituency by contacting the appropriate people in the Dept. (and Paul Martin if necessary) to suspend any further consideration of this legislation. While the government insists that they are cutting taxes, this is just another example of how they are simply giving with one hand and taking with another.

-----Original Message----- From: Landry, Cameron R. Sent: Wednesday, August 16, 2000 12:14 PM To: 'consltcomm@fin.gc.ca' Subject: Draft Legislation re: Taxation of Unrealized Foreign Capital Gains

I are writing to strongly protest the intention of the Dept. of Finance to tax unrealized capital gains from foreign investments.

I am an individual investor with a modest investment portfolio in both registered, tax sheltered (RRSP) and unregistered, taxable portfolios. I have purchased equities in non-Canadian companies and foreign exchange traded funds for the latter portfolio. My investment philosophy is "buy and hold". I have done this to diversify my investments and to minimize expenses.

As I understand your proposed legislation, you would now tax the unrealized (as in "no cash") appreciation in values of foreign holdings in my non-registered portfolio. You would do this in spite of the following facts:

- These investments were made with after-tax dollars. - I will have no cash from the actual sale of these securities to pay the tax. - You would do it in a discriminatory manner versus the treatment for Canadian investments and at an inclusion rate of 100%.

This draft legislation amounts to an unconscionable tax grab, is unfair to small investors such as myself and is being rushed through during the slow summer period to avoid undue scrutiny by the investment community. It is a poorly concealed attempt to punish Canadian investors who are voting on the policies of the Liberal government with their investment dollars.

I intend to forward a copy of this e-mail to my MP and to the Minister of Finance to insist on their immediate review of your actions.

From Norm Goldman, with his permission:

Hi- I read your interesting article to-day - Catch -22... Are you saying that if I owned a closed fund traded on the NYSE which has a basket of US and possibly other foreign securities that the proposed law would apply? This fund pays out a montly dividend which is earned by way of dividends and covered call options as well as capital gains- there is a 15% withholding tax If this is the case- many Canadians are surely "up the creek!" Regards- Norm Goldman

Here's the letter L.E. sent to Paul Martin. Perhaps it can be adapted by others:

The Hon. Paul Martin , Minister of Finance The House of Commons, Parliament Building Ottawa, ON K1A OA9 Email: Martin.P@parl.gc.ca

Re: Taxation of U S Mutual Funds (Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities)

Dear Mr. Martin,

I write to express my shock that you have reversed your position and are now proposing to bring ordinary U S Mutual Funds under the provisions of your tax avoidance legislation. We have owned American mutual funds (e.g., Vanguard) for many years and have always reported the yearly income from these funds and paid tax on them to Canada. Each year we receive IRS form 1042S from the U S fund which specifies the income and specific nature of that income which is then included with our Canadian tax return. As you know, the America tax rules require U S mutual funds to flow through all of their income and earnings to their fund holders on a calendar year basis, even if disbursed in a subsequent tax year. This is similar to Canadian tax law. We understand your department is proposing to remove the exemption for these widely held mutual funds for three reasons:

1. These distributions may not necessarily be subject to immediate Canadian income tax. This is silly since I know of no case where I can pass up reporting the 1042S income that is reported to the CCRA as well as to us. If your staff finds a minor example, it certainly does not apply to any Canadian taxpayer of whom I am aware.

2. Such an exemption could inappropriately allow for the use of tiered structures . . . This I consider to be a straw man issue since U S funds invested in by the average Canadian or American do not use this tax avoidance strategy. Why should you penalize the mass for a few odd-ball funds. Exclude those funds from the exemption.

3. To provide equality of treatment between domestic and foreign investment funds, it would be necessary to use income for Canadian tax purposes for the purposes of such an exception. This I also consider to be a straw man argument. There are few differences in determining taxable income between Canadian and US mutual funds. Income is income in both countries and operating expenses and fees and treated similarly. Where there is a difference, such as short term and long term capital gains, these are specified on the 1042S. While some US income such as federal or municipal bonds which have tax exemption status for the individual US holder this exemption is not available to a Canadian holder. In any case specific information about tax status of pay-outs is listed by state of residency when tax information is sent yearly to each taxpayer.

Finally let us consider your "default" position which assumes holders of U S mutual funds will not have enough information to prepare their tax return and the "simpler mark-to-market regime" which will be required.

First I believe that the information provided each year by the U S mutual funds including the 1042S and supporting documentation is sufficient to use the s. 94.1 election for most Canadians.

Your proposed solution to require a mark-to-market approach may be appropriate for professional traders who are taxed as a business, but should never be applied to individual investor taxpayers. We do not make "contributions" to U S mutual funds; we invest in these funds on an arms-length basis, the same as if we bought an individual stock. The reason we use mutual funds is because we do not know the American market as well as we know the Canadian market and also wish to diversify our risk.

The idea that we must pay full income tax on unrecognized capital gains is draconian in nature. First we would have to redeem shares to get the money to pay taxes and second we are denied the capital gains exemption on that which is totally a capital transaction. The yearly difference in market value of mutual funds is entirely made up of unrecognized gains and losses within the mutual fund. All investment income and recognized capital gains have been paid out by year-end. It makes no tax or economic sense to tax this as ordinary income and is contrary to the entire philosophy of fairness which you espoused in this year's budget when cutting the capital gains rate.

Although we are Canadian, we have friends who are U S citizens with US Mutual funds. What you suggest creates difficult problems of double taxation for them. This conflicts with the intent if not the provisions of the Canada-U S tax treaty.

I will not speak to the question of your attempts to properly tax off-shore trusts; that is a complex issue while an exemption for U S mutual funds is not as complex as your department appears to believe..

Please do not make life difficult for small Canadian taxpayers to simply invest in a US mutual fund and pay taxes each year on the income generated by that investment.

Sincerely

Bylo has tons more like that, Jon. He's set up a new page, as per link:

Yeah...and he's adding them as fast as he can!

I just e-mailed this to Jason Kenney, CA's finance critic:

It think Huggett's RIP idea deserves its own thread, so I'll repost Bylo's bit. We'll leave this thr Tax Legislation Division Department of Finance Canada 17th Floor, East Tower, 140 O'Connor Street Ottawa, Ontario K1A 0G5

To Whom It May Concern:

RE: Proposed taxation of exchange-traded funds

I am writing in response to a recent media report on the tax treatment of exchange-traded funds. According to the report, in the Financial Post, exchange-traded funds (ETFs) such as WEBS and QQQs will be marked to market annually, and unrealized gains taxed at 100%. If this report is accurate, the policy is tantamount to prohibiting Canadians from holding these securities outside of registered accounts.

It does not seem in the best interest of the Government of Canada to discourage Canadians from investing in these instruments. Presumably our Government would wish to encourage its citizens to accumulate wealth, so that they may pay more taxes, and so as to minimize the burden on the social safety net after their retirement. ETFs are increasingly recognized as an important part of wealth accumulation.

The key role of ETFs stems from the recognition of the vital importance of asset allocation, as distinct from security selection. ETFs greatly facilitate the separation of these two decisions. Now investors can focus on the big picture: which asset class or geographical entity will outperform. Once that decision is made, it is simply a matter of choosing the relevant ETF.

It may be argued that Canadian mutual funds can fulfill this role in the wealth management process. Unfortunately, Canadian foreign-content mutual funds tend to charge exceedingly high MERs, on the order of ten or more times the fees on ETFs. To say the least, it would appear that the Canadian consumer might benefit from competition for the mutual fund industry.

It has been suggested that ETFs somehow facilitate tax avoidance. If a Canadian citizen holds these or any other securities in an account at a Canadian brokerage, it is impossible to avoid the disclosure requirements. How is it that holding the 30 individual stocks in the DJIA is taxed in the same manner as any Canadian common share, but holding DIA-A now ought to be subject to annual deemed disposition and 100% inclusion? The absence of a stronger argument does little to deflect criticism that this legislation is intended to protect Canadian bank mutual funds.

My interest in this issue is solely as a private investor. I hope to use ETFs in my non-registered accounts to redress the limitations on foreign content mandated in my RRSP, and hence to ensure that my family can remain independent of the social safety net now and through our retirement years. I would strongly urge you to reconsider this extremely punitive treatment on ETFs.

And here's the letter D.P. sent to his MP:

Dear Diane,

As a resident of your riding, I wanted to bring the following issue to your attention.

According to a report in the Financial Post ("Offshore investors to fight changes in capital gains rules", by Jonathan Chevreau, August 15), legislation proposed by the Department of Finance will provide for unique and punitive tax treatment of exchange-traded funds (ETFs). An ETF is like a mutual fund, in that it holds a variety of securities. Mutual funds, however, can be sold only at the end of the day at whatever was the closing net asset value of the fund. ETFs are traded on an exchange (usually the American Exchange) just like a common stock. Typically these are index-type funds. For example, one of the more popular funds, known as the Qs (for the trading symbol QQQ), tracks the 100 largest companies on the NASDAQ exchange. Another, known as Diamonds, tracks the Dow Jones Industrial Index. Not only can these funds be bought and sold throughout the trading session, they are inexpensive. The management fee on Diamonds, for example, is about 0.15%. By contrast, the Management Expense Ratios on U.S. equity mutual funds offered in Canada are typically between 2% and 3% -- that is, more than ten times the cost of the U.S. index fund. Even the fees on the U.S. index mutual funds offered by the chartered banks are almost twice that of the ETF.

As you know, for most investments held outside of tax-protected accounts, holdings are not taxable until sold, and are then taxed at the capital gains rate of two-thirds inclusion. The proposed legislation would have ETFs marked to market annually. That is, the account holder would be deemed to have sold the holding once each year. Moreover, if there were a capital gain, it would be taxed at a rate of 100%. In effect, the Department of Finance would prohibit Canadians from holding ETFs outside of RRSPs.

Why is this important? It is well-understood that the most important determinant of return to an investment portfolio is the asset allocation decision. That is, what share of your portfolio is bonds, what share to equities; what share to technology vs. financial services; what share to Europe vs. Canada. Until recently, the investor first had to make the asset allocation decision, and then choose a particular security. Say, for example, that they decided a year ago that the transportation sector should have a prominent place in the portfolio. If they chose Bombardier, they prospered. If they chose Laidlaw, the decision was a disaster. An ETF would allow them to instead choose a transportation sub-index, with exposure to perhaps 20 companies, significantly reducing their risk.

ETFs are important, then, in that they offer the investor the opportunity to improve the performance of their portfolio, at a far, far lower cost than the mutual funds offered by the banks. With the questionable ability of the Canadian government to assure income support to retired baby-boomers, the performance of Canadians' investments is of vital importance.

Why does federal Finance seek to discourage investment in ETFs? The stated aim is to curtail the use of overseas investing to avoid Canadian taxes. If you have ever had an account at a Canadian brokerage, you know this argument is specious. There is no way to avoid the disclosure requirements. Moreover, it is perfectly legitimate for you to purchase the 30 individual stocks in the Dow Jones Industrial Average. If you hold them for more than a year, there is no deemed disposition. If they are worth more when you sell them, your capital gain is taxed at two-thirds. Why, then, would the purchase of the Diamonds ETF, which is the same 30 stocks, be treated differently?

One suggestion is that this legislation is a sop to the banks, perhaps as compensation for the merger fiasco. The fact of the matter is that ETFs threaten the established order in the mutual fund industry (The Financial Post ran a series of articles on this on July 22, which can be accessed on their website). Until recently, Canadians were captive. The mutual funds offered in Canada performed less well, and with significantly higher MERs, than those offered to Americans resident in the U.S. Moreover, the volatility of the markets, and the proliferation of index funds, made it more and more important to adopt at least a core of index funds into your portfolio. If consumers no longer purchased whatever mutual fund the banks recommended, the banks would lose a profit centre. This legislation helps the banks defer that crisis.

For the record, I am not employed in the brokerage industry. I do not sell ETFs. My interest in this issue is as a tail-end boomer, who understands all too well that he's on his own when it comes to taking care of his retirement. I hope soon to have used all my RRSP room, and to begin investing in non-registered accounts. By "virtue" of the foreign content restrictions on RRSPs, my non-registered accounts will be weighted to foreign content. At the same time, I do not begin to have the expertise to pick stocks in Europe or Asia. So I expect to depend on ETFs like the Euro350. Instead, the Department of Finance wants me to be hostage to the Canadian banks.

My apologies for the length of this note. This is a complicated issue, and I did not want to presuppose that you had already been briefed on it. Thank you for your attention to this matter.

Sincerely yours,

I missed up the link too - what's happening??

Try again:

From reader A.H., the following question:

Dear Mr. Chevreau, I'm sending this inquiry after reading your Wednesday column. It was not clear to me whether you were arguing that the unfair taxes you wrote about were to be applied to all earnings made on equities outside of Canada or whether only on mutual fund accounts. Could you clarify? For example, I am a dual citizen (Canada and U.S.) and have broker accounts in both countries. My investments in the U.S. account are in U.S. equities. Are you reporting that these will be taxed annually on whether I realize capital gains or not?? Thanks, in advance, for your reply.

Rob Carrick and Jon Chevreau--Any chance of other stories on this issues?What about NAFTA retaliation? Is there a chance of a Charter case? What about doing something on the implications for "brain drain", dual citizens, attracting Canadians back from the US? Note the 5 year exemption (the "hockey player" clause).

It's even worse than we could have imagined. Just got a copy of Blake, Cassels & Graydon's Foreign Investment Entity Rules Released leaflet which reads in part:

The full amount of the increase in fair market value is subject to tax even if the investment would otherwise be capital property. ... There is no grandfathering of existing arrangements. Furthermore, even accrued gains up to the beginning of the year in which the new rules first apply [presumably 2001] are not eligible for treatment as capital gains.

From George Parkanyi, with permission:

Dear sir or madam, I find it patently absurd that the government would even consider so ARBITRARILY targeting a mainstream investment vehicle that finally allows Canadians to cost-effectively diversify into global investments with their AFTER-TAX dollars. What the hell does this have to do with tax evasion?!! If someone wanted to evade taxes offshore, there are a million possible investments they could put their money into besides ETFs. How (&)*&* stupid can you be to disincent foreign investment? If I can make $10,000 in an investment from overseas, I have just brought $10,000 net additional wealth in Canada to go into the economy when I spend it and part of it goes to the government in taxes. If I make that $10,000 in the Canadian market, I'm just taking it from somebody else in Canada (not THAT many foreigners invest here because of YOUR stupid policies). Recycling the same old stocks in our limited market in RSP mutual funds just keeps them artificially inflated in value AND underperforming in global terms because it diminishes the need for managements to compete as productively to improve their companies share values. And you guys wonder why there is a brain drain from this country (when you finally bring yourselves to admit to it)? HELLLLLOOOOOOO!!!!!!!!! This stinks of being yet another corrupt policy to protect the inefficient Canadian fund and bank wealth management industries at the expense of regular people trying to save money and improve their lives. I was seriously considering investing a part of my portfolio in a basket of iShares to take advantage of the ebb and flow in different markets and currencies using a simple asset allocation formula. Now you tell me I have to pay taxes as if this were income? based on market value?!!! Just leave us alone! I'd rather have you sitting there twiddlling your overpaid thumbs in a corner than actually trying to DO anything. (Although you can believe I'm all for reducing the number of MP's, senators, and public servants by at least 50% across the country, and get the rest focused on real work). That would still at least do less harm ... Disgusted, George Parkanyi

Good fight Bylo. I will do my tiny bit to help in this really unfair tax grab. In addition to contacting my MP and Martin, I am also personally taking the time to phone the people I have worked with in both the Reform and Alliance Party to ask them to lend their voices and organizational skills in helping fight this fight.

My concern at this time is that it is not an easy issue to explain. Many I speak to are in favour of bringing "rich" tax evaders to justice. The task is to make it clear that this is not about tax evasion, off shore investing but rather ordinary investors, not the rich and powerful, trying to escape not taxes but the ridulously high cost of investing outside Canada using Canadian banks and fund companies.

Anyway you certainly don't need any lessons on how to launch a successful grassroots campaign from the likes of me. Good job, bylo. Count me in as one of the privates in your army.

Hi Bylo,

I have just finished sending a long e mail to Mr Kenney outlining my concerns about this issue. In addition, I strongly suggested he seek out your site and this one to become better informed on this issue. I plan on bugging him until I am sure he is personally involved in this struggle.

Since, I revealed more about my personal life and my involvement with the Alliance than I wish to make public, I won't share the contents of this e mail with you, bylo.

Continue the battle: The people will win!!!

ordinary investors, not the rich and powerful, trying to escape not taxes but the ridulously high cost of investing outside Canada using Canadian banks and fund companies.

In addition, there are many people who have at one time or another resided in the US, and who not only chose to use that opportunity to buy Vanguard (and other US) mutual funds, but who were then unable to buy Canadian funds. I'm amazed by the number of such people who have e-mailed me copies of their letters to Ottawa. Some of them are now retirees who would face draconian taxation of their nesteggs if this legislation goes through as currently drafted.

This is now one of my nightmares: Despite following the rules, living frugally, paying taxes, saving for retirement, etc. some nameless government bureaucrat (with a fully indexed pension!) decides to legislate my best laid plans and sacrifices into oblivion.

Until last week I couldn't really imagine that could happen in Canada. But like Diefenbaker once said, in politics a week is a long time(1).

Well folks, we've got another couple of weeks to rattle some cages in Ottawa and across the nation. Let's rock 'n roll so loud that we wake those sleepy bureaucrats and politicians out of their summer naps.

you certainly don't need any lessons on how to launch a successful grassroots campaign from the likes of me

From what I've learned about you on TFL and TWB over the past couple of years A-J -- may I still call you A-J? :-) -- I take that as quite a compliment.

If I don't have the pleasure of buying you a beer next month, at least Rob#1 and Shakespeare and I will hoist our glasses to you.

_____
(1) When I verified that quote, I came across this one, "I love to make Paul [Martin, Sr.] mad. You can do it by saying, innocently, that no other member has the ability to compress such small thoughts into so many words." - September 2, 1967, Star Weekly.

Sigh, some things it seems never change...

Some of them are now retirees who would face draconian taxation of their nesteggs if this legislation goes through as currently drafted.

Speaking of which, has anyone told CARP about this?

Jo Anne

has anyone told CARP about this?

Not me. Who do you suggest we conatct? (They won't have me as a member [yet.])

Link screwed up again.

Well folks, we've got another couple of weeks to rattle some cages in Ottawa and across the nation. Let's rock 'n roll so loud that we wake those sleepy bureaucrats and politicians out of their summer naps

OK. I sent CARP this fax:

Dear Sir or Madam:

CARP needs to address urgently a proposed set of changes to Canada's tax laws that would directly impact individuals who hold U.S. mutual funds or exchange-traded mutual funds (ETF's) in non-registered accounts. These changes would cause a significant tax penalty for law-abiding Canadian citizens who hold such funds. Many CARP members may be liable for a major tax penalty if the proposed legislation is not revamped.

To find out more about this issue, I ask you to visit the web pages at http://www.bylo.org or the discussion now ongoing at http://www.wealthyboomer.com. A letter- and fax-writing campaign is now in progress to halt these legislative changes. The proposed legislation is only open for comment until September 1, so I ask you to move quickly.

I am attaching a copy of a FAX I sent to the Department of Finance, Paul Martin, my MP, and the opposition Finance critic, Jason Kenney.

Please bring your resources to bear on lobbying against these proposed changes.

Yours sincerely,

[Shakespeare], Ph.D.

Membership Number [xxx-xxxxxx]

Attachment: Copy of previous fax:

Link screwed up again.

It's not you Bard and green. It's "them." "They" changed their HTML processing logic this afternoon and it seems they blew it.

By all indications "they" are Liberals :-)

Thanks for jumping on that so quickly, Shakespeare. CARP has a big voice.

Jo Anne

Jo Anne, if you are a member, perhaps you could fax them too. We need CARP to make an official submission.

I'm only 47 39, Shakespeare.

Jo Anne

Oh, well. Maybe LaP will send something - she's the same age I am.

David Taffler is the guy at CARP we need to talk to. I'll call him in the AM. We should also liase with every personal finance "guru" and personal contact any of us have: from Gordon Pape to Garth Turner to Brian Costello: the works!! Linda Leatherdale at the Sun has always been a tax fighter. Let's go get them!

I e-mailed Gordon Pape earlier tonight - but I don't know him, so an e-mail from you may carry more weight.

Does anyone have a relationship with Paul Bates, President & CEO, Charles Schwab Canada? Would be great if some of the major financial institutions would voice support for the cause. I'll email Schwab's service desk and refer to my account there and request that they take a stand, but I'm sure personal contact would go further.

My solution is Stockwell Day for PM. Reagan described liberal economics as rule 1, if it moves tax it, rule 2 if it still moves bury it in regulation and rule 3 when it is virtually dead subsudize it. Mencken described liberals" the urge to save humanity is always a false front for the urge to rule". God PLEASE SAVE ME FROM THESE self righteous do godders.

Has anyone had any response from government officials. Will they review this issue.

I've sent a letter to Dept. of Finance and both my MP and Finance Minister Paul Martin. Is there anything else one can do?

Has anyone had any response from government officials.

Someone related by a e-mail a conversation they had with a Finance official just after the campaign launched. Apparently they had already started receiving our faxes.

Is there anything else one can do?

1. green/11:05pm has an excellent idea. Send a letter to your non-bank broker (Schwab, E*Trade, Merrill-Lynch, et al) that points them to the campaign. Be sure to emphasize that if the ownership of US ETFs is essentially banned you will be driven to move your money to one of the bank brokerages where you can easily buy replace the ETFs with low-MER index funds.

2. Phone your MP and wake him/her out of their summer snooze. Make sure they understand why you are irate.

If they're Liberal, ask them pointed questions about why our Government is attacking us. Ask them what they're doing on our behalf to protect us from Finance's zealots. Demand their committment to ensure the exclusion of public, listed US-based securities from final legislation.

If they're Opposition make sure they understand how embarrassing they can make this for the Liberals. (And if they're Liberal make sure they know you're working with the opposition to embarrass them.)

3. Keep faxing. Get your friends and neighbours to fax. Even if they don't own any of the securities that are targetted one day they may want to. More disturbing is the prospect that this is just the "thin edge of the wedge" in which law-abiding tax-paying individual investors get caught in some heavy-handed, ill-conceived "scheme" by Finance to catch tax evaders. (Going after tax cheats is fine. Mowing down innocent bystanders in your path is not.)

Meanwhile, the reader e-mail keeps coming. I'll post a few who didn't get back to me on permissions, so I'll just use their initials. Like this one from E.A.:

I cannot protest loudly enough your proposed legislation regarding Foreign Investment Entities. Not only is the legislation incomprehensible, it is draconian and unfair and will only antagonize an already weary Canadian taxpayer.

The types of investments you are targetting are well known and well utilized as a standard vehicle of commerce - not as part of a tax avoidance plan. They should not be singled out for punitive tax treatment. And so what if there is some tax advantage. You simply cannot attack bona fide investments because they do not meet your criteria of perfect tax equity - that argument is becoming quite tiresome.

And furthermore, you will eliminate this legitimate investment vehicle only to make Canadians buy mutual funds as a substitute and pay the exhorbitant fees they charge in Canada.

Nor should interests in private investment companies set up by non resident Canadians (who may never have stepped foot into Canada) for family members who just might happen to be living here be part of these new proposals. Your far fetched proposals are simply ludicrous.

Our tax system is a mess and the complxity you keep adding to it is no solution. Only but a few tax practitioners understand the stuff you are dolling out these days and that in itself is unfair to taxpayers in general.

Most people will pay their taxes if they perceive they are fair but most believe they are not in Canada. Taxes exist to raise government revenues to pay the bills but who ever said it made sense to tax everything that moves - there must be some flexibilty in the system - a feeling that the government is not hounding taxpayers for every last dime - as now seems to be the case.

This legislation should not be grandfathered - it should be cancelled!

Respectfully EA

FCA, CFP, TEP

From reader I.C.:

I read your excellent article with a feeling of horror and frustration. On the preceding page Diane Francis described another Cretien "boys" deal. This looks similar. Are the Mutual Fund guys trying to put ETFs out of business in Canada?

I regard them as a sensible, low cost way of having a diversified portfolio. The transactions take place through Canadian brokers and the Canadian Tax people have full information and get their capital gain taxes as if I held individual stocks. Moves against this type of investing seem designed to protect the very high priced mutual funds, which want to claim some sort of expertise or crystal-ball gazing ability that they certainly don't have. I don't want to pay for their ineptitude, I only want the ability to do asset allocation in a cost-efficient manner. Apparently over 90% of the variation of performance between portfolios is explained by allocation, not stock picking.

The Canadian government, through it's restriction on foreign ownership in RRSPs, is hell bent on maintaining an artificial investment climate in Canada, where investors are forced to chase the same stocks and inflate their prices. No wonder the TSE has recently outperformed the Dow. It has nothing to do with fair valuation and everything to do with mutual funds investing through RRSPs.

Why can't the Government just be happy to get their normal capital gains taxes and not try to skew the market artificially at every opportunity. Martin has ridden on the coat tails of the US economy, but he shouldn't get the idea that he has done anything special, or has an infallible touch that will enable him to manipulate the market for the benefit of a few cronies. How else can one explain such a ridiculous move? There is clearly no economic justification.

From reader B.A.:

Thankyou for your article in today's Post. It is surprising that in a world where investors are asked to rely more and more on themselves to provide for their own retirement, a world in which global investment products are more available to the small investor than ever before, that our government should be taking steps to shut down attractive investment choices for us.

Keep up the heat on this issue.

Just got off the blower with Gordon Pape and he's in: he'll send a letter to Martin and mention both TWB and Bylo's site in his next issue of The Internet Wealth Builder. I understand from Dan that Duff Young is in and I'll try to get Stephen Kangas pumped up next. Remember, we need a QUANTITY of stuff from everyday investors and as many BIG NAME supporters as we can muster.

Jon,

Try to "pump up" Tim Cestnick too. I know he writes for the "opposition" but he's a tax guy after all and ought to have some strategic ideas on how to fight this formally. I posted an announcement on his Waterstreet website, but so far it's been largely ignored.

Not so Bylo - he just doesn't visit the forum everyday. He posted (last night or this morning) and is contacting the Dept of Finance.

And how about "pumping up" TWB's Paul McKeever and David Lesperance?

DanH,

I checked this morning just before Tim posted "I will be contacting those I know at the Department of Finance to speak to them about this issue. I'll let you know what transpires."

My apology to Tim.

How about Walter Robinson and the Canadian Taxpayers Federation?

I see no mention of this issue on their website.

Jon, I have noticed you post excerpts from him on the wisdom forum periodically. Can you get in touch with him?

Sure. And here's another reader response, with permission:

Finance Department Tax Legislation Division Ottawa Ont. K1A 0G5 Dear Sirs/Madame I was shocked to read the articles in the August 15th editions of The Financial Post and The Globe concerning proposals for the taxation of ETF's. THERE MUST BE SOME MISTAKE ! ETF's are the best investment product which has been developed in decades for the average investor and now the Goverment wants to impose a prohibitive tax on these investments PLEASE TELL ME IT IS NOT TRUE! ALL knowledgable people on investment theory fully endorse index investing. For a small sample of the support for indexing please refer to books and articles by Charles Ellis, Peter Berstein, Burton Malkiel, Eric Kirzner, John Bogle, Rex Singfield, Benjamin Graham, Warren Buffet, David Swensen, Larry Swedroe, Bruce Jacobs, Frank Fabozzi, Walter Good, Richard Evans Eric Famma or NOBLE PRIZE WINNERS such as Paul Samuelson, William Sharpe, or Merton Miller. These experts are all passionate advocates for the benifits of index investing. It would be a travesty if EFT's were not exempt from the Finance Dept's attempts to catch offshore tax evasion schemes. Dean Alexander CA, CFA. Vancouver B.C.

I e-mailed Walter two days ago and I haven't heard back, nor have I heard back from the CICA.

This just in from Gordon Pape [partly in response to my suggestion he mention this on his CBC spot next week]:

Hi - can't do it on CBC - those items are taped in advance. But will deal with it extensively in my Internet Wealth Builder newsletter, which goes out on Monday and will post the article on my Web site. GP

To help get the word out more, I posted Bylo's original plea to get involved into the following Canadian newsgroups:

Also some feedback coming into my email box today. Keep the campaign going!

From Paul Bates, President & CEO, Charles Schwab Canada: "Regarding planned taxation matters and ETF's. We are planning to get involved on behalf of our clients."

From Lou Sekora, Liberal M.P. Port Moody-Coquitlam-Port Coquitlam, B.C.: "Thank you for your e-mail regarding your concern over legislation on ETFs, as well as the letter you sent directly to The Hon. Paul Martin, Minister of Finance."

This is outrageous! I have convinced not only myself but a number of my classmates at the U of A to buy QQQs since their MERs are just 0.18% and they give you exposure to 100 NASDAQ companies with just one transaction.

I am kicking myself because I just learned about this within hours of shaking Stockwell's hand and talking with him here in Edmonton this afternoon. If I'd known about this yesterday I would have handed him Jonathan Chevreau's National Post article so I'd be sure that he was aware of the issue.

Isn't Rogueman spreading the word with his Alliance friends in the west?

From reader P.H.:

To whom it may concern: The purpose of this message is to register my objection to Finance Canada's proposed legislation to tax unrealized capital gains on foreign investment equities. I understand that September 1, 2000 is the deadline for receiving input such as mine, which has been motivated by what I perceive to be an unfair tax policy proposal that will penalize small investors. I urge you to reconsider this ill-conceived approach to increasing Government revenues at the expense of Canadians who, in good faith, have chosen target investments like ETF's to increase their wealth and gain financial independence from public income support programs. Sincerely,

More great coverage,

Thanks cbg1 and thanks to the the Financial Post and Richard Croft for educating me on the benefits of ETF's. It was through watching Richards FPX indices that I first got hooked on these investment vehicles and acted on the thought - "why doesn't my portfolio look as simple as this and perform as well".

From reader Sam Bartucci, with permission:

TO Kathy Kerr Business Editor Edmonton Journal I'm very disappointed in The Edmonton Journal that they have not commented or written any articles on the proposed tax legislation of Foreign Traded Mutual Funds. As I explain below I think you owe it your readers to alert them on these proposed changes which will effect the returns of popular U.S. exchange traded funds such as SPY "Spiders S & P 500", QQQ "NASDAQ 100", and DIA "Dow Jones Index", etc.

It is with great shock and disbelief that I read in The Globe and Mail (written by Rob Carrick) on Tuesday, August 15, 2000, and The National Post (written by Jonathan Chevreau) on how the Finance Department is proposing to treat gains from foreign exchange traded mutual funds, also called index participation units. According to the article, the gains would have to be declared annually as ordinary income vs capital gains, which means you would not get the benefit of the 66% tax inclusion rate. It would also hurt the compounded appreciation of your investment, as you would annually have to sell a small portion of your investment to pay the taxes.

I agree with the point of the legislation in "curbing tax avoidance by stashing money abroad" as entirely legitimate. But including exchange-traded funds would be overkill.

Including exchange traded mutual funds in the legislation will hurt many small investors like myself who are simply buying exchange-traded funds to build a low cost but well diversified fund. This legislation would handcuff the small investor trying to maximize their returns for a comfortable retirement. Exchange-traded mutual funds are a low cost alternative to mutual funds, and it is one of the few vehicles that small investors have to broadly diversify in the U. S. stock market without paying high management fees to mutual fund companies.

In closing, as an ordinary Canadian, I urge the finance dept. to review the inclusion of exchange-traded funds in the proposed legislation. This policy change would widen the wealth gap between the United States and us.

I've written the above concerns to both the finance dept., my member of parliament and Paul Martin, the Finance Minister. The Finance Dept. set a Sept. 1, 2000 deadline for comments from the public.

I urge the Edmonton Journal to alert their readers of this change so that they may have the opportunity to write or e mail their views to the Finance dept. and their member of parliament.

Yours very truly,

Sam Bartucci

9 Huntington Cresc.

St. Albert

(780) 460-7905

An email from DB sent to myself and the other journalist covering this topic:

Well done to both of you for your recent articles, including today's explaining the folly and unfairness of the Chretien government's intentions to impose a new income tax methodology on foreign investment entities and specifically US exchange-traded funds such as i-shares. As a small investor, I find myself at a loss of words to describe the rising sense of anger and frustration that I am feeling because in effect I am about to be denied the use of these excellent investment vehicles just because I am a Canadian. Why am I to be discriminated against just because I am trying to maintain a capital base under a free-spending federal government which has become too arrogant to listen to ordinary people. I am not a constitutional lawyer, but surely I am about to be denied one or other of my fundamental rights, which are so precious to this same government, for example the right to own and exercise ownership of property.

Keep up the good work; this government must be made to listen to logic and reason for a change. If anyone is working up a petition, I will sign it.

Hi Jon/Bylo,

I have made contact with every living, breathing Alliance member I know. The message is definitely out there.

BTW many of the rank and file, ordinary Canadians if you will, commented, that they are struggling just to meet their maximum RRSP allowance. Worrying about non existent investments outside their RRSP or country is, I have to admit not a burning issue with them. I tried, however, to explain that if they can change the rules on these investments without any prior discussion the same could happen someday to their RRSP investments. This helped, I think, to bring the issue into better focus.

This clearly is where part of the battle must be shifted. Those who are directly affected by this change in legislation are simply not the stuff of mass movements. The average Canadian needs realize that even his/her RRSPs could someday be attacked in the same fasion by distant, uncaring, unconnected, bureaucrats. They must be made aware that this is their fight, that it is not simply the worries of elites. They must come to realize that this is as good as any place to start fighting for the right of individuals to lawfully increase their wealth, without fear of unfair, predatory, changes in the tax act.

So far I am a bit disappointed by the lack of official feedback from the Alliance Party. I think they are missing a potentially very important political issue.

I continue to soldier on.

Well put rogueman.

The broader we make this issue hopefully the more people it will interest.

Like bylo said in one of his threads "Finances foray down the slippery slope of taxing capital gains, and taxing them at ordinary income rates, should disturb all taxpayers, then those not directly affected by this legislation."

The bottom line is it may not affect everyone today, but allowing the government to switch the tax treatment of an investment at the flip of a switch and their desire to start taxing unrealized gains could affect all of us down the road and shouldn't go unchallenged.

I'm trying to find out where the FPSC stands on this issue. They issue the CFP designation and are a collective group which include the CAFP, the CGA's, CA's, CMA's, CAIFA, and the Credit Union Institute of Canada (CUIC).

Jon, please forward to DB

To: DB

From: Every small investor in Canada.

Thank-you for the early warning about the ramifications of this legislation. DB what you wrote in your original email to Jon seemed so incredulous that it took a while to sink in. However once the penny dropped, we confirmed your statement and as you can tell from these threads the fight for reason is now well under way.

If anyone is working up a petition, I will sign it.

If you haven’t been directed there already please visit www.bylo.org/ you will find the internet version of a petition you are looking for. You will also see that your anger and frustration is shared by a great many Canadians.

Thanks again, we all owe you one.

A-J,

First thank you for your efforts. Please know that there many people including several of the posters to these threads who are also working diligently to get the word out.

You're right that the general public doesn't identify with this issue as they did with say, the GST. However, remind those who think their RRSPs aren't vulnerable to arbitrary attack by Finance that a few short years ago one of Paul Martin's junior ministers floated a trial balloon that would have taxed Canadians on their RRSPs when the assets exceeded as little as $500k. That balloon was shot down as the result of negative public reaction. It can happen, and it must happen again. That little historical excursion resonates [oh oh, I'm starting to sound like a spin doctor!] with me in particular because that minister is not only still in a Finance role but he's also still my MP. I've been trading phone messages with him for the past several days because I'm determined to remind him of his previous foray down an equally slippery slope.

We each need to do what we can to make our MPs understand why this legislation is wrong, and help our opposition MPs to do what they can to embarrass the government over it. I'm concerned that this legislation is rather technical (after all, what's an ETF? why would Canadians own US mutual funds?) and worse it's buried in and associated with anti-tax-evasion legislation which the public does support. Still, I'm confident it's not a lost cause. Even MPs, if they hear it repeated often enough, will eventually understand what we're trying to explain to them :-)

Jon,

1. That "slippery slope" quote is on my website. I heartily encourage you to use it as a "sound bite" in your next column.

2. Is the DB in your 5:56 PM post the same DB who alerted us all to this legislation? If so, please convey our collective thanks to him.

This is a good time to reiterate Bylo’s action plan:

Please ensure you have done each of the following. If we back off now we lose our opportunity to have our concerns fully considered before this becomes law.

1. Phone your MP and wake him/her out of their summer snooze. Make sure they understand why you are irate.

2. If they're Liberal, ask them pointed questions about why our Government is attacking us. Ask them what they're doing on our behalf to protect us from Finance's zealots. Demand their commitment to ensure the exclusion of public, listed US-based securities from final legislation.

3. If they're Opposition make sure they understand how embarrassing they can make this for the Liberals. (And if they're Liberal make sure they know you're working with the opposition to embarrass them.)

4. Keep faxing, Keep faxing... Get your family, friends and neighbors to fax. Even if they don't own any of the securities that are targeted one day they may want to. More disturbing is the prospect that this is just the "thin edge of the wedge" in which law-abiding tax-paying individual investors get caught in some heavy-handed, ill-conceived "scheme" by Finance to catch tax evaders. (Going after tax cheats is fine. Mowing down innocent bystanders in your path is not.)

When you have finished the above return to step one and repeat.

A letter to an MP from Pat and Gerry Wood, with their permission:

The Honourable Bill Graham, MP House of Commons Ottawa, On. K1A 0A6

Dear Mr Graham

We are two of your constituents who are writing to bring to your attention and protest against draconian measures being proposed by the Dept. of Finance.

The department has hauled out the proverbial elephant gun to kill a mouse. They have decided there is a "tax avoidance" risk if Canadians own US mutual funds, regardless of the size of the investment!

We are attaching for your reference some newspaper articles that describe these bizarre proposals in more detail. We have made our own enquiries, and have been reliably informed that the newspaper reports are substantially correct.

The proposals will force Canadians to pay tax on the annual increase in value of such investments, even if they have not been sold. If we are lucky enough to have a US mutual fund that appreciates by $2000, we will have to pay nearly $1000 in tax, even though we have received no cash from the sale of the fund. This is obviously not a tenable situation. In fact, it will effectively prevent Canadians from owning mutual funds and similar investments in the US, or indeed in any foreign country. For retirees, as we will be next year, this severe restriction of investment opportunity will be particularly onerous.

History has established that investment returns are significantly enhanced when an individual can diversify into more than one country. The economic coercion being proposed by the Dept. of Finance will effectively deny this diversification to smaller investors, who tend to rely on mutual funds. Wealthy Canadians, of course, can afford private investment managers to structure portfolios of direct investments. These are not caught by the new rules.

Where is the logic to tax avoidance rules that hurt small investors and can easily be bypassed by wealthy Canadians?

Yours truly

Pat and Gerry Wood

Cc: The Hon. Paul Martin

Mr. L Farber, Dept. of Finance

Three or four reader letters will be published on the editorial page of Thursday's Financial Post (Aug 24). Last I checked, "phantom tax" was part of the headline for the box containing th letters.

Yes, Jon,another excellent column [I think they are getting better with each one, so don't stop now - (:-)]

In particular the following comment made me pause and reflect:

"The person who drafted the legislation at Finance has since joined the private sector. It's not even clear those who remain fully understand the legislation they're trying to implement, or the full implications of it."

Nameless, faceless, no longer there. A telling point about irresponsibility and the lack of accountability on this absurd tax proposal.

Even if it is changed, they lose credibility with nonsense like this.

And out taxes and time are paying for it. Shush.

And of course most of the bureaucrats who create this legislation and the politicians who vote on it haven't a clue about investing, asset allocation, diversification, cost minimization, etc. because they don't need to. After all they all have gold-plated fully-indexed pension plans to ensure their risk-free, comfortable retirement.

their risk-free, comfortable retirement

I've always thought there ought to be after-the-fact accountability trails. In the same fashion as the Neurumberg [sp?] trails.

A la:

After they retire. Yes Mr bureaucrat "X", you really are guilty of messing up while you were "responsible" during your working years and so we now are striping away your government pension. As punishment, may you rot in a flop house.

For example; about our white elephant Sky Dome here in Toronto, that cost twice as much as it was supposed to and left the taxpayers holding the bag on it. We should take Davis, Godfrey, Eyton, ... to task on it.

[One sometimes needs such fantasies.]

From Paul Hession, with permission:

To whom it may concern: The purpose of this message is to register my objection to Finance Canada's proposed legislation to tax unrealized capital gains on foreign investment equities. I understand that September 1, 2000 is the deadline for receiving input such as mine, which has been motivated by what I perceive to be an unfair tax policy proposal that will penalize small investors. I urge you to reconsider this ill-conceived approach to increasing Government revenues at the expense of Canadians who, in good faith, have chosen target investments like ETF's to increase their wealth and gain financial independence from public income support programs. Sincerely, Paul Hession

from Andrew J. Kavouras, with permission:

Hello Jonathan:

As a portfolio manager (with Guardian Capital Advisors), one of the most useful tools that is still available for wealth creation in the taxable domain is tax deferral on unrealized gains. With all the punitive tax policies discouraging entrepreneurial spirit in this country, this one takes the cake. The government seems committed to maintain its path of "partnership in profit but not in risk". As investment counselors to private clients with taxable portfolios, this proposed tax measure is regressive and discriminatory.

I applaud you perseverance in reporting such an outrageous tax proposal. I (we) would like to participate in some kind of forum, lobby group to express my (our) dismay. Does Paul Martin realize the impact of this? I wonder what he thinks about it. Is this some perverse way of addressing income inequality?

I hope your work makes the front page soon ....I would think that many Canadians are unaware of this proposed tax grab and from the middle-class onward, this will hurt most where it's really personal ...in the pocketbook.

Sincerely,

Andrew J. Kavouras Tel. 416-947-4087.

I hope your work makes the front page soon ....I would think that many Canadians are unaware of this proposed tax grab and from the middle-class onward, this will hurt most where it's really personal ...in the pocketbook.

Jon,

Re: Front Page Coverage of Legislation

I believe that Andrew Kavouras has brought up a very legitimate point. It is now apparent that this legislation if passed will affect a significant cross section of the Canadian population. The investor that thoroughly reads the business section of the financial papers is slowly becoming aware of this problem but what about everyone else ?

The general public deserves to be informed of the fundamental reversal in tax policy about to take place in this country.

It would be different if this policy proposal had been debated openly with input from all interested parties but it wasn’t. Deliberate or not the method our government has used to try and implement this change appears underhanded and clandestine. They buried the important references in the depths of non-related legislation and even then they mention the US products only to specifically exempt them from the proposed new rules.

Then months later they do a crafty turnabout and cancel the exemption for US products all because of some vague unexplained concern. With the stroke of a pen in a single paragraph in an obscure press release that the “press” never reads they surreptitiously do a full reversal on US based products.

Considering the tactics that have been used against the unsuspecting public this news story should clearly move from the depths of the business section and onto the front page. The grass root campaign to fight this slight of hand by the Finance Dept. needs to be made known to the broad population who are completely unaware of the legislative freight train bearing down on them. Remember if DB had not sent his email we would all be blissfully unaware this was about to happen. There would have been no protest page on Bylo's site and no articles in the business sections.

This is “news” and it should have the same coverage a general tax increase. This story belongs on the front page.

The Toronto Star finally did an article on the issue. Hopefully the issue will make the front page.From: "Roseman, Ellen" To: SAM Sent: Thursday, August 24, 2000 1:34 PM Subject: tax on exchange traded funds

> Sam-- thanks (in part) to your prodding, I covered this issue on Wed. Aug. > 23 in Star business section.

Finally some west coast coverage of this issue.

Terry Greene, Fee-only Financial Planner from North Vancouver, and regular poster here succeeds in getting Michael Kane to do a peice Friday August 25 th in “The Vancouver Sun”. See page F 4 “ Legislation would hurt little guy, too, planners tell government”.

Thanks Terry

Try to get a plug for Bylo’s site www.bylo.org/ in Michael Kane’s upcoming follow-up article.

This is a start and we are working on a couple more media spots. Stand by we will keep you posted.

cbg1, I did point out to Michael via e-mail that there aren't many planners telling the government much of anything.

Still no reply from the FPSC on this issue. Nor to my knowledge has the CAFP voiced their concerns.

And I definately reminded Michael that I consider the reference to bylo's site important.

I also consider it important that the issue be expanded to include U.S. mutual funds and stocks, not just etf's.

But it's a start and I appreciate his willingness to write the article.

Montreal Gazette- Business Section of Aug 25th finally writes an article! At least they woke up. Regards- Norm

The North Shore News, which covers North & West Vanouver picked up on a letter to the editor I wrote.

Don MacDonald has written a very good article in the Montreal Gazette.

”An adviser to Finance Minister Paul Martin took pains in an interview yesterday to emphasize that nothing is written in stone and it was never the intention of the government to give a leg up to the mutual-fund industry.

"We're having a look to see if we've cast the net too wide," said Karl Littler, Martin's special adviser on tax policy.”

That’s the understatement of the year. Come on Karl, if you have something to say spit it out. Maybe he is waiting for the front page articles that are sure to come.

Agree it would be nice to move beyond business pages but the cumulative effect of all this should be enough to move the department of finance in some small way -- they've already told me they recognize we're right about the foreign content implications in RRSPs and RRIFs so at least that has to be changed. If and when they make an about-face, THAT may be considered front page news, especially if it's all linked back to the effectiveness of the very grass roots movement that has in part been spawned right here. That's the gist of the next piece that will appear by me. Alas, I have no control over where the piece appears.

Jon, when do you go to print ?

the cumulative effect of all this should be enough to move the department of finance in some small way

Lets hope they go " all the way " we don't want any half measures.

The Victoria " Times Colonist " will be running the story on Saturday with references to the Campaign, Bylo's site and TWB.

Quote from article: “Ottawa to hit taxpayers.” August 26, 2000, Victoria “Times Colonist” by Andrew Duffy,

“There’s been a very large outcry on this” said Dwyer “I’m not sure tax legislation has ever seen this kind of attention”.

Blair Dwyer is a tax lawyer and former Senior Rulings Officer with Revenue Canada in the head office in Ottawa.

This is a very telling observation and bodes well for a democratic society. Another confirmation of the effect "David" is having on "Goliath".

cbg, the piece ran Saturday and was referenced in the other thread by Bylo. As for this one in Victoria, do you have a link to it?

From B.C. reader B.M.:

Proposed Taxation on Foreign Investment Entities > Auto forwarded by a Rule > Thank you so much for your articles on the above subject in the Post on Aug. 24 & 26. This was completely new to me and I was incredulous as I read through them. We all know that the federal bureaucracy is out of touch with reality but we didn't know until now that the Department of Finance is an insane asylum run by the inmates. I am shocked and very angry about this proposed legislation and I intend to send a strong protest about it to Paul Martin, Len Farber, my MP Ted White, and MP Jason Kenney. In addition to the huge additional taxes the government would gain, the Canadian mutual fund industry, with their excessively high MERs would benefit enormously. Who in their right mind would invest in foreign investment equities if their unrealized capital gains would be taxed as straight income? This leads me to think that the federal bureaucrat who prepared this proposed legislation, and who is now working in the private sector, did so to please his masters in the Department of Finance before he left, and his new masters in the private sector. My question is, who is this guy and who is he now working for? Many of your readers I'm sure would like to know. Thanks & keep up the good work.

Jon, I will fax the article to you Monday morning. Newspapers west of the rockies don't have online articles like the rest of the civilized world.

The article you did Saturday was very good. I liked the quote from the manager of the Canadian mutual fund, even he thinks this legislation is ridiculous.

Bylo and Terry, next stop the six oclock news :-).

From reader R.F.:

I thank you for your articles in the National Post warning of the looming lunacy of this legislation. I can only attribute it to 2 factors: (1) undue influence by the Canadain mutual fund industry (despite its denials, or (2) the authors of it in the Department of Finance must have been high on crack cocaine. I have registered my strong protest with our "Bermudan" Finance Minister and with the opposition finance critic. In any other country, this legislation would not see the light of day. To amend this legislation is not sufficient. It must be completely withdrawn! There is no other way. However, because Canadians are such a complacent bunch,it looks as if it will pass. Should that happen, don't give up the fight. After the term of this government has ended, all efforts must be made to repeal it. This government has done many stupid things, but the introduction of this legislation surpasses most other things in stupidity! Feel free to quote me on any of this letter, but I wish to remain anonymous since I fear govt. reprisals. Yours truly, A loyal reader

From an income tax specialist at a financial services firm:

Good Afternoon Mr. Chevreau

I have been reading with interest, your articles on the "Taxing of Unrealized Gains of Foreign Investment Entities".

Let me be very selfish in my comments. I say "Please, please, let them bring on this very draconian legislation".

I will have to hire more staff, buy more equipment, and rent more space to keep up with the business that this legislation will bring me. My business is providing income tax advise and preparing tax returns for our clients.

Have you ever known a major change in the tax laws that did not drive more business to professional tax preparers?

What a way for the government to stimulate the economy.

Yours truly;

Well I'm please to say that the Senior partners of Macdonald, Shymko (MSC) have begun to voice their opinions. In addition to the Vancouver Sun article on Friday, which largely came about thanks to Doug Macdonald. David Shymko wrote an excellent article on the issue in the business section of Monday's Vancouver Sun.

David is president of the Canadian Association of Personal Financial Advisors (CAPFA), which is a Professional Association of Fee Only Financial Advisors.

David's tax knowledge is extensive and he used it to point out that there will be no spousal rollover for those who own these investments at their time of death.

Thanks David

Excerpt from the article: “Tax problem possible for ipu holders” August 28, 2000 , by Eric Kirzner - National Post .

“In our discussions with department officials on Friday, it was clear to us that they were well aware of the problem. We found them constructive and we expect that they will be working toward an appropriate and equitable solution.

Our advice to SPDR, iShare, DIAMOND and other IPU holders is that they should not trade at all on the basis of this proposed legislation.

We are optimistic that it will be resolved soon -- and favourably”

------------------------------

Sounds like Finance is putting the final touches on the last act of this play . The actors will soon take their respective positions deliver the grand finale. It should be an easy rewrite ..... just use the lines from the original script:

The rules would not apply where the foreign-based investment fund annually distributes or allocates to Canadian investors all of the fund's income to which those investors are entitled.

That investment funds situated in the United States not be subject to these rules since tax avoidance and deferral opportunities are not a concern through the use of such vehicles

One more time with link.

Jon, we haven’t forgotten your earlier post : 25-Aug-2000 - 4:59 PM

“If and when they make an about-face, THAT may be considered front page news, especially if it's all linked back to the effectiveness of the very grass roots movement that has in part been spawned right here.”

Have you written the first draft yet ? :-)

Not yet!

From reader W.R. Frankish, with permission:

Having read your article in the Post this past weekend, I have these thoughts. 1. The Government is floating balloons to see exactly how far they can push wiping out the last few people in this country that have worked, saved, and are proud of accomplishing something with their lives, without the aid of Government.

2. If they think they are going to herd investors into Canadian mutual funds, they had better think again. One way or another people will find a way to ensure that they will not have to live on the Canada Pension Plan and die a pauper and burden to their families. What the hell is wrong with people wanting to enjoy their retirement by doing a few things they have dreamed of all their lives?!

3. If investors decide they might as well repatriate their foreign stocks and other holdings, think of the macro economic impact. Huge amounts of money will be buying Canadian dollars, pushing up the exchange rate of Canada verses the U.S., and this would undoubtedly severely cripple the ability of our exporters- which is what this country relies on. Secondly, if there is not a steady stream of investing outside of the country, there will be further pressure in the short term, keeping the Canadian dollar too high.

4. Thirdly, perhaps the reason why allot of people invest abroad is because the returns are better. Currently I would say most people take some profits from time to time, pay their tax, AND SPEND THE MONEY IN CANADA- daaaa what kind of idiot can't see this as a good thing for the country. If anyone should be putting a tax on to stop investment in foreign countries, it should be the foreign country itself. Canadian investors are taking investment gains made by foreign companies in foreign lands and enhancing their lifestyle in Canada-employing people from service providers to house builders to performers of the arts here in Canada. Hence the Canadian economy is receiving a benefit which cost absolutely nothing.

5. With-out these strong foreign gains, the Canadian economy will shrink as the result of less disposable income; deficits will rise; foreign investment will fall as will the Canadian dollar; and the living standard of Canadians will fall yet again.

6. Greed and politics should not be in sound economic policy. W.R. Frankish Banff, Alta.

From Ontario's Alain Beaulieu, with permission.:

Dear Mr. Chevreau,

I read with interest your article "Absurd Law Will Slaughter Portfolios" in the Financial Post, issue of August 26, 2000, p.C4. May I add that this will be another strong contributor to the brain drain. Imagine being some top qualified American executive being transferred to Canada for a few years. His portfolio is in the US and he would have to pay tax on non-realized capital gain? And even worse, at maximum marginal tax rate? Forget it! No one will want to come here and those who are here will want to flee ASAP!

It looks like the best shot that Canadians have at this is to make taxation an issue at the next federal elections. Chretien wants to make health care an issue, but the Canadian Alliance will have to steal the show if we want a real reform of taxation. Anyhow, find enclosed a previous article on the difference of Return of Investment between countries. Notice that $1000 invested in 1970 reaches $19,920 in Canada, while it reaches $44,960 in USA. Add taxes on top and that means less money left to reinvest in other enterprises. The risks don't offset the rewards enough and that means Canada is aiming toward becoming a Third World Country and will have to forget about being part of the G7 countries.

So why not allow Canadians to get better returns on their investments? After all, when the baby boomers retire, there will be less workers to support them and they better be prepared because the Canadian government will be incapable of helping as much as they should. So why put that Berlin Wall of investments between Canada and USA (or the rest of the world)?

Best Regards,

From reader A.C.:

Dear Mr. Chevreau,

Thank you for your informative reporting on the punitive tax grab by the Department of Finance. [snip]

You might be interested in the problem it poses for me, since it could provide a further example of the unplanned negative consequences of the legislation. I came to Canada from the U.S. in 1993 as a professor of [snip] , and have remained here in spite of the higher taxes and declining exchange rate because I like the country and its culture. I don't think I'm alone in being part of the reverse brain drain. I love my work here, and have no desire to return to the states, but this legislation may force me out.

My father died in 1991 when he had just begun to draw down his pension. I received a share of the remainder, and put it into two Janus funds and one Vanguard fund. Other investments were not as successful, but I let the winners run through nine years of a bull market. Now 70% of those assets are unrealized capital gains, and I would like to let them to appreciate further.

Unfortunately, the Canadian government is poised to confiscate roughly one-third of those funds. If I don't sell this year, they would confiscate 50%! It seems that I would be better off leaving the country so that I am not classed as a Canadian resident by the end of 2000.

My question for the government: do they really wish to exacerbate the brain drain by driving out those landed immigrants who would prefer to remain and contribute (but not if it costs us much of what we have saved)?

Sincerely,

One of the unexpected outcome of this entire fisaco, is that I found out who my "enemies" are.

With the exception of CI, not a single mutual fund company has spoken out against this proposal. And not a single bank-owned brokerage has spoken out against it, even though many of their clients holds ETFs.

I will remember this for the future ... it does not make sense to do business with those companies that do not have my best interest at heart.

With the exception of CAFPA, which is an organizaion for "fee only" planners, I don't believe the financial planning community which include the CAFP and FPSC organizations have voiced much opposition to this legislation either. At least not that I'm aware of.

In other words, those who may gain join the battle: fee-only planners like ETFs because they are low-fee vehicles that can be essentially "marked up" when the add-in their yearly advisory fee based on assets. Is that a fair interpretation? Those financial planners and DSC based mutual fund people who live off trailers and the like prefer the status quo where ETFs didn't threaten their base: naturally they're not going to rise up against something that hurts the lower-cost competition. We've not heard much either from the investment counselling industry either (ICAC), though I believe they will at least be submitting their position.

Jon, that's my perception of the situation. indexing takes the food directly from their mouths. anything that hurts the trend towards indexing is good in their eyes. the trailer fees and mer's are completely invisible. they have no awkward moment where they have to guiltily hand over a bill for like $20,000 for 3 hrs work. it's paradise for them. Canadians are conditioned to think financial planning is free. Most people balk at the idea of paying cash to a fee-only fp. true mer's could actually be 4%, which is $8000/yr on $200,000.

Right. So who has the most to gain from the campaign? Us do it yourselfers, which is exactly why the pied piper of do it yourself indexers -- Bylo -- has led the charge. This entire debate goes to the heart of the constant tug of war between what is in the consumer investor's best interests and what is in the interest of the so-called "advice dispensors." So it's not surprising the battle lines are drawn the way they are and that the only people who really care are the small knowledgeable investors and media who always like a good story.

Canadians are conditioned to think financial planning is free.

True but the banks have a big part in communicating this message to Canadians. For about a year, two local branches (one Royal and one TD) have large signs posted that say things like "Free Financial Plans Inside" and "Free Financial Planning by Qualified Financial Planners". The banks still reach more people than the commission-based FP network so I've got to think that the big five play a big part in this misconception.

From F.P.:

> Dear Finance Minister, Finance Critics, and Members of the Standing > Committee on Finance > > I am a retired Canadian living on a small amount of passive investments. > Many of my investments are made via my American $ Account that I have > with TD Waterhouse. All of these investments are in the form of the > SPIDERS, WEBS, and HLDRS that are only available on the AMEX. Such > Exchanged Traded Funds (ETFs) offer flexibility, economy, safety and > diversification that I cannot achieve by investing in Canadian Mutual > funds. I report ownership of these assets on my Income Tax return and > distributions have been subject to Canadian taxes. > > I see from Finance Canada News Release 99-102, the government has > reversed its exemption of such funds from requirements proposed in the > 1999 Budget Plan. This is not a mere technical rule change aimed only at > tax evaders. It imposes a new and onerous tax regime on small Canadian > investors who have honestly invested in the most effective, legal > investment vehicles available to them. The exemption would impose an > entirely new capital gains tax regime on EFT's that is different than > every other type of capital gain. This seems not only unfair and > unwarranted, but also contrary to Government policy on capital gains > taxation. > > According to the news release, the rationale for the new ruling involves > "concerns that this exemption would allow for structures that could have > undermined the effectiveness of the rules." If that's the case, I > suggest the government improve the enforcement of the rules and > prohibit those structures when they arise. You can safely assume that > small investors like myself could never afford the lawyers necessary to > create such structures. > > I respectfully submit that ownership of exchange traded funds can in no > way be construed as a form of tax evasion requiring imposition of a new > capital gains tax regime. Therefore, I hereby request that the > Department of Finance follow the logic of its initial Budget Plan > proposal , i.e., "that investment funds situated in the United States > not be subject to these rules since tax avoidance and deferral > opportunities are not a concern through the use of such vehicles."

From W.M.

Mr. Chevreau, just so you know, as a result of your column, following text was sent by e-mail to our Minister of Finance: Proposed Federal Legislation to Tax Unrealized Gains of FIEs

Mr. Minister, Sir:

Let me get right to the point: What you are proposing is something which implies that I am doing something you disapprove of, and therefore, you are going to stop me from doing it. Let’s see it, then, what is it that I am doing that you disapprove. Example is probably the best way to get the point across.

You see Sir, I am an investor, and I invest in Canadian as well as foreign equities. The part of my activity, which you don’t like, as I understand, is this:

I take my after tax earnings, and I invest these earnings I invest these earnings in foreign equity, let’s say XYZ Inc., at US$37/share I ride the market, I take all the care (and risk) to grow this lowly share, … I succeed! I decide to sell at US$86/share, … I am happy, … and you should be too (explanation will become obvious in latter part of this message) I pocket US$49/share gain (for now, … taxes are still due on that amount)

I pay tax on this profit, … actually on 67% of it, at my marginal rate of: let’s say 50% (this makes it simple, … my rate will perhaps be little different)

You Sir, your Ministry that is, as a result of my tax payment, pockets equivalent of US$16.42 Further still, I take my portion of the gain (equivalent of US$32.58), and I spend it, in Canada (mostly, of course, since I must admit, I spent 1-1/2 days in USA this year, … and I am not going there again this year)

So, all this activity is what you don’t want me to do. Of course if I still insist, since it is not illegal to do what I am doing, you are proposing following:

You consider my foreign stock (XYZ Inc.) as FIE for tax purposes, then under the scenario I presented above, I would have to pay tax on "mark to market" basis once a year even if I have not sold this investment, or "realized" the actual gain. Further still, at that point I would have to pay then tax at my top marginal rate, just as if the gains were investment or employment income, … and on 100% of the gain to boot (and not the 67% inclusion rate that now prevails).

Well, Sir, if this is what you proposing, and ultimately decide to implement into Canadian tax structure… I am quitting this game. I will no longer invest in FIE’s, I will forego the gains of US$49/share in my example, … I will pay no taxes to your Ministry, since tax on ‘nil’ is still ’nil’. I will also not release into the Canadian economy that exemplary equivalent of US$32.58 because I never earned it. Taking it further still, … I suspect that my marginal tax rate will decline somewhat, … and you, Sir, your Ministry, that is, will get fewer of my hard earned dollars.

Well, Sir, this is how I see this proposed tax changes, … and I don’t like them. I don’t like them as an individual, and I don’t like them as a Canadian. Why should I! This legislation will force down my standard of living as an individual, and this legislation will deprive my country, Canada, of influx of cash, which otherwise would stimulate an economy.

Sir, I am confused! I just don’t understand what you are trying to accomplish by this legislation. Perhaps, someone from your Ministry would care to explain this to me. I am ‘all ears’.

Sincerely yours,

From D.C.:

Jonathan,

I read your article on August 31st regarding alternatives to ETF's. I intend to go one step further.

Over the years I have observed fund companies using shareholder money derived from management fees to fund activities like racing cars and saving tigers. These may be good causes but they should be funded directly from management’s pockets not unitholders. Now when they should be taking a stand they are seemingly bankrupt both financially and morally.

The fund industry may gain by the proposed legislation and I will have to use their international products to diversify. However, I don't have to use their Canadian products. My plan is to move money out of Canadian mutual funds into products like the TSE 60. This will be simpler in my RRSP where potential capital gains taxes are not an issue. For tax purposes my Canadian funds in my non-registered accounts will stay. But future investments will go into alternatives.

In my opinion the investment industry has missed a glorious opportunity to score points with investors by taking a strong position against this proposal. By saying nothing they amplify my suspicions that as an investor I am nothing more than an annual income stream. It is apparent they will sacrifice the long-term interests of investors to look after themselves. This is my way of sending a message to these companies that I will not be bullied into their products.

[snip]

D.C.

D.C.:

You stole the words out of my mouth. Using patriotism as a justification to rip off consumers, then trying to avoid competition through government regulations ... what arrogance.

Regardless of whether this legislation passes, I will go out of my way to avoid using Canadian-based mutual funds and Canadian-based brokers.

From reader D.P.:

No wonder more & more are setting up deeper & deeper off shore... Way to go Canada !