Although there will be a small number of Canadian based ETFs brought to market, it is unlikely that the variety available on the US markets will be replicated in Canada. For example, there are over 40 varieties of iShares available today on the American Stock Exchange with many more series of different brands existing or planned. It is regrettable that the Department of Finance proposes to deny Canadians practical access to a whole class of low-priced, efficient investment products.

It is regrettable that the Department of Finance proposes to deny Canadians practical access to a whole class of low-priced, efficient investment products.

Wow! Can they really be that mean spirited? Why do they want to do that? Is the Canadian mutual fund industry behind this prposal?

require a Canadian holder of a foreign ETFs to mark his/her investment to market each year and to record the result as ordinary income or loss.

If enacted this will certainly please owners of SPYs and QQQs :-(

Jon, since FPX uses SPYs and WEBs you may want to ask Kirzner & Croft to comment.

require a Canadian holder of a foreign ETFs to mark his/her investment to market each year and to record the result as ordinary income or loss.

This idiotic proposal will restrict ownership of AMEX-traded ETF's to registered accounts.

I can't believe it! I'm marking the days off on the calendar waiting for these ETF's to show up and bookmarking the quotes as they do. I bide my time as new products are announced and gradually map out my indexing strategy and BAM-O... CCRA pulls the rug out from under my feet!!! That's not regrettable, that's criminal!

I check my calendar and see it isn't April 1st but please tell me this is a joke... right???

Apparently mutual funds that are based in offshore tax-haven countries (where there is no tax on dividends and capital gains), instead of paying out distributions, simply plough them back into the assets of the fund. This has the effect of letting such income and gains compound tax-free. (In countries like Canada and US, the fund company pays out distributions so that unitholders -- not the fund company -- will be responsible for the tax.)

I recall reading a couple of years ago that RevCan had closed a loophole in which Canadian taxpayers would buy such offshore tax haven mutual funds and, since those funds never paid distributions, let their investments compound tax-free. In closing the loophole, RevCan required Canadians who own such funds to pay tax on the accrued gains even though the taxpayer never actually received any payments. I don't recall the details of how this is done, i.e. how the amount of dividends and/or capital gains is determined. Perhaps, like the above amendment, all annual increases in the value of the investments are treated as ordinary income. That would certainly discourage the use of offshore funds :-)

In any case, perhaps the intent of the proposed amendment is not to penalize all foreign ETFs, but only those that are based in offshore tax havens. US-based ETFs like SPYs, QQQs, and iShares do pay out distributions (albeit smaller ones than conventional non-indexed mutual funds) so they're already taxed today under existing rules.

If the prosposed amendment is indeed targetted at US ETFs then it's draconian to say the least. Someone should determine if this is the case, and if so, we need to launch a campaign against it. I'll be glad to help, but so far I've been unable to find any information about this at the CCRA, Finance or Parliamentary websites using any of their search engines or on any of their "what's new" or "press releases" pages. I guess it's hard to mount an objection to something you can't find :-)

P.S. to Jon, when you receive e-mails such as the one from DF, do you tell the sender that you'll post their e-mail on TWB and [hint, hint] invite them to come on TWB to discuss the issues they've raised? If not, you should.

Mais oui, Bylo, on both counts. It wouldn't be ethical to post a private e-mail onto this web site or any other without first getting the subject's permission to do so. It's their call whether initials, full name or nothing at all. And of course I let them know about TWB forum: that's how some of the recent good posters, such as Greg Hurst, have come about here.

On June 22, 2000 the federal government proposed amendments to the provisions of the Income Tax Act dealing with the taxation of foreign investment companies. One effect of these amendments will be to require a Canadian holder of a foreign ETFs to mark his/her investment to market each year and to record the result as ordinary income or loss. The conversion of gain or loss from capital to ordinary, and the requirement to mark to market annually, will effectively take foreign ETFs off the market for Canadians.

Jon, is D.F. a credible source ? Where did he get this information ? Can this be verified through any government agency ?

June 22, 2000 Finance Minister Paul Martin today released draft legislation regarding the taxation of non-resident trusts and foreign investment entities.

The Department of Finance is seeking comments on the draft legislation by September 1, 2000, to enable legislation to be tabled in Parliament later this year.

Is this is what D.F. is referring to ? See the link and related down loadable documents ref. proposed legislation.

Although IANAL, this sounds like yet another attempt by Finance to close loopholes in offshore trusts (see also my 08-Aug-2000 - 2:05 PM post.) We need someone who understands both the technical aspects of this proposal as well as how ETFs are structured (and they're not all in the same way.)

The Finance press release says [note the sentence I've italicized]:

A foreign investment entity will generally be a non-resident entity that has investment properties representing at least one-half of its assets. Canadian investors may, if they so elect, include in taxable income their annual share of the income earned by the entity. However, a Canadian investor who does not have sufficient information to do the calculation would instead be required to include in income the annual increase in the fair market value of the interest in the entity.

We need someone who understands both the technical aspects of this proposal as well as how ETFs are structured (and they're not all in the same way.)

Someone from the Finance Ministry to clarify if U.S. based ETF's are covered in this proposed legislation would be helpful. This is certainly a worthwhile subject for a Financial Post story if D.F. is correct in his interpretation.

On checking my e-mails again, I see that the source's initials was D.B., not D.F. He's with one of the big five Toronto-based accounting firms, so I presume is reliable. Anyone with further on the tax issue please info e-mail bylo@bylo.org or myself at jchevreau@nationalpost.com

Pat McKeough's Canadian Wealth Advisor has a piece on ETFs in his mid-August issue, entitled "How to cut the cost of index investing." He says: "the best of these exchange-traded funds offer well-diversified, tax-efficient portfolios with exceptionally low management fees. We think high-quality mutual funds with a long-term focus will beat indexes over long periods."...he says if you want to invest in index funds, most ETFs will beat index mutual funds because they have lower expenses. He rates iUnits S&P/TSE 60 index participation fund (XIU/TSE) as a buy, as is Nasdaq-100 trust shres (QQQ) and Spiders and DIA/ASE." McKeough also hints at possible taxation grey areas. See also Bylo's site.

We think high-quality mutual funds with a long-term focus will beat indexes over long periods

Where's the supporting data?

Sure, some funds beat the indexes - but which? How do you tell in advance?

Aye, there's the rub.

Shakes,

If he said what you expected him to say he wouldn't have much more to say so all he'd have left to say would be sayonara and then fold his newsletter, eh?

Bylo, what's all this about a campaign to protest ETF capital gains taxes? Is your site back up?

Bylo, what's all this about a campaign to protest ETF capital gains taxes? Is your site back up?

Jon, see thread "Stop tax on US mutual funds/ETFs held by Canadians"

Am brand new to TWB but have read myself silly in these Forums over the past 24 hrs or so and appreciate the wealth of knowledge and opinions here. Much better quality than most I've seen.

My question (other than the looming tax issue) is really around which of the ETF's are considered closed end funds, or don't have accurate NAV tracking during the day. I had the impression that products like Diamonds, SPY's, QQQ's are real time accurate. I do understand how IShares can be out of whack (particularly international ones) but what about others? Any preferred link other than the "Index Shares" page?

Good ETF primer here from Morningstar.

A "primer" on this subject will be a column in Thursday's FP Investing section, based in part on this thread and Bylo's site.

From article by Jonathan Chevreau, Financial Post, September 7, 2000 “ETFs emerging as rivals to mutual funds”

ETFs have been at the centre of a storm of controversy the past month over proposed Canadian taxation of unrealized capital gains of foreign investment entities. That's not the focus of this column, however. This one attempts to serve as a primer to exactly what these new financial instruments are.

Now that the storm is blowing over, lets hope that ETF's really are here to stay.

George$ was perhaps a little premature with his original but now prophetic thread title. In any case, thanks to the Department of Finance listening to the arguments of Canadians and many TWB posters, we truly can CAN declare that "Exchange traded funds are here to stay!"

Since the issue was started by Ottawa's desire to find tax evaders because foreign funds don't issue T5's, wouldn't this have all been prevented by amending the US-Canada tax treaty and others for reciprocal capital gains filing to the investor's country of residence? Since the IRS has been traditionally grabby, just moreso under Clinton, the Americans would have sprung for this since probably a few expatriates try to dodge their tax obligations, which are based on their citizenship or permanent resident status NOT where they legally reside. Imagine all the hassle it would have saved the TWB crowd.

While still a miniscule fraction of the entire US population, more Americans live abroad than ever before and the IRS now has permanent attaches stationed in larger embassies and consulates (e.g., Ottawa, Toronto, London, Paris). There was talk a year or so ago about adding a third inspection at US ports of entry, by the IRS.