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Some recent legislation threatened to impair the integrity of the U.S.-based IPUs. The Department of Finance's June 22 draft legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities was aimed at tax evaders who hold investment assets offshore. But the sweeping provisions in the 183-page document raised concerns that Canadian investors would be forced to annually mark-to-market and pay tax on their unrealized profits on some of their foreign investments called Foreign Investment Entities (FIEs).

The definition of a FIE would include among other things, all non-Canadian IPUs including the aforementioned SPDRs and iShares as well as DIAMONDS (pegged to the Dow), Nasdaq-100 tracking shares and other such index-related products.

Two weeks ago I indicated that I expected the Department of Finance would reconsider the adverse tax position created by the legislation. Tax lawyer David Louis and I indicated that some, if not all, of these IPUs distribute at least 90% of their gross income from dividends, interest, and gains from the dispositions of stock.

This distribution policy is consistent with their legal definitions under the U.S. Internal Revenue Code as regulated investment companies or RICs. Since they distribute all or virtually all of their income, this means that in general, the undeclared income from realized capital gains in the fund would be zero or very close to zero.

On Thursday last week, the Department of Finance in a news release announced, among other things, that it was essentially exempting U.S. investment funds that meet the RIC legal definition from the application of the FIE rules. The department specifically mentioned DIAMONDS, SPDRs and Nasdaq-100 tracking shares as RICs. The RIC definition would also apparently apply to U.S.-based mutual funds. However, whether the ruling would apply to other products such as Merrill Lynch HLDRS and U.S.- based closed-end investment funds remains unclear.

What is clear is that the IPU products that Richard Croft and I use within the FPX Indexes are classified as RICs and exempt from the onerous implications of a market-to-market requirement. Thus the IPU remains our investment choice.

The Department of Finance has once again shown itself to be a good listener. As Jon Chevreau pointed out on Friday in these pages, the department was highly responsive to the public interest and industry practice, listening to the "several hundred protests lodged by individuals and practitioners."

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