The chorus of protests over the federal government's proposal to tax "phantom" gains on a long list of foreign investment properties is at last making itself felt.

Tomorrow is the deadline for objections, but that deadline may now be extended, according to Walter Robinson, federal director of the Canadian Taxpayers Federation.

His chats with senior Department of Finance officials this week suggest to him that Finance has been made aware that the net it cast is too wide.

Robinson expects some modification of the legislation as it relates to U.S. instruments.

Why is it important to join the protest campaign being organized at www.bylo.org to dissuade Finance from ramming the legislation through?

Consider this:

Once upon a time, in a friendly tax regime long, long ago -- before 1972 -- there were no capital gains taxes in Canada.

Then we had taxes assessed on varying percentages of any capital gains: 50% after 1972, rising to two-thirds in 1988 and 1989, and three-quarters after that, until this was cut back to two-thirds in the last federal budget.

There were also exemptions on the first $500,000 of lifetime gains, later cut to just $100,000 for investment portfolios.

Ironically, given the federal government's apparent intention to punish the so-called rich, it was the truly rich who were able to make it through these windows in time to build sizeable non-registered investment portfolios.

The rest of us struggling middle-class wage slaves were born too late or too poor to benefit from those exemptions. Instead, we have been forced to live with niggardly tax-assisted retirement savings limits in registered pension plans or registered retirement savings plans and to supplement them with non-registered or fully "taxable" portfolios.

Part of the strategy with taxable equity portfolios is to delay ultimate consumption by not actually booking profits when a stock or foreign equity fund rises in price. Except for paying annual taxes on the dividend or interest income such stocks might throw off, the big gains of the 1990s bull market were largely sheltered from taxes as long as profits weren't actually taken, or "realized."

This is why there is such a furor over the government's proposal to tax foreign investment properties on a mark-to-market annual basis.

One of the problems with the proposals, according to Allan Lanthier, director of international tax for Ernst & Young, is that this definition is extremely broad, and with no exception for properties used or held in an active business.

Another, says Lanthier, is that "there is no guarantee that the exception for publicly traded shares will apply."

For securities that fall within the definitions, the investor would pay tax annually (at a 100% inclusion rate, not the 67% rate) on profits never even taken. The securities affected are chiefly publicly traded U.S. investment funds and certain stocks with more than half their assets in a long list of investment entities.

Consider how absurd this is -- an adjective several industry commentators have used to describe the legislation. Remember that any cash used to buy these securities has already been subjected to income tax. Now, if the 50% that remains (since most taxable portfolios are used by those in the highest tax bracket) can actually create a small paper profit, you would have to fork over to the Canada Customs and Revenue Agency taxes on phantom stock market gains -- gains you've not yet enjoyed. To pay for them, most people would have to sell some or all of the securities affected.

And what happens if you are flush enough to continue to buy and hold over, say, five years? Say the stock was a major U.S. technology company, a sector specialists believe would often be caught by the new rules. Each year you would be paying tax on the imputed gains.

But what if the stock plummeted at the end of those five years and you finally sold at t

Assuming the legislation passes unamended, what can you do? Since the touchstone of opposition has been people who obey the law and play the game according to the rules created by this government, it's logical to lay out what tax-efficient options remain for taxable portfolios.

If the twin goal is low investment management fees or transaction costs and the least possible triggering of capital gains, there are several options:

• Buy individual U.S. stocks that are clear of the 50% investments rule, and make sure they are picked from the five major sectors of the economy.

• Buy Canadian stocks with international scope, such as Bombardier Inc., Toronto-Dominion Bank, Nortel Networks Corp., Magna International Inc. and various domestic technology companies.

• Buy U.S. equity and international equity funds from Canadian fund companies, preferably from low MER, actively managed, no-load groups like Phillips, Hager & North Ltd. or Sceptre Mutual Funds. Remember, the U.S. or foreign equity funds from mainstream open-end Canadian mutual fund companies are not affected by the proposed legislation.

• Buy the banks' low MER (i.e. under 50 basis points) index funds. Popular groups are CIBC Securities Inc. and TD GreenLine funds.

• Use the higher MER popular fund groups but take advantage of the capital gains umbella systems of such fund groups as C.I., AIM and the handful of others with similar ways of moving between global equity or sector equity funds without triggering tax.

While these strategies apply to taxable portfolios, there are also implications for the 25% foreign content limit within RRSPs and RRIFs. As the rules originally stood, you would soon be offside on foreign content, but a Finance official says it will redraft the legislation to make sure that doesn't happen.

For those who want exchange-traded funds under the proposed new regime, they might better be held in RRSPs as foreign content. Alternatively, Barclays Global Investors Canada will shortly unveil some 100% RRSP-eligible Standard & Poor's 500 and EAFE ETFs. Even inside a taxable account these would be taxed less egregiously than U.S.-based ETFs.