In the event the Finance department doesn't come to its senses over the proposed taxation of unrealized capital gains of foreign investment entities such as ETFs and U.S. mutual funds, has anyone given thought of what the optimum strategy would be for taxable portfolios?

Assuming the twin goal is low fees and non-triggering of capital gains, it seems to me the short list is:

1.) buying individual U.S. stocks that are definitely clear of the 50% investments rule, and making sure they are picked from the 5 major sectors of the economy

2.) Canadian stocks with international scope, such as Bombardier, TD Bank, Nortel, Magna, various techs

3.) U.S. equity and international equity funds from Canadian fund companies, preferably from low-MER no-load groups

4.) owning the higher-MER groups but using the capital gains umbella systems of fund groups like C.I., AIM and the handful of others with similar ways of moving between global equity or sector equity funds without triggering tax

5.) other?

5. Putting ETF's in your RRSP as foreign content.

6) buy the bank's low-MER index funds (i.e. under 50 bp)

7) buy BGI Canada's forthcoming 100% RRSP-eligible S&P 500 and EAFE ETFs (which even inside a taxable account would be taxed less egregiously than US-based ETFs!)

In general, the consequences can be managed at a modest penalty (about 0.3%) - except for the tax penalty from the forced sale that will precede the reassignments.

However, I don't think some of the wilder assertions about certain stocks being affected can have been meant by the drafters of this legislation, and that revisions/clarifications will be forthcoming.

I don't think some of the wilder assertions about certain stocks being affected can have been meant by the drafters of this legislation, and that revisions/clarifications will be forthcoming.

Agreed, but remember they suddenly rescinded the exemption of US-based securities. It's important to understand why.

mikale's comment the other day

FWIW, the legislation will pass. The Finance Department has been playing with this "trust stuff" for too long. Finality is required. However, Finance routinely brings out technical amendments to fine tune prior legislation. ... such that lobbying efforts may be successful in the second (third?) instance.

If that's true, we buy-and-holders are about to have our "discipline" tested in a completely new dimension :-(

One problem about waiting too long is that current holders of US-based mutual funds or ETF's will want to sell before it becomes law, so that they can have the gains treated as CG's. This means that they will ahve to pay close attention to the date at which it becomes effective, to sell beforehand.

That's what I meant about testing our discipline.

Actually as you point out it's more than just that. It's really a gamble (a form of "chicken") on the part of buy-and-holders that Finance/CCRA will back down before we have to submit our first tax return under the new legislation.

Scary!

I'm wondering whether the list of still-acceptable investments (i.e. not triggering deemed gains annually) might also include the foreign pooled funds of Canadian investment counsellors?

Many thanks mikale. That long list of committee members (each of whom I believe receives extra remuneration for their value-add to this process) reminds me of Bismarck's observation that those who have an appetite for sausage and the law should never watch either being made.

The 2000 Pre-Budget Consultations subsection on Mikale's finance committee link contains the following:

Over the past seven years, thousands of Canadians have contributed to the budget consultation process: their concerns and suggestions have been reflected in the Committee's report and in its recommendations to the Minister of Finance.

Again this year, we are asking that prospective participants provide the Committee with their written submissions as early as possible, but not later than September 1, 2000. Submissions should be forwarded to Pat Steenberg, Clerk of the Standing Committee on Finance, Room 603, Wellington Building, House of Commons, Ottawa, Ontario, K1A 0A6. Alternatively, the may be faxed to (613) 996-1626 or sent by e-mail to fina@parl.gc.ca.

So maybe you can just target the secretary (probably the only one who pays any attention to faxes/emails anyways).

This discussion should not be happening at this time (except for the parts about how to further pressure on the Finance committee).

It would be totally, totally wrong for this legislation to pass and its totally totally wrong to start thinking of lesser alternatives. We need to focus on stopping this legislation. I'd suggest that the only course of action we should be planning in the event the Finance department doesn't come to its senses is civil disobedience acts like the occupation of Paul Martins offices.

Did anyone email the secretary of the committe? If not I will. I actually don't mind taking a few minutes and emailing the entire committee.

I've gone ahead and emailed the entire Finance committee, bcc'ing By1o@.com. In case anyone else wants to contact part or all of the committee, here are the individual email addresses:

Chair and Co-Chairs: Bevilacqua.M@parl.gc.ca; Discepola.N@parl.gc.ca; Harris.R@parl.gc.ca

Members: Brison.S@parl.gc.ca ; Cullen.R@parl.gc.ca; EppK@parl.gc.ca; Gallaway.R@parl.gc.ca; Guarnieri.A@parl.gc.ca; Leung.S@parl.gc.ca; Loubier.Y@parl.gc.ca; Marceau.R@parl.gc.ca; Nystrom.L@parl.gc.ca; Pillitteri.G@parl.gc.ca; Redman.K@parl.gc.ca; Solberg.M@parl.gc.ca; Szabo.P@parl.gc.ca;

Associate Members: Ablonczy.D@parl.gc.ca; Anders.R@parl.gc.ca; Bennett.C@parl.gc.ca; Borotsik.R@parl.gc.ca; Brien.P@parl.gc.ca; Cardin.S@parl.gc.ca; Comuzzi.J@parl.gc.ca; Desrochers.O@parl.gc.ca; Doyle.N@parl.gc.ca; Dube.A@parl.gc.ca; Fontana.J@parl.gc.ca; Forseth.P@parl.gc.ca; Gagnon.C@parl.gc.ca; Girard-Bujold.J@parl.gc.ca; Guay.M@parl.gc.ca; Herron.J@parl.gc.ca; Johnston.D@parl.gc.ca; Jones.J@parl.gc.ca; Kenney.J@parl.gc.ca; Limoges.R@parl.gc.ca; Lunn.G@parl.gc.ca; Mackay.P@parl.gc.ca; McDonough.A@parl.gc.ca; Mills.B@parl.gc.ca; Myers.L@parl.gc.ca; Perron.G-A@parl.gc.ca; Picard.P@parl.gc.ca; Power.c@parl.gc.ca; Riis.N@parl.gc.ca; Sauvageau.B@parl.gc.ca; Schmidt.W@parl.gc.ca; Shepherd.A@parl.gc.ca; Solomon.J@parl.gc.ca; St-Julien.G@parl.gc.ca; Tremblay.St@parl.gc.ca; Turp.D@parl.gc.ca; Valeri.T@parl.gc.ca;

green,

Thanks for making the submission and copying me. Having read your e-mail I have a concern about the exclusive use of the term ETF.

I realize that most Canadians are affected only through ownership of ETFs, however this legislation also affects open-ended mutual funds (e.g. Vanguard, Fidelity, Janus, et al), closed-ended mutual funds (like ETFs but minus the creation unit mechanism to arbitrage out the premium/discount to NAV), and -- if Jon's last FP column is correct -- even the shares of certain companies like MSFT and BRK. (There are many reasons why Canadians might own US-based mutual funds even though they are not generally available in Canada as are ETFs and stocks. The campaign website gives several such reasons.)

I'm concerned that because many people who make submissions to Ottawa own only ETFs they understandably request only that the exemption from the new legislation be reinstated for ETFs, i.e. without mentioning any of the other types of securities. It would be a real pity if we got exactly (and only) what you're asking for, because that would leave everyone else in the predicament that we all face today. That's why I refer to "US-based mutual funds and ETFs" on the website. Even that terminology may be too narrow if it turns out that certain stocks are also affected.

Perhaps a better term is something like publicly-traded US investment funds and stocks.

Any CAs or tax lawyers out there who can clarify this point?

Agreed that the implications of this legislation is broader than ETF's and there is risk with closed end mutual funds and perhaps even stocks like BRK and CMGI and perhaps even MSFT. I've been trying to explain the issue to some people that do not own these products and I get plenty of silence - one has to explain what an ETF or closed end mutual fund is before people get the implications and I can see people minds thinking "why don't I know about these already?" and getting lost in the issue.

Anyway, I'm hoping that politicians throw this back into the legislation writers lap and demand that they work with industry to make sure that their Tuna nets are Dolphin free. I think the trick is to keep the arguments fairly non technical for politicians but I'm definitely open to any wording that is suggested.

I once emailed a MP about an unrelated issue and received this reply from an assistant: "Thank you for your letter. is not able to sit at the computer, but I have printed out your letter and will give it to him. Many thanks."

one has to explain what an ETF or closed end mutual fund is before people get the implications

Which I think is yet another reason for a more generic term like "publicly-traded US investment funds and stocks." This also conveys the message that what we're talking about are investment vehicles that are fully regulated in the US and are in turn available only from brokers/dealers/fundcos who are also regulated and required to report (and even withhold tax from) all income that they distribute to share/unitholders.

There are key structural differences even among "ETFs." For example, "Unlike many ETFs that are structured as unit investment trusts, BGIs are registered as open-end funds" ... "one of the primary flaws of the unit investment trust structure of ETFs. That flaw is termed dividend drag. It occurs because the SPDR accumulates dividends that are only reinvested quarterly. This will change, however, when Barclays introduces its S&P 500 index ETF. Barclays plans to take advantage of the regulated investment company structure that allows it to increase returns by securities lending, investing undistributed dividends in repurchase agreements, and using futures. These are techniques that are not available to the UIT-structured SPDR but are currently available to mutual funds. " ... "ETFs that are structured as unit investment trusts, such as SPDRs, cannot reinvest dividends immediately. Instead, they deposit the income in a noninterest bearing account and reinvest it periodically, usually each quarter. BGI intends to enhance returns to its ETF shareholders by lending securities to short-sellers and investing undistributed dividends at once in income-yielding repurchase agreements and futures."

I just posted a new related thread that calculates the cumulative cost of this new tax, if it goes through. The rough cut was it immediately translates into a 25% tax hike for those in the top bracket. That, of course, assumes people are using the FOEs that trigger deemed capital gains. By using the products mentioned in this thread, one continues the deferral. Where it gets interesting is when you compare the costs of high fees to the cost of paying imputed capital gains. If the 25% calculation is accurate, it's very close to the impact over 15 or 20 years of MERs at 2%. So what you gain on the fee side with these products in a taxable plan is lost on the capital gains side. So you substitute with a high MER foreign equity fund sold by a Canadian fund company and you don't pay the capital gains tax right away but lose on the fee side. Curioser and curioser!

i'd rather have capital gains taxed annually than pay a 2% mer. it's not even close. td has international no load index funds with mer's of .45 % which is cheaper than Barclay's etf which can be as high as .99%. Bylo has stirred us up for no reason. anyway, the canadian mutual fund industry will get a much needed boost from this. i own some fund mgmt stocks and they'll benefit greatly from this new fair tax.

Contrarian is scary.... Maybe he was an expert consultant during the drafting of this legislation. Or maybe a vested interest in a movement to force Canadians to put all this stuff (and strip bonds)into RRSPs and dampen the clone fund craze....hmmmmmm

AltaRed, the highly educated and well-intentioned bureaucrats that drafted this superior legislation have no need of my input. If you think Canadian mutual funds are making out like bandits with these high mer's, maybe you should buy shares in these mutual fund mgmt companies like i did. The less competition from etf's ,the higher canadian mer's can be. Everyone benefits. If mer's would only double , I think Canadian fund companies could see a doubling of share price. Canadians are never going to catch on to high mer's so its a safe bet. Canadians know smoking kills them but they still smoke, and that is why investing in tobacco companies has been such a delightful experience for me.

To return to the thread title, as background to turn this thread into a column, I'm trying to recap the history of capital gains in Canada. I'm told that before 1972, there were none, then it went to 50% inclusion rate and other percentages, there was the $100,000 exemption (and $500,000 before that?) that came and went, and lately the cut from a 75% inclusion rate to 66.7%. Does anyone have a good source or URL that precisely lists all this history?

Jon, you could get this info from "Preparing your Income Tax Returns" by Author Anderson. You'd have to be an accountant to understand what they are saying, though. no concise summary.

inclusion rate is 2/3 for 1988 and 1989, and 1/2 for prior years back to 1972.

lifetime capital gains exemption was phased in as follows:

1985 $20000 1986 50000 1987 100000 1988 100000 (max changed from 500k to 100K)

there were alot of changes so hard to summarize.

Is it even certain that the Canadian fund companies get off scot free on this thing? What happens if a U.S. equity fund contains lots of tech stocks or other securities caught by the 50% investment property rules? Or, for that matter, Canadian equity funds that fully use the 25% foreign content? Isn't this going to increase turnover and the amount of forced annual distributions?

The tax has NOT stayed put, as per other recent posts in Wealth. See also the "David vs. Goliath" thread in Wisdom which looks at the role of the Net in citizen advocacy.