The mutual funds industry will only gain through the elimination of its low-cost competitors. Don't expect them to come to our aid. Only we individual Davids, by collectively slinging our "stones" at the Goliath, can make the Philistines in Ottawa listen.
Here's a selection of comments and copies of submissions that we've received from people who have taken the time to express how they feel in their own words. Some have taken imaginative approaches in mounting their protest, including contacting the Opposition and its Finance critic Jason Kenney, e-mailing non-bank brokers who would lose ETF business, writing to the Canadian Association of Retired Persons (CARP), etc.
Personal information has been deleted in order to respect the confidentiality of the participants -- unless you have explicitly authorized otherwise.
Many more people submitted the sample letter(s) essentially verbatim. We wish to thank every one of you for your contribution to reversing Finance's absurd position. ...Bylo
Websites that have linked to our campaign
Canadian Taxpayers Federation
Fund Library
MyBC Money
Gordon Pape
Directions
The Coffeehouse Investor
Financial Serenity
Your reaction on The Weathy Boomer discussion forum
How the campaign got started
Stop tax on US mutual funds/ETFs held by Canadians (1)
Stop tax on US mutual funds/ETFs held by Canadians (2)
Reader response to ETF tax issue
What's left if the Foreign investment entity tax stays put?
new
ETF exemption from phantom tax: a Pyrrhic victory?
Your reaction on The Fund Library discussion forum
Stop tax on US funds/ETFs held by Canadians
From: [chartered accountant]
Sent: September 1, 2000 2:13 PM
To: farber.len@fin.gc.ca
Subject: FW: Tax Changes - Foreign Investment Entities
Mr Farber:
I am forwarding a copy of a letter recently sent the Honourable Mr Paul Martin, the Minster of Finance. I would like to add an additional suggestion, which is that investments made in countries with which Canada has a tax treaty be exempted from the proposed legislation. Surely, we are not concerned that the IRS, or Inland Revenue is allowing underhanded dealings by Canadians seeking to avoid taxation.
As a specific example, my children hold an investment in Berkshire Hathaway. You may be aware that Berkshire does not pay dividends, although it regularly earns a substantial investment income, and from time to time realizes a capital gain (or loss, unfortunately). It would seem that Berkshire is considered a FEI under the proposed legislation. But why? Berkshire (and its various operating subsidiaries in the US, Canada, and elsewhere) is subject to all of the taxes normally imposed on corporations where it does business. Far from avoiding Canadian tax, investors in Berkshire are volunteering to pay US tax on US operations, UK tax on UK operations (and I am sure Canadian tax on Canadian operations) - exactly the same way investors in Inco, Noranda, Alcan or Bombardier volunteer to pay tax in other jurisdictions. In most cases, the rate of tax or the tax base are minor concerns - the driving factor is the prosperity and economic growth of the market that the company serves. Why is the department so anxious to discriminate against my children, in favour of an investor in -say- Fairfax Financial or Onex Corp, companies similar to Berkshire?
-----Original Message-----
From: [chartered accountant in BC]
Sent: September 1, 2000 1:20 PM
To: Martin.P@parl.gc.ca
Subject: Tax Changes - Foreign Investment Entities
Dear Mr Martin:
I am writing to add my voice to those who oppose the current proposal to tax gains in certain classes of investment on an accrual basis, rather than on an 'on realization' basis, as is the current practice for all investments made by Canadian residents.
This proposal will apply to all investments made outside the 'foreign content' portion of RRSPs or RRIFs, and thus is an additional tax on investments already legally and openly made with after-tax capital. If this already diminished capital can earn a more attractive return outside the country, then so be it. The ultimate result will be a greater capital inflow to Canada when the investment is liquidated, resulting in greater aggregate wealth for us all. Why is this a problem? I won't comment on the inexplicable decision to allow the unnamed (but widely thought to be Bronfman) family trust to remove capital from this country without paying the taxes which would otherwise have been due, other than to observe that it certainly helps to have a senator or two on your payroll when you want a favour from Her Majesty's treasury.
Pity the rest of us don't have the same clout, and more the pity that Canadians have to seek foreign investments to protect their capital from the perils of an over-taxed, under-productive corporate sector and a deliberately depreciated currency. I do not accept that even the "abuses" of such investment strategies should be offensive to Her Majesty, but the proposal as it sits is over-broad: while claiming to catch whales you are criminalizing minnows. The proposal should be withdrawn and rewritten, if it is not dropped entirely. If you and your officials were sure that these activities constitute evasion, rather than mere avoidance of tax, why not use that other ill-though blunderbuss of tax legislation, and apply the General Anti-Avoidance Rules?
This proposal is simply bad policy. It is a general principal of taxation that tax measures are preferred which do the least to discriminate between economically-similar decisions. This policy does exactly the opposite, by treating Canadian and foreign investments differently. This policy seeks to tax economic benefits well before they are realized, when in fact they may never be realized. This policy is an attack on MY right to do with my money what I please, and an attack on capital in general. Surely the importance of capital formation is not a new concept at the Department of Finance (although it would explain some things).
A few years ago a loopy law professor from the University of Victoria (Maureen Moloney (sp?) - the Dean of the Faculty at the time, which goes a long way to explaining why UVic law grads never work in the corporate sector) speculated that homeowners should pay tax on the 'imputed value' of the rent they were earning by occupying their homes, as well as on the increase in their market value. That proposal could be dismissed since she was a radical left-wing feminist advising the NDP, who at the time were still looking for ways to destroy this province (they have done well, haven't they?). I never thought that I would see such a proposal from a professedly-centrist government such as yours.
If the fact that this is a bad policy were not enough, the tracking, accounting, and administrative costs of compliance with this policy are enormous. This represents yet another burden on taxpayers for negligible gain. The foreign portion of an individual's portfolio is often deliberately held as a hedge against future currency depreciation, and to provide funds for their retirement. What possible benefit will come from punishing the individuals who hold such investments and forcing them either to accept a lower return or to pre-pay taxes that will never come due, and thus in either case a lower capital base for their retirement years?
At one time I thought you were actively working to improve the lives of the citizens you claim to serve (unlike some other members of cabinet). I regret that I jumped to that hasty conclusion, since that is obviously not the case.
Yours truly,
[chartered accountant]
September 1, 2000
[These comments were appended to a "standard" letter by a chartered accountant in Toronto]
In addition to the standard fare in this fax, I note that this is another example of Finance robbing Peter to pay Paul. In the last budget there was increase in the foreign content limits for registered products. Much tambourine banging about this great gift. Now we have the "other side of the story". We will tax back this increase by taxing phantom foreign content in both registered and unregistered products.
This is the same stunt as was pulled with the decrease in UIC premiums only to be followed by an increase in CPP premiums. All optics and politics. It is time our tax system was put on a firm logical foundation.
September 1, 2000
[These comments were appended to a "standard" letter by a professor in Montreal]
If it becomes impractical for Canadians to own foreign-based index or mutual funds, then the proposed rules will function as a protectionist wall keeping investment funds in Canada. While some nationalists might welcome this, there are unintended consequences:
- There will be less pressure on Canadian fund managers to reduce the relatively high management expense ratios (MERs) of Canadian mutual funds.
- With a captive pool of capital (beyond what already exists in the tax-deferred RRSPs), Canadian managers of publicly-traded corporations will have a "soft-pillow" of funding and less incentive to innovate to compete globally. In the long-run, reliance on captive domestic investment funds can lead to disastrous complacency in management, as demonstrated by the current morass engulfing the Japanese economy. There, much-needed restructuring is delayed by "soft-pillows". In the long run, "soft-pillows" hurt rather than help employment and innovation.
August 31, 2000
I write to comment on the Canada Customs and Revenue Agency's proposed changes to the taxation of US mutual funds. The proposed rules are unfair and unworkable, and I urge you to oppose their enactment into law.
My own situation provides an example of the counter-productive consequences of the legislation. I came to Canada from the U.S. in 1993 as a professor of [deleted], 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 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.
I would caution the government that it risks exacerbating the brain drain by this punitive tax grab. I would prefer to remain and contribute to [deleted] University and the Canadian education system, but not if it costs me much of my savings. Sincerely,
[Vancouver]
Sorry - no time for details but had also wanted to send this to J. Kanitz also but lack e-mail address - here's main points:
- small investor - takes big chunk savings
- buys Berkshire Hathaway (BRK) number years ago
- other less desirable options (like Canadian TIPs on TSE) avail. at time
- consideration at time - just buying a stock - as a long term investment
- had low income years in interim - now in higher tax bracket
- Mark to market like a car accident
- permanent impairment of income if have to pay tax on gain as income
- tax on per share gains of $30,000 + for investors will:
- cause tax hit in one year
- mean that other choice of TIPs of TSE would have been proper choice
- possibly force sale of BRK to pay tax
- loss of opportunity on foregone growth if had bought TIPS as now paid in tax so growth now lost for 30-40 years until retirement - and people don't realize this!!!!
- final cost of tax change could be $300,000 to small investor's retirement funds as compared to making a retrospective alternate choice many years ago.
As like a car accident - any possibility of a class action lawsuit for damages to innocent parties???
It all seems incredibly unfair!!!
August 30, 2000
Mr. Len Farber
General Director Legislation
Tax Policy Branch
Department of Finance
17th Floor, East Tower, 140 O'Connor Street
Ottawa, ON K1A 0G5
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Farber,
I expect by now that you have received numerous comments strongly in opposition to the proposed changes to the taxation of foreign investment entities. You may add my voice to this protest. I believe I can add one more reason why the changes are ill-advised. It is an argument that has not been made very frequently, but I believe is very compelling.
With large numbers of skilled workers moving to the United States, Canada’s economic competitiveness depends on its ability to attract and retain skilled workers from other countries. I moved to Canada from the United States several years ago. In addition to my skills which I apply in Canada’s growing biotechnology industry, I brought with me a substantial amount of capital, in the form of U.S. mutual funds, which I continue to hold.
The draft legislation, as proposed, changes the capital gains treatment that my U.S. mutual funds currently receive and deserve. If the proposed legislation passes into law, I will be faced with a three-horned dilemma:
1. Sell the funds - This would result in a substantial tax liability both to Canada on the appreciation of the funds since my move to Canada but also to the United States on the appreciation of the funds from their purchase date. This tax liability to the United States is a result of my U.S. citizenship. While the tax paid to Canada would be a windfall to Canada, the tax paid to the U.S. would reduce my assets under investment with no benefit to Canada. Reducing my assets under investment would in turn reduce the tax that Canada would be able to collect when I liquidate my assets during retirement.
2. Continue to hold the funds - This would result in an annual tax liability to Canada based on the appreciation of the funds. Since the United States would only tax the funds upon their sale, a mismatch would occur for the U.S. foreign tax credit, putting me in jeopardy of double taxation. Even if double taxation can be avoided, the loss of the favourable capital gain treatment and the annual tax liability make this option unviable.
3. Move back to the United States - This would result in a deemed disposition and a tax liability to Canada on the appreciation of the funds since my move to Canada but no tax liability to the United States on the appreciation of the funds from their purchase date.
Unfortunately, for me, my Canadian family and the Canadian biotechnology industry, the latter option appears the most attractive.
My company is currently recruiting several U.S. residents, all of which I am sure have substantial holdings in U.S. mutual funds. Consider how they would view this tax proposal. As I have described above, continuing to hold the U.S. mutual funds would not be financially viable. Selling the funds would result in a substantial tax liability to the U.S., which I believe would strongly discourage these candidates from moving to Canada.
The wording of the original 1999 Budget Plan plainly exempts and clearly differentiates the aboveboard U.S. based foreign investment entities from the complex tax avoiding trusts:
"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."
and
"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."
I respectfully request that the exemption for U.S. based Foreign Investment Entities be fully reinstated into this legislation.
Sincerely,
[Vancouver]
CC: The Hon. Paul Martin, Minister of Finance
The Hon. John Manley, Minister of Industry
The Hon. Hedy Fry, MP Vancouver Centre
Mr. Jason Kenney, CA Finance Critic
Mr. Gilles Duceppe, BQ Leader
Mrs. Elsie Wayne, PC Leader
Ms. Alexa McDonough, NDP Leader
Letter to the editor of North Shore News [Vancouver]: Stop this new Liberal tax grab
From: [Sydney, BC]
To: Lunn.G@parl.gc.ca
Sent: Monday, August 28, 2000 6:00 PM
Subject: Proposed Legislation
Mr. Gary Lunn
Sir:
The local newspaper recently reported legislation has been proposed where, among other things, investors will be taxed on the increase in the value of their U.S. investments each year.
I am a U. S. citizen who, to satisfy my Canadian wife’s desires, retired to live in Canada. I brought with me a portfolio of U. S. mutual funds upon which I am substantially dependant for retirement income. I have no pension.
If passed, this proposal will destroy what is a modest but comfortable living and quickly reduce me below the poverty level.
I came to Canada in good faith and have lived here in good faith, paying my taxes and respecting the laws. Now Canada, in bad faith, threatens me with a tyrannical confiscation of my very hard earned retirement funds.
Among others, I intend to bring this matter to the attention of the United States Consulate.
Angrily:
[Sidney, BC]
Aug 25th 2000
Hon Paul Martin
Minister of Finance
140 O"Connor St
Ottawa, ON
K1A 0G5
Dear Mr Martin.
I am ading my name to the strenuous opposition to the Finance Department"s plan to tax any growth of US based exchange -traded indices( i.e. SPYDERS, DIAMONDS etc) as active income. This flies in the face of common sense.
1 Does the minister expect to increase tax revenues as a result of this legislation?
2 Does the minister wish to eliminate the ability of Canadians to be able to invest thier after-tax savings in jurisdictions out of Canada, and is he prepared to answer for the limited financial returns which may otherwise help to raise the average standard of living of Canadians?
3 Is not the capital gains tax, already payable on the sale of any investment growth, a sufficient "windfall" tax that the goverment reaps without any output of service?
4 Is this legislation not a direct support to the Canadian mutual fund industry, who as a group charge much higher management fees than in the US, and who visibly waste millions of dollars of those fees in heavy advertising rather than appropriately spending those fees in researching how best to invest their clients' f savings?
5 Since the Government already withholds rightful old-age pensions and CPP payments to professionals and small -business owners who have worked hard, paid high taxes, and saved diligently in order to maintain a decent standard of living, how can the Minister now further limit and penalize ways in which these ordinary Canadians can continue to fund their retirement in the absence of any corporate or government pension?
I look forward to your response.
Yours very truly,
[Vancouver]
August 25, 2000
The Hon. Paul Martin
Minister of Finance
Department of Finance Canada
140 O'Connor Street
Ottawa, ON K1A OG5
Fax: (613) 992-4291
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
The way I understand this draft legislation is that it will change the capital gains treatment of US mutual funds and Index Participation Units such as S&P and NASDAQ Units. . Gains made will be taxed as income not capital gains and that income will have to be reported annually.
My understanding of the reason for this change is prevent Canadians from avoiding taxes by moving moneys offshore.
It seems to me that this will affect a great number of Canadians that own these units as a way of investing in the US and who willingly pay their taxes. I know it will affect me.
The fact that more and more Canadians feel that they have to move money offshore to avoid excessive taxation demonstrates that possibly our tax system is unfair. At the leading edge of the Baby Boom generation (I’m 55) , starting to finally accumulate a bit of a nest egg for retirement, I’m beginning to see how much of my earned income goes to taxes. If the Tax system allowed Canadians to keep more of their investment returns possibly more Canadians would leave their money in Canada.
This new legislation seems unfair to me as anyone who has held US mutual funds and/or Index Participation Units will either have to sell them and incur a taxable capital gain or will be forced to pay income tax on what should be a capital gain.
I would ask that in fairness to Canadian investors that you reconsider this legislation
Yours truly
[British Columbia]
CC Mr. Len Faber General Director Legislation by fax to (613)992 4450
Mr. Jason Kenney, Finance critic, by fax to (403) 225-3504
Mr. Richard Harris MP by fax to (613)996 9850
Kevin Dehod
McLean & Partners Private Capital Corporation
2400-421 7th Ave S.W.
Calgary, Alberta
T2P 4K9
403-234-6102
kdehod@mcleanpartners.com
August 24,2000
The Hon. Paul Martin
Minister of Finance Canada
Department of Finance
140 O’Connor Street
Ottawa, ON K1A 0G5
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Martin,
I am a partner in a Calgary based investment firm called McLean & Partners. Mclean & Partners is a locally and independently owned investment firm providing independent, unbiased, comprehensive financial solutions for high net worth clients.
On behalf of my firm, clients, and fellow Canadians please re-consider the intent of the proposed legislation vs. what the actual consequences will be if the legislation is passed as is. I’m sure I speak for almost all Canadians including yourself when I say “the intent is to curb, control, and monitor physical allocations of capital offshore, not to hinder the ability of tax paying Canadians to invest in foreign investments that are domiciled in a Canadian investment account.”
U.S. based mutual funds and ETF's (Exchange Traded Funds) annually distribute or allocate to Canadian investors all of the fund's income and capital gains. The distributions are reported and taxed under the current tax rules. There is unquestionably no intent by any Canadian holding these products to avoid tax in Canada.
In fact the wording of the original 1999 Budget Plan plainly exempts and clearly differentiates the aboveboard U.S. based foreign investment entities from the complex tax trusts that you are trying to target. "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." and "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."
I appreciate your review of my submission, and I hope the Finance Department is able to see the huge discrepancy between the intent of the legislation and the potential punitive tax consequences for tax paying Canadians saving for their retirement.
I respectfully request that the exemption for U.S. based Foreign Investment Funds be fully reinstated into this legislation
Yours Truly,
Kevin J. Dehod
Vice-President
Mclean & Partners Private Capital Corporation
cc: The Hon. Senator Dan Hays, Mr. Jason Kenney, Mr. Gilles Duceppe, Mrs. Elsie Wayne, Ms. Alexa McDonough, Marie-Claude Hebert
Kevin Dehod
McLean & Partners Private Capital Corporation
2400-421 7th Ave S.W.
Calgary, Alberta
T2P 4K9
403-234-6102
kdehod@mcleanpartners.com
August 24,2000
The Hon. Senator Dan Hays
Deputy Leader of the Government
Room 275S Centre Block
The Senate of Canada
Ottawa, Ontario
K1A 0A4
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Senator Hays:
Earlier this week I spoke with your assistant Trevor Lynn. Myself along with my partners, clients and the investing public of Canada seeks your help and understanding with regard to the draft legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities.
I am a Vice-President with McLean & Partners in Calgary. McLean & Partners is a locally and independently owned investment firm providing independent, unbiased, comprehensive financial solutions for high net worth individuals.
Our concern with the draft legislation is the potential punitive tax treatment on ETF’s (Exchange Traded Funds) and US based Investment Funds. I realize the intent of the legislation is focused on offshore investment accounts but it appears that the draft covers ordinary tax paying Canadian investors who are saving for their retirement. I’ve attached several articles that discuss the benefits of ETF’s and I encourage you to read through them for a better understanding. From an investor’s perspective these are one of the most cost effective and diversified ways you can build a portfolio. ETF’s and other US based funds are currently core holdings in our client portfolios and are going to be an integral part of their and other Canadians portfolio’s in the future.
The wording of the original 1999 Budget Plan plainly exempts and clearly differentiates the aboveboard U.S. based foreign investment entities from the complex tax avoiding trusts: "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." and "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."
I respectfully request that the exemption for U.S. based Foreign Investment Funds be fully reinstated into this legislation.
Senator Hays, I appreciate your help and understanding in this matter. Please call me with any questions you may have at 1-888-665-005. All Canadians look forward to your support on this issue.
Yours Truly,
Kevin J. Dehod
Vice-President
Mclean & Partners Private Capital Corp.
August 24, 2000
To: GilmoreB@Parl.gc.ca, KenneJ@Parl.gc.ca, WayneE@Parl.gc.ca, MartinP@Parl.gc.ca
Dear Parliamentarians:
Just a note to register my opposition to the proposed taxation for US investments under the changes to the income tax legislation. It seems very unfair to small investors.
[British Columbia]
ETF phantom gains tax backlash [Letter to editor published in 24Aug00 National Post]:
I was shocked to read the articles concerning proposals for the taxation of ETFs. There must be some mistake! ETFs are the best investment product developed in decades for the average investor, and now the government wants to impose a prohibitive tax on these investments. Please tell me it is not true!
All knowledgeable 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, Burton Malkiel, Eric Kirzner, John Bogle, Rex Singfield, Benjamin Graham, Warren Buffet, and many others. These experts are all passionate advocates for the benefits of index investing.
It would be a travesty if ETFs were not exempt from the Finance Dept.'s attempts to catch offshore tax evasion.
Dean Alexander, Vancouver.
ETF phantom gains tax backlash [Letter to editor published in 24Aug00 National Post]:
I cannot protest loudly enough the 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 targeted 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. 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. You will eliminate this legitimate investment vehicle only to make Canadians buy mutual funds and pay the exorbitant fees they charge in Canada.
This legislation should not be grandfathered -- it should be cancelled!
Ed Arbuckle, Waterloo, Ont.
ETF phantom gains tax backlash [Letter to editor published in 24Aug00 National Post]:
Re: Offshore Investors to Fight Changes in Capital Gains Rules, Aug. 15.
To the Department of Finance:
I find it patently absurd that you 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 do index and closed-end funds 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 exchange traded funds.
How stupid can you be to disincent foreign investment? Portfolio investing is a zero-sum game. If I can make $10,000 on an investment from overseas, I have just brought $10,000 net additional wealth into Canada to go into the economy when I spend it or pay 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).
This stinks of being yet another lobby-driven policy to protect the inefficient Canadian fund and bank wealth management industries, at the expense of regular people.
George Parkanyi, president, Imaginaction Inc., Ottawa.
[Calgary]
August 21, 2000
Mr. Len Farber
General Director Legislation
Tax Policy Branch
Department of Finance
17th Floor, East Tower, 140 O'Connor Street
Ottawa, ON K1A 0G5
By Fax to: (613) 992-4450
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Farber,
I am writing to express my opposition to the proposed changes regarding taxing of ETF's. I am an individual investor, (self-employed) and manage my own RRSP portfolio to look after my retirement. While I do not have a large non-registered portfolio, I do not want to have any new restrictions on what appears to me to be an attractive class of investment vechicles.
I see this proposal as a new tax. My personal feeling is that our elected officials should be looking for ways to eliminate or reduce existing taxes to stimulate the economy rather than introdicing a new tax under any disguise.
Following are two attachments that express my feelings better than I can do in my own words:
-----
Attachment #1
We are Canadian investors who legally own U.S. based Foreign Investment Funds. Some of the products we own are as follows: SSgA sponsored ETFs like SPYs, QQQs, DIAs, Sector SPYs and Mid Caps as well as Barclays iShares, WEBs and other US-based mutual funds.
The draft legislation, as proposed, changes the capital gains treatment that these products currently receive and deserve. This tentative legislation rescinds standard equity tax treatment that allows deferral of capital gains tax.
While it is theoretically possible for a Canadian to elect to be taxed only on his or her share of the income of the fund, this is not a practical option. The election requires that the fund's income be computed under special Canadian rules. A Canadian investor is not going to have access to the type of information that will be necessary in order to make these calculations. The U.S. based fund is not going to perform a second set of income calculations as Canadians are a small proportion of all investors. As a result the Canadian investors will be forced to pay capital gains on accrued but unrealized gains.
U.S. based mutual funds and ETFs (Exchange Traded Funds) annually distribute or allocate to Canadian investors all of the fund's income and capital gains. The distributions are reported and taxed under the current tax rules. There is unquestionably no intent by the Canadian investor holding these products to avoid tax in Canada.
The wording of the original 1999 Budget Plan plainly exempts and clearly differentiates the aboveboard U.S. based foreign investment entities from the complex tax avoiding trusts:
"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." and "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."
We respectfully request that the exemption for U.S. based Foreign Investment Funds be fully reinstated into this legislation.
For further information related to this submission refer to:
-----
Attachment #2
1. Investors are taxed on gains they haven't realized.
2. It taxes capital gains as income.
3. It is anti-consumer. It forces investors to use more expensive and
inefficient vehicles (for example, the management fee on S&P500 depository
receipts is over 5 times lower than the typical management fee on index
funds from the Canadian fund industry); and it lessens choice (for example,
there are no products in Canada equivalent to the Russell 2000 iShares).
4. It is protectionist. The Canadian large banks and mutual fund companies
will profit at the expense of consumers, because competition is stifled
through the unequal application of taxes.
5. It unfairly favors the wealthy. For example, a wealthy investor who can
afford to buy the 30 DJIA stocks will receive preferential tax treatment
over other investors who can only afford to purchase these same 30 stocks
through the Exchange-Traded DIA.
6. It creates investment uncertainty. It is extremely difficult, if not
impossible, for an investor to determine if investments form over 50% of a
company's activities in the case of companies such as MGI and Microsoft; and
it would certainly affect the taxation on stocks of companies such as
Berkshire Hathaway.
Yours truly,
[Calgary]
Canadian investor and taxpayer
cc:
[Toronto]
Mr. Len Farber
By fax to: +1 613 992 4450
Dear Mr. Farber,
I was shocked and appalled to learn of draft legislation which proposed to declare US based Mutual Funds and Exchange Traded Funds as FIFs (Foreign Income Funds), and thus require taxation on capital gains on these investments on an annual basis, rather than at the time of sale.
This change will greatly increase the cost of investing in the United States. For an affected investment yielding 10%, the difference in return amounts to 17% over just fifteen years. For 25 years, the difference in returns is 45%. This change is unfairly punitive to long term investors!
Further, it will require I pay tax on profits I have not made in cash yet. I will be forced to sell investments, or delay other investments in order to meet this obligation. Previously, I only had to pay capital gains tax when I had the profits of my investment in hand.
Clearly, this is some sort of oversight. We already have a tax treaty with the United States which eliminates the possibility of tax evasion through investments in such instruments. The government has already agreed with this by the wording in the 1999 Budget Proposal, which said in part: "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." Has additional evidence since come to light which invalidates this wise assessment? Why has the government's commitment been forgotten?
Worse yet, I'm told that Mr. Robert Spindler, the director of the Canadian Institute of Chartered Accountants has said that the rules may apply to some US stocks, such as Microsoft, Yahoo, or Berkshire Hathaway, since these companies have large holdings in other investments. Is it fair to so hobble Canadian investors choices? Is the United States really the unregulated hinterland that this legislation supposes it is?
I do not consider myself a cynical man. Therefore, it would not become me to suggest that the position of the government on this matter is nothing more than an attempt to introduce legislative relief from competition for Canada's mutual fund industry. Sadly, this will be an unintended consequence of the amendment should it pass as it currently stands. The Canadian mutual fund industry will have years more freedom to continue to charge their usurious management fees.
Yours Truly,
cc:
Pat Steenberg,
18 August 2000
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign
Investment Entities
To the Clerk of the Committee:
Here is a copy of a letter I sent to Mr. Len Farber of the Department of
Finance ,The Honourable Paul
Martin and other selected Members on the above matter.
I am hereby bringing it to the attention of this Committee.
I respectfully submit that ownership of exchange traded funds, US-based
open and closed mutual funds
and other securities can in no way be construed as a form of tax evasion
requiring imposition of a new
capital gains tax regime.
This is not a mere technical rule change aimed at tax evaders. It
imposes a new and onerous tax regime on
Canadian investors in straightforward exchange traded funds, mutual
funds and other investments whether
held in US or Canadian accounts.
I hope that The Honorable Members will reconsider this Finance
Department recommendation and
reverse it to the original Department proposal as per the 1999 Budget.
Thank you.
Yours truly,
[Toronto]
-----
15 August 2000
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Wappel:
Enclosed please find copy of a letter I sent to Mr. Len Farber on the above matter.
I respectfully submit that ownership of exchange traded funds, including those held in domestic accounts and US-based mutual funds can in no way be construed as a form of tax evasion requiring imposition of a new capital gains tax regime.
This is not a mere technical rule change aimed at tax evaders. It imposes a new and onerous tax regime on Canadian investors in straightforward exchange traded funds and mutual funds whether hold in US or Canadian accounts.
As my member of Parliament, I hope that you will bring this unfair imposition of new taxation to the attention of Mr. Martin.
Thank you.
Yours truly,
[Toronto]
15 August 2000
Mr. Len Farber
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Farber:
I am a retired Canadian living on passive investments. Many of these investments are held through US discount brokers in the form of Exchanged Traded Funds (ETFs) and US based mutual funds. Funds held this way offer economies, safety and diversification that I could not find domestically.
According to articles in the National Post and Globe & Mail today and The Wealthy Boomer Website (http://wealthyboomer.com) I see that your office has reversed its exemption of such funds from requirements proposed in the 1999 Budget Plan. (Finance Canada News Release 99-102.)
This change could force me to sell such assets to pay tax on unrealized gains. It would impose on certain types of investments an entirely new capital gains tax regime from that applying to every other type of capital gain. This is unfair and unwarranted and contrary to Government policy on capital gains taxation.
I report ownership of these assets on my Income Tax return and distributions have been subject to Canadian taxes. I fully understand and expect that tax information is shared between CCRA and the IRS. In no way can ownership of these assets be construed as some sort of tax evasion plan.
According to your office's news release (above), the rationale for withdrawing the exemption is "concerns that this exemption would allow for structures that could have undermined the effectiveness of the rules."
If that's the case, devise rules for those structures if, as and when they arise.
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."
For more information about the reasons behind my request, please see the web page located at http://www.bylo.org/usmfetftax.html
Thank you.
Yours truly,
[Toronto]
cc:
Continued in What campaign participants have to say (more) ...
1. The Hon. Paul Martin, Minister of Finance, by fax to (613) 992-4291
2. Rob Anders, Calgary West, by Email to Anders.R@parl.gc.ca
3. Jason Kenney, Alliance Finance Critic, by fax to (403) 225-3504
4. Walter Robinson, Canadian Taxpayers Federation
5. ByloSelhi (investor advocate)
August 20, 2000
General Director, Legislation
Department of Finance
17th Floor, East Tower, 140 O'Connor Street
Ottawa, ON K1A-OG3
1.The Hon. Charles L. Caccia, MP for Toronto Davenport, by fax to +1 613 995 8202.
2.The Right Hon. Jean Cretien, Prime Minister of Canada, by fax to +1 613 941 6900.
3.The Hon. Paul Martin, Minister of Finance by fax to +1 613 992 4291
4.The Hon. Jason Kenney, Finance Critic, Canadian Alliance, by fax to +1 403 225 3504
5.The Hon. Gilles Duceppe, Leader of the Bloc Quebecois, by fax to +1 613 992 6779
6.The Hon. Mrs. Elsie Wayne, Finance Critic, Progressive Conservative party, by fax to +1 613 947 4571.
7.The Hon. Mrs. Alexa McDonough, Leader of the New Democratic Party, by fax to +1 613 995 7224.
8.Mr. Rob Carrick, Writer, Globe and Mail, by fax to +1 416 585 5085.
9.Martin Byre, Director, National Post, by fax to +1 416 383 2439.
Clerk of the Standing Committee on Finance,
Room 603, Wellington Building
House of Commons
Ottawa, Ontario, K1A 0A6.
FAX (613)-996-1626
General Director Legislation
Tax Policy Branch
Department of Finance
17th Floor, East Tower, 140 O'Connor Street
Ottawa, ON K1A 0G5
The Hon. Paul Martin, Minister of Finance
The Hon. Tom Wappel
The Hon. Deborah Grey
The Hon. Gilles Duceppe
The Hon. Elsie Wayne