| What campaign participants have to say (more) |
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... Continued from What campaign participants have to say
August 18, 2000 Hi Bylo: Attached is a FAX that I send on behalf of our investment club. Please feel free to post it anomyously, and everyone is welcome to use it by filling in their own names.
To: Subject: Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities Dear Mr. Farber: As part of a disciplined investment approach, our investment club makes extensive use of U.S. Exchange-Traded Funds because of their low management fees, instant liquidity, and extensive sectorial coverage. The products we use include Depository Receipts, iShares, HOLDRs, and mutual funds from U.S. fund companies. We also want to use actively-managed Exchange-Traded Funds (such as Vanguard’s VIPERS) once they are available. The proposed legislation is extremely unfair to investors who use these vehicles, for the following reasons:
Yours truly,
[Alberta]
Cc: The Honorable Paul Martin, Minister of Finance Fax: (613) 992-4291
August 18th, 2000 Dear Chair, Co-Chairs, Members and Associate Members of the Standing Committee on Finance. I feel compelled to inform all members of the Finance committee of an important current issue that I'm very, very concerned with. The Finance department is working on legislation to attempt to close some loopholes that tax evaders use by placing restrictions on Canadians ability to invest in foreign trusts. Unfortunately, the net that the Finance Department is casting will make the sale of legitimate invest vehicles that are set up as trusts, namely Exchange Traded Funds (ETF's), impractical to own in Canada. Today, many honest tax paying citizens like me have built their retirement portfolios around these highly efficient investment vehicles. This act would cause me and thousands of other Canadians great hardship. No piece of legislation has the ability to damage my well planned financial future as this one. Please review the issue and be aware that members in your own riding will likely be effected. It is highly likely that even members of your committee invest in these Exchange Traded Funds. This act is akin to shutting down our borders totally in an attempt to stop illegal immigration. This proposed legislation is so, so wrong. Please help to stop it. What follows is the exact memo I sent to Paul Martin and my MP a few days ago .... [message dated August 15, 2000 11:36 AM below] ----- In case anyone else wants to contact part or all of the House of Commons Standing Committee on Finance, 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 ----- Bylo, thanks for all your efforts on pointing impacts of the proposed legislation on EFT's. Here's a copy of the letter I sent to Paul Martin, cc'ing my MP - you requested copies on your web site. I've also faxed the letter to Mr. Len Farber, General Director Legislation, Tax Policy Branch and left him a voice mail since he's out of office till next week. I've called my investment advisor and he's also starting a letter writing campaign with some of his colleges. Thanks again.
----- Original Message -----
I've just discovered that my investment portfolio is under attack by the federal government's Canada Customs and Revenue Agency since I hold the investment products classified as Exchange Traded Funds (EFT's) . Both the National Post and the Globe and Mail Newspapers have run stories covering the issue this today. For background information and links to the newspaper articles, see the web site
I am an individual investor and have chosen to build my investment portfolio around these innovative investment products. Exchange traded funds give investors the power to:
- Trade the "market" with a single investment as easily as trading a stock.
- Take a long-term position in a benchmark portfolio of leading companies.
- Receive cash dividend distributions in certain cases.
- Acquire an instantly diversified portfolio.
- Buy or sell at any time during the trading day.
I treat EFT's exactly like I do stocks, except when I purchase an EFT, instead of holding a equity in a single company, I hold equity in several companies. EFT's have a number of advantages of mutual funds including index mutual funds. The strongest advantage is that they very passively managed and have a low cost to the investor. They are they best product that I have found to build an investment portfolio with a diversified long term approach. Note that I currently pay Canadian income tax annual on assigned distributions that the EFT's assign to me and intend to pay capital gains tax, if capital gains occur, when I redeem the EFT's.
You new proposed changes where gains on EFT's are taxed each year regardless of redemptions are unfair. If you pass this legislation, EFT's would no longer be the most attractive vehicle open to me to construct my diversified investment portfolio outside of my RRSP. I would be forced to liquidate my holdings in EFT's and be faced with an unfair one off capital gains tax bill due to this forced redemption. I would then have to find another, less attractive investment vehicle for my foreign content. I would either have to take on more risk in holding more individual foreign stocks directly or purchasing Canadian managed foreign mutual funds that are far less efficient investment vehicles.
Please reconsider your proposed tax change on EFT's. EFT's are the best investment product on the market for the long term investor. Prohibiting me from investing in these products makes absolutely no sense at all. I understood that the days of hostile, unfriendly tax regimes in Canada were over. Am I wrong? EFT's are also great competition for the mutual fund industry in Canada. Is the mutual fund industry - mostly Canadian banks - behind your proposed changes? Are you trying to kill the only competition the Canadian fund industry has? Please reconsider. Remember, a Canadian holding a U.S. based EFT is no different that a Canadian holding a U.S. stock. Please exclude EFT's such as SPY, MDY, QQQ, and iShares from what might otherwise be a fair attempt at closing loopholes on foreign trusts designed to evade Canadian taxes. Lets have fair government.
Please do not quote by name. I was trying to come up with a simple example for communication purposes (to MPs). You might find this useful:
The legislation proposes in one swoop to reduce our family assets (outside the pension plan) by 25 per cent. How does this happen? To take the simplest example:
If one starts with 10,000 dollars and over a period of time it appreciates to 20,000 dollars, a 10,000 dollar capital gain is involved. This only goes into effect when we sell. Good money management is generally not to sell until one has to. The draft legislation essentially forces us to sell, pay tax at the highest marginal rate (which is proposed to be 50% after January 1 for these assets). Thus the 10,000 gain is reduced to $5,000. Our assets now total $15,000 rather than $20,000.
Although the situation is more complicated (obviously), this is the essence.
[Manitoba]
Hi Bylo:
Most people are busy, so I have summarize some of the issues.
There are so many things wrong with this tax proposal, that I am only
listing 5 of them:
Hi Bylo:
This is an EMail that I send to my MP, David Kilgour. I have also submitted
comments to the Finance Minister, the Department of Finance's Legislation
Division, and Jason Kennedy.
---
August 16, 2000
To: The Honorable David Kilgour
From: Edmonton, Alberta
Subject: The proposal to tax foreign investment funds
I just read about the Finance Department’s proposal to tax foreign
investment funds in the Globe and Mail article of August 15th titled
“Proposed tax on index units casts too wide a net”.
I find this to be a frightening proposal. If enacted, it will effectively
deny ordinary Canadian investors access to a wide range of efficient &
inexpensive stocks that can be used as mutual fund substitutes, and in the
process create a protectionist environment for the Canadian financial
industry, at the expense of consumers.
The affected vehicles include very popular U.S. trusts, some of which trade
hundreds of millions of shares per day, and millions of Canadians invests in
them. Some of these are: depository receipts, iShares, holdrs, funds
offered by U.S. mutual fund companies, and most importantly, a large number
of actively-managed Exchange-Traded-Funds that are about to be introduced.
For the first time, Canadian investors have alternatives to the captive
Canadian investment industry. I hope your action will convince the Finance
Department to not pass a tax proposal that stifles this competition.
August 18, 2000
Mr. Len Farber
By Fax to: (613) 992-4450
Submission on: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Farber,
We are retired Canadians living off our modest investments. We have become aware through articles in the National Post and Globe & Mail that your office has reversed its exemption of U.S. Exchange Traded Funds in the proposed 1999 Budget Plan. (Finance Canada News Release 99-102.)
The products you propose to unfairly tax in this legislation are the foremost investment products on the market today. Exchange Traded Funds such as SPYs, DIAs, Sector SPYs and Mid Caps as well as Barclays iShares, offer the investor a passive, efficient, low cost, diversified investment vehicle. These considerable and powerful features are particularly important to us as retired Canadians.
Although we do not yet hold these products we have done our research and have every intention to incorporate these worthwhile products into our portfolio.
As you surely must be aware U.S. based Exchange Traded Funds annually distribute or allocate to Canadian investors all of the fund's income and capital gains. These distributions are reported and taxed under the current tax rules. There can be no fair or reasonable justification to change the current tax treatment these equities receive.
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.
To say this newly proposed tax policy is ridiculous is a gross understatement.
The wording in the original 1999 Budget Plan clearly distinguishes the legitimate U.S. based foreign investment entities from the tax avoiding type of trusts you should be going after:
"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."
"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."
According to your office's news release, the rationale for withdrawing the exemption is:
"concerns that this exemption would allow for structures that could have undermined the effectiveness of the rules."
This so called concern is vague and insufficient justification for the indiscriminate, sledge hammer approach to tax policy you are proposing.
We hereby request that the Department of Finance follow the intent and wording of the initial 1999 Budget Plan proposal and reinstate the exemption for U.S. based Foreign Investment Funds into this legislation.
Yours truly,
[British Columbia]
copies:
Email Memo
Date : August 17, 2000
Dear [********],
I am writing to acknowledge receipt of your email of August 17, 2000 regarding the Liberal Government's proposed new taxation of US mutual funds.
Over the past few days I have received a number of emails from North Vancouver residents who are strongly opposed to this proposal. Fortunately, the internet is now a great tool for people with similar interests to organize opposition to ill-advised government proposals, and it now looks like this issue is going to balloon into a big problem for the Government, mostly thanks to internet technology.
I am pleased to advise you that the Canadian Alliance Finance Critic, Jason Kenney MP, is fully aware that this is a major issue and his office is working on it. Rest assured, as your MP I fully understand the issue and will be doing what I can to help Jason to persuade the Minister to abandon this taxation initiative.
Yours truly,
Ted White, MP
August 17, 2000
Dear Sir or Madam:
CARP needs to address urgently a proposed set of changes to Canada's tax laws that would directly impact individuals who hold U.S. mutual funds or exchange-traded mutual funds (ETF's) in non-registered accounts. These changes would cause a significant tax penalty for law-abiding Canadian citizens who hold such funds. Many CARP members may be liable for a major tax penalty if the proposed legislation is not revamped.
To find out more about this issue, I ask you to visit the web pages at http://www.bylo.org or the discussion now ongoing at http://www.wealthyboomer.com. A letter- and fax-writing campaign is now in progress to halt these legislative changes. The proposed legislation is only open for comment until September 1, so I ask you to move quickly.
I am attaching a copy of a FAX I sent to the Department of Finance, Paul Martin, my MP, and the opposition Finance critic, Jason Kenney.
Please bring your resources to bear on lobbying against these proposed changes.
Yours sincerely,
["Shakespeare" in Alberta], Ph.D.
-----
Bylo,
Here is a copy of the note I sent Jason Kenney, without the attachment that you already have [see below]. You may reproduce it if you wish, including signature.
Sir:
Here is a copy of a letter I faxed last night to the Department of Finance, Paul Martin, and Rick Cassen concerning proposed financial legislation. I hope you will use your efforts to deflect this misguided approach, which will penalize honest tax-paying Canadians.
-----
August 14, 2000
Mr. Len Farber
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Farber,
I am an individual Canadian investor who wishes to purchase US-based mutual funds and/or exchange-traded funds. I have just discovered that buried in the draft legislation pertaining to Taxation of Non-Resident Trusts and Foreign Investment Funds that resulted from the 1999 Budget Plan is a new regulation that unfairly changes the standard capital gains treatment that these investment funds currently enjoy. If enacted, this regulation will effectively make it impractical for me to own such investment funds.
The inclusion of US-based investment funds in the legislation is unfair, unwarranted and unnecessary. While the Government of Canada should take steps necessary to stop tax evasion using offshore trusts and related mechanisms, under the new regulations I will be inadvertently caught in a punitive tax net that's intended to catch law-breakers.
I hereby request that the Department of Finance follow its own logic that the "rules would not apply where the foreign-based investment fund annually distributes or allocates to Canadian investors all of the funds income to which those investors are entitled" and consequently reinstate the provision "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" that was in the original 1999 Budget Plan.
For more information about the reasons behind my request, please see the web page located at
Yours truly,
["Shakespeare" in Alberta], Ph.D.
cc:
From: [Vancouver]
I would like to request that Schwab Canada get involved in a campaign by individual investors to stop proposed Federal Liberal Finance department legislation that would in effect make it non feasible to invest in Exchange Traded Funds (ETF) such as Barclay's iShares products, Nasdaq's QQQ product, AMEX's MDY and SPY products and Merrill Lynch HOLDRs products.
For background on the legislation see the National Post story at http://www.nationalpost.com/commentary/columnists/story.html?f=3D/stories/20000816/371634.html and the Globe and Mail Story on http://www.globeandmail.com/gam/ROBColumns/20000815/RCARI.html
There is a web page that's serving as a base for the protest against the legislation. That page is: http://www.bylo.org/usmfetftax.html. It contains some great background information.
If this legislation passes, half of the holdings I have in my Schwab US$ account would need to be liquidated. I would likely have to resort to re-building a well diversified portfolio with Index Mutual funds marketed by Canadian banks like CIBC or TD (Toronto Dominion) Index funds and would likely need to buy them directly from the financial institution. I prefer to deal with Schwab Canada over Canadian banks and I prefer ETF's over Index Mutual Funds.
I would appreciate that before the processor of this Service Request dispose of this matter, that it be brought to the attention of Paul Bates, your CEO. It would be a crime if the federal government in effect disallowed its citizens from purchasing U.S. based ETF's and forced individual investors back into the banks grip. This is a great opportunity for an organization like Schwab to come to the defence of the customers it serves.
Thanks in advance,
[Vancouver]
August 17, 2000
Mr. Len Farber
Re: Proposed Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Farber,
The recent articles in the National Post [Aug 15, 16] and the Globe & Mail [Aug 15] on the proposed new taxation rules has me sputtering with dismay and anger. I cannot believe these proposals are for real. But apparently they must be.
Over the years my wife and I have purchased US-based Vanguard mutual funds outside our RRSP as a means of saving for our soon-to-be retirement. The draft legislation, as proposed, changes the capital gains treatment that this investment and other similar products currently receive and deserve. This tentative legislation rescinds standard equity tax treatment that allows deferral of capital gains tax until the sale of the capital asset. Why, why is this being done? Why are our retirement plans being threatened by such unexpected and irrational changes?
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.
Vanguard [and ETFs (Exchange Traded Funds)] annually distribute and allocate to Canadian investors all of the fund's income and capital gains. The distributions are reported and taxed under the current tax rules. We report these incomes annually in our tax returns. There is no intent or desire on our part to avoid paying our fair share of tax in Canada.
The wording of the original 1999 Budget Plan plainly exempts and clearly differentiates the aboveboard U.S. based foreign investment entities [such as ours] 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: http://www.bylo.org/usmfetftax.html
Yours truly,
[Toronto]
cc: 1. The Hon. Paul Martin, Minister of Finance, by fax to (613) 992-4291
Thur., Aug. 17, 2000
To Paul Martin,
Now you've gone too far. It's one thing to pluck the golden goose so
artfully that it doesn't hiss. It's quite another to beat the life out of
him.
Let me add my voice to the growing protest of small investors who are
appalled at the proposed legislation to tax Foreign Investment Entities
(FIEs), including exchange traded funds and U.S.-based mutual funds.
This is literally the last straw and if you do not moderate this stance and
come to reason, you are really courting the possibility of a full-scale tax
revolt from honest citizens, most of them professionals.
Consider:
1.) the amount of tax-assisted savings in Canada, through RPPs or the
RRSP, is about half that of the U.K. and the U.S.A.
2.) in response, knowledgeable investors have tried to build taxable
portfolios with tax-efficient products like FIEs in order to minimize
capital gains taxes AND high Canadian mutual fund management fees. [editted]
3.) these taxable portfolios are created with income that has ALREADY
been subjected to the income tax
4.) once again you are changing the rules in mid-stream and punishing
the many honest tax payers playing within the system you created, in order
to catch a few super affluent users of foreign tax havens.
5.) the rise of those tax havens is itself a sympton that Canadian
taxation has grown oppressive. If you want to curb tax havens, you should
bring taxes down to at least the level in the United States.
6.) One solution to this problem may be the idea presented by tax
veteran Donald Huggett, in the last of almost 50 years of his Price
WaterhoseCooper's newsletter, Canadian Tax News. I urge your staff to obtain
Number 4, 2000, wherein he critizes Ottawa's bureaucrats as being too
"obsessed with their own little world and oblivious or negative to any
outside proposals for improvement." I submit that the current protest is a
classic example of this. In particular, I'd urge your department to consider
Huggett's idea of a Registered Investment Plan (RIP), which would be
administered like registered pension plans and RRSPs. Contributions would be
unlimited but not be deductible for tax purposes. Dividends and interest
would be taxable annually but any capital gains taxes would be exempt, or
taxes on gains deferred until withdrawn for personal use or consumption. The
contributor could withdraw income at any time on the grounds it has already
been taxed. This would allow investors to exchange investments and prepare
properly a retirement nest egg that is not completely possible with the
frozen $13,500 RRSP contribution limit now in effect.
Sincerely,
[Toronto]
Date: Tue, 15 Aug 2000 12:40:10 -0800
BY FAX TO THE HON. PAUL MARTIN, MINISTER OF FINANCE
Mr. Martin, As a small investor, I am shocked and appalled by this proposed legislation. Your comments??
Proposed tax on index units casts too wide a net
Bylo,
Individual letters went out today for both my wife and myself.
Included with all the letters were copies of the three newspaper articles for background.
Copies here are for you, as requested:
[Victoria]
August 17, 2000
The Hon. Paul Martin
By fax to: (613) 992-4291
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Martin,
The decision announced November 30, 1999 revoking the exemption of U.S. based investment funds would indicate that many products (see list below) widely held by Canadians, some since 1992, will be unfairly caught up in legislation designed to discourage tax avoidance by complex off-shore trust structures.
The original Budget Plan plainly exempts and clearly differentiates the aboveboard U.S. based foreign investment entities from the complex tax avoiding trusts.
What is the reason behind this proposed change in policy?
Who initiated it and why were the exemptions dropped?
The purpose of our submission is to formally request that you reinstate the exemptions for U.S. based Foreign Investment Entities and reverse a portion of the decision described in the Nov. 30, 1999 news release. The part that I am referring to is shown below:
The administrative advantages of an exemption for NRTs and FIFs based in the United States are reduced because of the elimination of the additional tax on distributions from foreign trusts. Moreover, there were concerns that this exemption would allow for structures that could have undermined the effectiveness of the rules. Consequently, a proposed exemption from the new rules for NRTs and FIFs based in the United States will not be implemented.
The original 1999 Budget Plan includes in the subsection "Improving the fairness of Canada's tax system" the following exemptions and clarifications relating to U.S. based funds and investment 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.
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.
The draft legislation was intended to focus on a wrongful structure of trust that pays little or no foreign tax on their accumulated income and capital gains. The problem being that those making use of these complex trusts may benefit either from a deferral of tax or complete avoidance of tax. The avoidance occurs where the accumulated income is transformed into the capital of the trust, which is then distributed to the Canadian beneficiaries tax-free.
U.S. based mutual funds and ETFs (Exchange Traded Funds) annually distribute or allocate to Canadian investors all of the fund's income to which those investors are entitled. There is unquestionably no intent by the Canadian investor holding these products to avoid tax in Canada. Capital gains accrued as a result of portfolio changes as well as income flow through to the investor (subject the non-resident withholding tax) and are routinely reported and taxed under the current tax rules.
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.
If the draft legislation is passed without the original exemptions for U.S. based foreign investment entities the following investment products widely and routinely held by thousands of Canadians, some since 1992, will be subject to unfair taxation.
* SPDRS - Standard & Poor's Depositary Receipts (SPY)
Exchange Traded Funds (ETFs) and U.S. based mutual funds offer investors a simple, efficient, low cost way to get exposure to the important U.S. equity markets (by size, style, and sector) as well as to some 19 of the world's international stock markets.
Small investors all across Canada are struggling to accomplish the considerable task of saving an adequate nest egg to fund their retirement years. These U.S. based Exchange Traded Funds (ETFs) and similar U.S. based index mutual funds are an essential part of this investment process. If we are to provide for ourselves, we must have access to high quality, low cost, efficient, diversified, passive index investment vehicles and incorporate them into our RSPs and our non-registered portfolios. The proposed legislation will cause unfair taxation and will render ineffective the foremost investment vehicles available today.
Further, this would put Canadian investors at a severe disadvantage relative to all other investors world wide who have fair access to these products.
The small investor is not well represented in Ottawa, unlike the banks, brokerage and mutual fund companies. We have no lobbyist to send to Ottawa to protect our interests and to speak to important issues such as this change in tax legislation. The majority of Canadians are not a part of any corporate or government employee pension programs, indexed or otherwise. Our individual investments vehicles are of the utmost importance to us. These changes will hurt all the individual Canadian investors and benefit a few special interest groups.
The banks, brokerage and mutual fund companies in this country have absolutely no interest in seeing the average Canadian utilize these very low cost and efficient U.S. based products. Our best interests and free access to these products directly conflicts with their desire to market high management expense (MER) products. The collective silence from these organizations with respect to this legislation is deafening to every small investor. If this legislation is passed as proposed there will be Champagne corks popping in every bank, brokerage house and mutual fund company in Canada, all at the expense of the legitimate tax paying Canadian investor.
Changing the current capital gains treatment that these products receive and deserve is punitive and uncalled for. Treating incremental gains of legitimate U.S. based equity investments as income is not logical or justifiable. The proposed legislation rescinds standard equity tax treatment that allows deferral of capital gains tax.
A comprehensive analysis of these established and productive products will logically bring you to the conclusion that they should be exempt from this legislation. They have been unfairly caught up in a legislation designed to prevent tax avoidance through complex and deceptive off-shore trusts.
Mr. Martin we are counting on your leadership and objectivity. We respectfully request that you reinstate the original exemptions thereby doing the moral and ethical thing for the poorly represented Canadian small investor.
I have held these products for a considerable length of time and I would be adversely impacted by this indiscriminate change in legislation. I look forward to receiving your personal and considered response to my concerns and this submission.
Yours truly, :
[Victoria]
August 17, 2000
Mr. Len Farber
By Fax to: (613) 992-4450
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Farber,
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: http://www.bylo.org/usmfetftax.html
Yours truly,
[Victoria]
cc:
August 17, 2000
Mr. Len Farber
By Fax to: (613) 992-4450
Re: Draft Legislation on the Taxation of Non-Resident Trusts and
Foreign Investment Entities
Dear Mr. Farber,
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:
http://www.bylo.org/usmfetftax.html
Yours truly,
[Ontario]
cc:
August 16, 2000
Mr. Len Farber
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign
Investment Entities
Dear Mr. Farber:
I am writing to express grave concern about proposed legislation that would
place an undue burden on Canadian investors who hold US-based
exchange-traded funds and US-based mutual funds.
I can understand your department's interest in preventing the abuse of
offshore trusts, but feel the proposed measures are most unfair to the far
greater number of Canadian investors who properly use these vehicles. In
particular, I note that the vehicles in question report all distributions to
the Internal Revenue Service, which shares information with the Canada
Customs and Revenue Agency.
Here are four reasons why a Canadian might choose to hold such investments:
1. These vehicles offer a much broader array of asset classes than
mutual funds available in Canada.
2. These vehicles charge management fees that are substantially below
those on Canadian-based mutual funds. I draw your attention to a report
released this year by the Association of Canadian Pension Management, which
warned that our high fees are making it much more difficult for individual
Canadians to provide for their own retirements.
3. Increased cross-border mobility means there are growing numbers of
Canadians who work in the US and Americans who work here. The proposed
legislation would arbitrarily and most unfairly penalize these people for
acting as very prudent investors while living in the US.
4. Many Canadians have relatives in the US and may well inherit such
holdings - which would be subject to US estate tax.
The proposed legislation also draws an unfair and arbitrary distinction
between exchange-traded funds in the US and those in Canada. That amounts to
both bad economic policy and bad tax policy.
These vehicles were excluded from the proposals outlined in February, 1999.
Please restore that exemption.
Yours truly,
[Ontario]
Cc: The Hon. Paul Martin
17 August 2000
I sent the following FAX to Mr. Farber today with E- mails to the cc list.
Also note another problem with the proposed legislation:
US companies have transferees here in Canada. I would guess that most of
these people own US investment funds. Thus they (or their companies) would
need to pay the proposed tax. Since the US has no such legislation I would
anticipate an outcry based on fairness and reciprocity.
You may want to contact companies who are likely to have US transferees
here and alert them Another option is to contact the large Public Accountants
(e.g. Price Waterhouse) who prepare tax returns for many of the transferees,
alert them to the problem and ask them to contact the government. (they
usually have a large number of government contacts).
Mr. Len Farber,
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities.
Dear Mr. Farber:
We are small Canadian investors who legally own U.S. mutual funds and
exchange traded funds. Some of the funds in which we are interested are: The
Vanguard funds, Biotech Holders Trust, Janus Funds, Manager's Funds etc.
We are Canadians who worked in the US for many years and who chose to
come back to Canada to retire. We made our investments in order to support
ourselves in retirement and not be a burden to the government. We have always
declared our non-Canadian holdings and paid tax on all distributions as
required by Revenue Canada.
The proposed draft legislation changes the current capital gains
treatment so that the US funds must be marked to market and capital gains tax
paid as though the funds had been sold. This would not allow us to defer
capital gains as is now the case for both US funds and Canadian based funds
and stocks. In addition the tax due on these unrealized gains would be at the
income rate rather than the lower capital gains rate. This will place a very
heavy tax burden on us that is not placed on other Canadian investors who
have chosen to hold only Canadian funds and seems grossly unfair. Basically
this will mean that no honest Canadian investor will be able to justify
owning US funds. Canadian funds are run by banks and investment companies who
charge exorbitant fees. Also if we are forced by the legislation to use them
as our main holdings we would have a risky concentration on Canadian based
securities (which are only 3% of the world's securities). This is not fair to
consumers.
Apparently this new legislation is aimed at large scale tax cheaters who
use offshore funds to hide income. But it actually will hurt small investors
like us. We suspect that large scale cheaters will find other ways to evade
Canadian taxes. In the case of the US there are already safeguards in place.
For example there are Canadian regulations requiring reporting non-Canadian
income and foreign holdings. Also US funds report distributions to the
Internal Revenue Service and there is considerable information exchange
between the tax authorities in Canada and the US (who have records of US fund
distributions) to assure that cheating doesn't occur.
While it theoretically may be possible for a Canadian 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 funds income be computed under special
Canadian rules. The investor is not going to have access to the information
needed to make the calculation. US based funds are not going to carry out a
second set of income calculations specially for Canadians. As a result
Canadians will be forced to pay taxes on accrued, but not realized, capital
gains.
US based mutual funds and exchange traded funds (ETF's) annually
distribute or allocate to Canadian investors a fund's income or capital
gains. These distributions are reported and taxed under existing Canadian tax
rules. There is no intention by most Canadian investors to avoid Canadian
tax. As for the cheaters it is hard to see how the proposed new regulation
will help, and in fact it will only encourage cheaters to cheat more to avoid
a bigger tax.
The wording of the original 1999 Budget Plan plainly exempts and
differentiates the above board U.S. foreign 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 these vehicles."
The proposed change seems inappropriate, punitive and unfair. It comes at
a time when Canada is trying to make its tax rules fairer to its citizens and
when the government wants to encourage citizens to provide for their own
financial security rather than be a burden on the public. It also appears
that we individual investors would be badly hurt by the proposed legislation,
the tax avoider may not be deterred and the big banks and investment
companies would benefit to the detriment of the consumer.
We respectfully request that the exemption for US based Foreign
Investment Trusts be fully reinstated into the legislation.
Yours Truly,
[retired couple from Toronto]
Hi Bylo,
How nice to hear your voice! Thanks very much for including me in this illustrious group, and congratulations on making such a big splash in the national papers today!!!! What in the world would Canadian investors do without you? I've been swamped over the last couple of days, but will add a message to my site tomorrow about this worthy effort. It sounds very much, though, as if you have the momentum you need to make the right things happen.
You do great work, Bylo -- thank you.
Very best wishes,
[financial planner and author]
Dear Mr. Martin:
I'm a proud, honourable, hard working Canadian male, 41 yr.. old. I'm
employed in the high-tech industry, have earned a healthy income for a
number of years and enjoy the risks and rewards of investing both inside
and outside of Canada.
Like many Canadians when compared to the lure of the US, I feel
over-taxed, however my appreciation and love for my country and our
culture keeps me living in Canada and paying those higher taxes.
I've recently learned of a gov't plan to tax unrealized capital gains on
equity invested outside of Canada. I'm fully prepared to pay my fair
taxes on realized capital gains when taking risks with my equity.
However, if your government has the audacity to formulate and pass into
law a tax on unrealized capital gains I think this is ABSURD and
UNFAIR. Not only would I never vote again for a liberal, I would simply
be forced to liquidate all of my Canadian assets and leave this
beautiful country.
Please reconsider passing such a ridiculously GREEDY law.
Sincerely,
[Edmonton]
The Hon. Paul Martin , Minister of Finance
Re: Taxation of U S Mutual Funds (Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities)
Dear Mr. Martin,
I write to express my shock that you have reversed your position and are
now proposing to bring ordinary U S Mutual Funds under the provisions of
your tax avoidance legislation. We have owned American mutual funds (e.g.,
Vanguard) for many years and have always reported the yearly income from
these funds and paid tax on them to Canada. Each year we receive IRS form
1042S from the U S fund which specifies the income and specific nature of
that income which is then included with our Canadian tax return. As you
know, the America tax rules require U S mutual funds to flow through all of
their income and earnings to their fund holders on a calendar year basis,
even if disbursed in a subsequent tax year. This is similar to Canadian
tax law. We understand your department is proposing to remove the
exemption for these widely held mutual funds for three reasons:
1. These distributions may not necessarily be subject to immediate
Canadian income tax. This is silly since I know of no case where I can
pass up reporting the 1042S income that is reported to the CCRA as well as
to us. If your staff finds a minor example, it certainly does not apply to
any Canadian taxpayer of whom I am aware.
2. Such an exemption could inappropriately allow for the use of tiered
structures . . . This I consider to be a straw man issue since U S funds
invested in by the average Canadian or American do not use this tax
avoidance strategy. Why should you penalize the mass for a few odd-ball
funds. Exclude those funds from the exemption.
3. To provide equality of treatment between domestic and foreign
investment funds, it would be necessary to use income for Canadian tax
purposes for the purposes of such an exception. This I also consider to be
a straw man argument. There are few differences in determining taxable
income between Canadian and US mutual funds. Income is income in both
countries and operating expenses and fees and treated similarly. Where
there is a difference, such as short term and long term capital gains,
these are specified on the 1042S. While some US income such as federal or
municipal bonds which have tax exemption status for the individual US
holder this exemption is not available to a Canadian holder. In any case
specific information about tax status of pay-outs is listed by state of
residency when tax information is sent yearly to each taxpayer.
Finally let us consider your "default" position which assumes holders of U
S mutual funds will not have enough information to prepare their tax return
and the "simpler mark-to-market regime" which will be required.
First I believe that the information provided each year by the U S mutual
funds including the 1042S and supporting documentation is sufficient to use
the s. 94.1 election for most Canadians.
Your proposed solution to require a mark-to-market approach may be
appropriate for professional traders who are taxed as a business, but
should never be applied to individual investor taxpayers. We do not make
"contributions" to U S mutual funds; we invest in these funds on an
arms-length basis, the same as if we bought an individual stock. The
reason we use mutual funds is because we do not know the American market as
well as we know the Canadian market and also wish to diversify our risk.
The idea that we must pay full income tax on unrecognized capital gains is
draconian in nature. First we would have to redeem shares to get the money
to pay taxes and second we are denied the capital gains exemption on that
which is totally a capital transaction. The yearly difference in market
value of mutual funds is entirely made up of unrecognized gains and losses
within the mutual fund. All investment income and recognized capital gains
have been paid out by year-end. It makes no tax or economic sense to tax
this as ordinary income and is contrary to the entire philosophy of
fairness which you espoused in this year's budget when cutting the capital
gains rate.
Although we are Canadian, we have friends who are U S citizens with US
Mutual funds. What you suggest creates difficult problems of double
taxation for them. This conflicts with the intent if not the provisions of
the Canada-U S tax treaty.
I will not speak to the question of your attempts to properly tax
off-shore trusts; that is a complex issue while an exemption for U S
mutual funds is not as complex as your department appears to believe..
Please do not make life difficult for small Canadian taxpayers to simply
invest in a US mutual fund and pay taxes each year on the income generated
by that investment.
Sincerely
cc: Mr. Len Farber, General Director Legislation
Glad someone's paying attention! I just sent off 7 copies of your letter, and I may have some time to offer, if there's something I can do.
[Alberta]
To: Canadian Association of Personal Financial Advisors - CAPFA - capfa.com
I am sure many of you read the article's) on the proposed changes to the tax
treatment of these vehicles. ( Globe and Mail Aug 15,00, Rob Carrick on
Personal Finance) If this mark to market system of bringing into income at
100% ( not the capital gain inclusion rate) is enacted it would, for most
investors, eliminate those products such as Spiders and QQQ's would be
covered by this net. These vehicles are inexpensive ways of investing in
these markets and they should remain as is or at a minimum grand fathered.
Please read the article and then write your displeasure to:
Finance Department
CAPFA will also send a letter.
Larry Jacobson, R.F.P. , MBA
Hi Bylo
I saw your posting on Wealthy Boomer last night. Great work!!!
[noted financial journalist and author]
Just learned about this issue in today's Financial Post (Jonathan Chevreau article p. C3). Here is the letter I sent:
August 15, 2000
Mr. Len Farber
By Fax to: (613) 992-4450
Re: Draft Legislation on the Taxation of Non-Resident Trusts and Foreign Investment Entities
Dear Mr. Farber,
This is a formal submission regarding the above captioned draftlegislation.
The overall intent of the legislation is worthy. As a Canadian
taxpayer, it is in my interest that wealthy Canadians not avoid paying
their fair share of taxes by setting up sophisticated offshore schemes.
However, the decision announced November 30, 1999 (which just came to my
attention) to revoke the exemption for U.S. based investment funds and
exchange-traded funds will cause significant harm to ordinary
law-abiding Canadian taxpayers. To the extent that the final version of
this legislation omits these exemptions, it will be ill-advised.
My own particular interest is primarily in the so-called exchange-traded
funds (EFTs), but my arguments also apply to US-based mutual fund
products. EFTs include such investments as Standard & Poor's Depository
Receipts (SPDRs). SPDRs are a basket of the S&P 500 stocks held in a
trust and offer the opportunity to invest in the S&P 500 index as part
of a passive equity investment strategy. Other vehicles are available
for other indices, such as DIAMONDs, which track the Dow Jones
Industrial Average, and NASDAQ 100 Trust Units, which track the NASDAQ
100. There are many such vehicles available in the U.S., all designed
to provide investors with a cheap and efficient means to invest in stock
market indices throughout the world.
Index investing can be accomplished through Canadian-based mutual funds,
but for many Canadian investors, US-based EFTs have several advantages,
of which the two most significant are:
· The annual expense fees for SPDRs are 0.12% to 0.18%, compared to
1.00% or more for many Canadian index funds, and
· EFTs trade like stocks, so they can be bought to sold at any time of
day, margined, or traded using limit orders or any other trading
technique available for stocks.
We live in a world in which individuals are being called upon to become
more self-reliant in preparing financially for retirement. Fortunately,
at the same time we live in a world of global investment opportunities
to which the individual investor has unprecedented access. It is sound
public policy to ensure that Canadians have access to legal investment
vehicles throughout the world in choosing the components of their
investment portfolios.
The investment vehicles that were exempted in the original proposals are
not in the same category as complex custom-made off-shore structures set
up to avoid payment of Canadian income tax. US mutual funds and EFTs
are broad-based commercial retail products owned by thousands of
ordinary Canadians.
I am resident in Canada and I hold these securities in an account at a
Canadian brokerage firm. T3's and T5's will be issued with respect to
any income distributed to me as an investor in an EFT. I am obligated
to pay capital gains tax on the gains on these products when I sell them
or when a deemed disposition occurs.
There is therefore no reasonable public policy justification for
including these products in the initiatives designed to discourage tax
avoidance through the use of complex off-shore trusts. The question is
not one of administrative advantages, as referred to in your press
release, but whether a significant and intrusive interference with the
investment choices of Canadians can be justified in the circumstances.
The answer clearly is no.
I have owned and wish to continue to own and acquire these products as
part of my investment strategy. The proposed legislation, although not
a legal prohibition against owning them, amounts to a practical one. No
one seeking equity investments will choose vehicles that carry such
punitive tax consequences.
I therefore request that the final legislation restore the exemption for
retail investment products, including US-based mutual funds and EFTs.
Thank you for your consideration of my submission.
Yours very truly
[British Columbia]
cc: The Hon. Paul Martin, Minister of Finance, by fax to (613) 992-4291
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