From our Canadian Bureau:       Page 3 Tax Proposal in Canada Raises Questions

As of the end of 1999, the fund's accrued gains on these four holdings totalled 38% of the fund's net asset value. Current rules wouldn't tax that gain because the fund hasn't sold the stocks. If this proposal is passed into law, unitholders of Fidelity Far East could be hit with a huge income distribution in 2001. Knowing that ahead of time, Canadian unitholders will likely start a run of redemptions on this and other funds in similar situations.

This proposed law has such large "trickle-down" potential that nobody but the
Canadian Finance Department will benefit from it. Over a 20-year period, this difference in treatment will cost Canadian taxpayers anywhere from 1.4% to 2.8% each year in eroded after-tax returns. Those figures effectively render EFTs and other affected securities useless in taxable accounts and will do far more harm to those who have already invested in such funds and accrued big gains.

Further, not only does this law propose to make a dangerous precedent by revoking these securities' capital-gains treatment, the Finance Department has made no provisions for grandfathering those who actually hold affected securities.

What can be done to stop this proposal in Canada?

It is impossible to legally avoid taxes on income and gains arising from foreign-based mutual funds and ETFs, so there is no loophole being exploited by investors of these holdings. In fact, U.S.-based funds calculate net income and realized capital gains in a manner that does allow Canadians to report the required income each year.

Further, the U.S. Internal Revenue Service issues form 1042-S - like Canadian T3 and T5 slips - to report all investment income and capital gains, then shares information with the Canadian Customs and Revenue Agency (CCRA). Hence, it makes no sense whatsoever why the Canadian government would want to penalize Canada's honest middle class to thwart the tax avoidance efforts of a handful of wealthy residents.

While closing the loophole should be supported, the proposal as it stands is
ludicrous and dangerous. The Department of Finance needs to hear the opinions of Canadian taxpayers by September 1, the deadline for comments on the proposal. (While it seems like a short time frame, the proposal was released in June of this year. But the provisions mentioned above were buried in 180 pages of vague legal terms and definitions.)

If you don't have time to draft a well-thought letter, pay a visit to http://www.bylo.org/ for a form letter and instructions on how to send it to government officials through the Internet. Whether you use that form or draft your own letter, send it to the following people:

The Hon. Paul Martin, Minister of Finance,
Department of Finance Canada; 140
O'Connor Street, Ottawa ON, K1A OG5; fax:
(613) 992-4291; e-mail: martin.p@parl.gc.ca

Len Farber, General Director Legislation,
Tax Policy Branch, Department of Finance
Canada; 17th Floor, East Tower, 140
O'Connor Street, Ottawa ON, K1A 0G5; fax:
(613) 992-4450

Jason Kenney, Finance Critic for the
Canadian Alliance; fax: (403) 225-3504;
e-mail: kenneJ@Parl.gc.ca.

Dan Hallett, B.Comm., CFP, is Senior Investment Analyst with Sterling Mutuals Inc. Dan is also a mutual-fund analyst and commentator for MyBC.com.
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