Mr. Chevreau, just so you know, as a result of your column, following text was sent by e-mail to our Minister of Finance: Proposed Federal Legislation to Tax Unrealized Gains of FIEs
Mr. Minister, Sir:
Let me get right to the point: What you are proposing is something which implies that I am doing something you disapprove of, and therefore, you are going to stop me from doing it. Let’s see it, then, what is it that I am doing that you disapprove. Example is probably the best way to get the point across.
You see Sir, I am an investor, and I invest in Canadian as well as foreign equities. The part of my activity, which you don’t like, as I understand, is this:
I take my after tax earnings, and I invest these earnings I invest these earnings in foreign equity, let’s say XYZ Inc., at US$37/share I ride the market, I take all the care (and risk) to grow this lowly share, … I succeed! I decide to sell at US$86/share, … I am happy, … and you should be too (explanation will become obvious in latter part of this message) I pocket US$49/share gain (for now, … taxes are still due on that amount)
I pay tax on this profit, … actually on 67% of it, at my marginal rate of: let’s say 50% (this makes it simple, … my rate will perhaps be little different)
You Sir, your Ministry that is, as a result of my tax payment, pockets equivalent of US$16.42 Further still, I take my portion of the gain (equivalent of US$32.58), and I spend it, in Canada (mostly, of course, since I must admit, I spent 1-1/2 days in USA this year, … and I am not going there again this year)
So, all this activity is what you don’t want me to do. Of course if I still insist, since it is not illegal to do what I am doing, you are proposing following:
You consider my foreign stock (XYZ Inc.) as FIE for tax purposes, then under the scenario I presented above, I would have to pay tax on "mark to market" basis once a year even if I have not sold this investment, or "realized" the actual gain. Further still, at that point I would have to pay then tax at my top marginal rate, just as if the gains were investment or employment income, … and on 100% of the gain to boot (and not the 67% inclusion rate that now prevails).
Well, Sir, if this is what you proposing, and ultimately decide to implement into Canadian tax structure… I am quitting this game. I will no longer invest in FIE’s, I will forego the gains of US$49/share in my example, … I will pay no taxes to your Ministry, since tax on ‘nil’ is still ’nil’. I will also not release into the Canadian economy that exemplary equivalent of US$32.58 because I never earned it. Taking it further still, … I suspect that my marginal tax rate will decline somewhat, … and you, Sir, your Ministry, that is, will get fewer of my hard earned dollars.
Well, Sir, this is how I see this proposed tax changes, … and I don’t like them. I don’t like them as an individual, and I don’t like them as a Canadian. Why should I! This legislation will force down my standard of living as an individual, and this legislation will deprive my country, Canada, of influx of cash, which otherwise would stimulate an economy.
Sir, I am confused! I just don’t understand what you are trying to accomplish by this legislation. Perhaps, someone from your Ministry would care to explain this to me. I am ‘all ears’.