FOOL ON THE HILL: An Investment Opinion
The Canadian government is proposing to tax certain unrecognized foreign investment gains as ordinary income. While the proposal is an effort to catch tax dodgers, it will penalize average Canadian investors by taxing them on the appreciation of Foolish investments like U.S. index funds -- even if the investment isn't sold. Bill Mann has a call to action in today's Fool on the Hill. Also, on a sad note, Fools mourn the loss of a community member.
If a currently proposed Canadian tax amendment goes through, our investing friends to the north will have to pay an annual tax on mutual funds and other types of equity investments that are traded on foreign exchanges, including those in the United States.
Canadian law is currently similar to American and other nations tax laws in this regard, where investors must only pay capital gains tax on realized gains (meaning only upon the sale of an appreciated security). But Canadian Finance Minister Paul Martin released language this June that would tax as ordinary income on the increase of value of foreign entities that are designed to track returns earned on investment properties.
The way this is written, Canadians will be taxed on their gains each year for any U.S.- based mutual funds they hold, including index funds and exchange traded funds such as Spiders (Amex: SPY). Moreover, Canadians would be taxed on holdings on certain individual securities with a majority of their assets in other investments. This would then include Berkshire Hathaway (NYSE: BRK.A), CMGI (Nasdaq: CMGI), and Wesco (NYSE: WSC).
The rationale for this change in law is simple: the Canadian government is concerned with abuse by wealthy Canadians who set up trusts in offshore tax havens and dodge Canadian tax. But because the U.S. investment entities are not required to provide T5 tax slips to Canadian investors, the government changed course and added U.S.-based investments to the list.
One of the core Foolish reasons for investing in index funds or individual equities is to reduce tax friction. If Canada pushes through with this absurd proposal, the tax rate on gains will send Canadian money formerly held in efficient instruments such as Vanguard Funds, QQQs (Amex: QQQ), or certain individual equities will go scurrying back above the border. This curtails choices for individual Canadian investors, and it lessens their access to some of the most compelling, safer equity investments in existence -- all in an effort to catch scofflaws.
As it is, there are seven things wrong with Canada. They are, in order: taxes, taxes, taxes, taxes, taxes, taxes, and the weather. We see story after story of Canadian hockey clubs being forced to relocate south due to onerous taxes, of the brain drain as Canadian leading-edge companies and individuals escape the competitive disadvantage of leaving so much in the government till each year. Canada, you have some of the brightest corporate stars out there in Nortel (NYSE: NT) and JDS Uniphase (Nasdaq: JDSU), as well as some could-have-beens such as Corel (Nasdaq: CORL). Quit penalizing your citizens. Quit getting your best tax ideas from Sweden. Quit taxing air.
And to Canadian citizens and other interested parties: comments on the proposed amendment can only be made before September 1. That's Friday. I urge you to send a personal note to the Finance Minister at [email protected]. Toronto resident Bylo Selhi (not his real name) has maintained a website at www.bylo.org that contains a wealth of information about this proposal.
News of the Weird
I came across a news piece the other day that I have to share. ZDNet columnist Sergio Non penned a modest proposal for a useful last hurrah for the doomed Iridium satellites, which Motorola (NYSE: MOT) has scheduled to release from orbit, causing them to burn up. Mr. Non said that the investors should at least get some value from this coda to the Iridium sage by allowing them to drop a satellite on Those Who Deserve to Have Satellites Dropped on Their Heads. It is wickedly funny stuff.
A Sad Time for Fools
The Fool Community was saddened by the passing of one of its own, as David Feinman, known in the Fool Community as FourStarDave, passed away suddenly over the weekend from a heart attack.
Like many of those who passed along their condolences to Dave's family, I only ever met him in the context of The Motley Fool website. And again, like most, the majority of my contact with Dave was indirect, through the funny, insightful and personal perspective that he displayed in his writing. Dave shared his comedy (he was a stand up comedian, or "comic and typist" as stated on his business card), his love of horse racing, his poetry.
There's an inherent danger for the eulogist of completely missing that which will make Dave so missed by his friends. Dave was not always polite he called it like he saw it, so to speak of him as a saintly character would miss the point. Dave instead was unfailingly fascinating. He gave freely of himself, and in so doing let Fool Community members see what kind of person he was.
There may have been others in our community who have passed on. In fact, it is undoubtedly so. In many cases these people simply disappear. In cyberspace, with its lack of physical constraints there is rarely such thing as a farewell party. FourStarDave is the first Fool who we have lost that we know about. I share the appreciation expressed by many of his friends here that his wife would remember to allow us to join her in grief.
Dave's funeral is on Thursday at the Hillside Memorial Park in Culver City, CA, at 4:00 p.m. There will be hundreds of us who cannot attend who join in thanking Dave for sharing himself with us. His family has requested that donations be made to the American Heart Association. Since the site requires an address to send a notification, please use the Fool's c/o Jerry Thomas, 123 N. Pitt St., Suite 300, Alexandria, VA 22314, and we will forward it to the family.
I thought I might organize a Man Enough to Wear a Dress day at the Fool to show our appreciation for Dave (those unfamiliar with the origin of this should read the retrospective compiled by another community member), but I dont think I've got it in me. Maybe we can all just shave our legs.
Fool on, 4*. Hope to see you at Churchill Downs some May.
-- Bill Mann, TMF Otter on the Fool Discussion Boards