(September 7 – 16:35) – In response to investor outrage, the Department of Finance has modified its tax proposals for foreign investment vehicles. Foreign exchange-traded funds will no longer be caught by the rules.

Finance is now proposing that U.S. investment funds be considered “regulated investment companies” and excluded from the proposed new rules. To qualify as a RIC, an investment fund must annually distribute at least 90% of its income to its unitholders. This should include DIAMONDS, SPDRs and NASDAQ-100s. Finance says it “is continuing to explore whether other foreign-based funds should be similarly exempted”.

The department says stocks that are widely held and actively traded on a prescribed stock exchange and whose principal business is not an investment business will not be subject to the proposed rules. There was some concern that firms such as Microsoft or Berkshire Hathaway would be caught by the new rules.

It also says that the rules will be modified to ensure that they do not impact the cost amount of properties for the purposes of calculating the foreign content limit in RPPs and RRSPs. Employee stock options will not be subject to the proposed rules. The two-thirds inclusion rate will be extended to apply to “deferral amounts” in respect of capital property acquired after June 22, 2000.

Under the proposals, a “foreign investment entity” is defined as a non-resident entity whose investment properties have a carrying value of more than 50% of the total carrying value of all its property. Finance is now proposing that “investment property” exclude: real estate used in a business, shares held by a corporation that are shares of its own capital stock, a resource property used in a business, and indebtedness incurred in connection with a business and owing to a related person.

Modifications will also attempt to better define a “significant interest” in a corporation, partnership or trust for the purposes of the rules. Finance is also reviewing its definition of “carrying value”, and it is considering introducing an alternative method of valuing property in determining whether a non-resident entity is a foreign investment entity.
-IE Staff