Proposed tax changes will snuff out ETFs

Young says he was surprised to learn that legislative proposals introduced in late June would effectively kill the ETF phenomenon for Canadian investors. Canadian-based ETFs, such as the iUnits traded on the Toronto Stock Exchange, will not be affected by the proposed changes — but all the popular U.S. ETFs would become useless to Canadian investors. The proposed rules, released without fanfare, are out for comment until September 1, with the plan that they’ll become law early next year.

If the proposals are passed as currently construed, investors would count up their gains and losses on U.S. ETFs once a year. This amount would then be taxed as income. Investors would have to pay tax on 100% of the amount, not the 67% charged on typical capital gains. This would keep any sane investor from using the products.

Finance’s ostensible goal is to make it unpalatable for Canadians to stash assets offshore, but the proposed inclusion of ETFs, which are used by retail investors as a cheap alternative to mutual funds, smacks some as protectionism for the Canadian mutual fund industry. Chat rooms around the Internet are burbling with outrage at the proposed move.

Without this change, Young suggests that, “ETFs could become an important part of every advisor’s practice in a year or two.” ETFs are good for consumers because they mean lower costs, and they make a good alternative for advisors whose clients are fed up with paying the large fees that some funds carry. However these tax changes will snuff out ETFs, he says, hurting investors and advisors alike.