Estate planners call for overhaul of foreign tax rule

(March 18, 2004) The federal government must redraft its proposed rules on the taxation of foreign investments, says the Society of Trust and Estate Planners (STEP), calling the current draft legislation seriously deficient and virtually incomprehensible.

The legislation is an attempt to eliminate any tax advantage gained from investing in foreign-based funds and non-resident trusts. It was first introduced in the 1999 federal budget, but has been amended several times, most recently in October 2003.

The revised draft — now containing 150 pages of definitions and 200 pages of explanations — still has not been passed into law, even though it’s retroactive to January 1, 2003.

“The rules are complex and virtually incomprehensible,” STEP said in a news release. “We cannot allow our tax system, which is based on voluntary compliance, to become infected with rules which are incapable of compliance and enforcement.”

Despite the legislation’s stated intention to create a level playing field for the taxation of foreign and domestic funds, the draft rules actually create the potential for overtaxation and double taxation of foreign investment income, STEP believes.

“The rules do not adequately measure the foreign income which should be reported and produce arbitrary income figures that penalize Canadians for investing via the foreign entity,” adds the society, composed of 2,000 lawyers, accountants, advisors and trustees involved in estate planning.

“We urge you to consider a different and simpler framework for the foreign investment entity rules,” STEP says in a letter sent to the prime minister last week.

The non-resident trust rules are designed to prevent Canadians from setting up offshore trusts while avoiding Canadian tax. But those regulations are also flawed, STEP says, since they contemplate Canadian taxation of foreign source income to non-residents, which may be unenforceable and a violation of international tax treaties.

The retroactive nature of the legislation is also a concern for STEP, since the rules are technically applicable to the 2003 tax year, although experts say there’s no requirement to follow legislation that is not yet law.

“Canadian taxpayers and their professional advisors are not equipped to deal with the complexities of the legislation,” STEP says, urging postponement of its introduction until a “fair, equitable and practical” set of rules can be developed.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com