The 30 per cent debacle

All the uncertainty over whether the 30 per cent foreign content rule will actually be scrapped or will die in a snap electron is sending chills down the spines of some investors who acted immediately when Finance Minister Ralph Goodale announced the plan in his February budget. Here’s an e-mail I received last week:

One reader wrote last week to say he had moved the foreign content in his mutual funds to the 40 per cent to 45 per cent range on hearing the news and is now very worried.

Of course, I do not make policy for the Government of Canada nor am I a spokesperson for the Government. All I can do is to convey what the folks in the Canada Revenue Agency and the Department of Finance tell me and offer my interpretation of what it all means. I can give no guarantees.

Calm is best
That said, my message to our worried reader is simple: Chill. The foreign content rule is dead. You will not be penalized. Unfortunately, it may take some time for all of this to work its way through the system so if you’re still uneasy you may have to live with that feeling for up to a year.

The position of the Canada Revenue Agency is unchanged om the one I previously reported here and it is supported by officials in the Department of Finance. The 1 per cent penalty tax on foreign content in excess of 30 per cent no longer applies, and has not applied since Jan. 1. The CRA will not collect this tax and will rebate any money that is sent to it.

That is the official line. Now for the caveats and the nuances. As you might expect, no one in the public service takes any responsibility for what politicians may or may not do in the future and no one wants to speculate on various “what if” scenarios. One CRA spokesperson told me that although the agency is acting on the assumption the legislation will pass, “it is up to each institution whether to apply the rule and collect the penalty”.

When I pointed out that this was akin to saying that the CRA was abdicating its responsibilities in this field, he expressed frustration about the whole situation saying that it “puts us in a difficult situation”.

Actually, it shouldn’t. As I have said before, historical precedent is that the CRA implements budget policies as soon as the Finance Minister says they are to take effect. All the agency is doing now is applying the same policy as in the past.

Privately, no one in Ottawa that I spoke to seems to feel there is any chance that this measure will not eventually be passed. If there is a snap election and the Liberals are re-elected, they would certainly bring it back in their first budget. If the Conservatives win, there is no reason to believe they would go back to the old rule, which would seem to run counter to their basic policies. An NDP victory is about the only thing people would need to worry about and what are the odds on that happening?

Election could lead to delays
But, of course, an election before the budget measure is passed would delay matters. No matter who won, we would not likely see a new budget until the fall and the enabling legislation would not finally be approved until about a year from now.

In the meantime, some financial institutions may continue to collect the monthly 1 per cent penalty interest on accounts over the 30 per cent rule, although why they would insist on doing this is a bit puzzling. The CRA has stated flatly that it is not collecting the tax and does not want the money.

So your brokerage firm or bank is under no obligation to keep imposing penalty interest. If they are doing so, it is for one of two reasons: they can’t retool their software without incurring major expense or they want to have the use of some of your money for a while.

Don’t dismiss that last point too quickly. Most financial institutions collect the penalty tax monthly but (little-known fact) they are required to remit the proceeds to the CRA only once a year, on March 31. In the meantime, your money sits in the account of the company that holds your plan.

A second spokesperson at CRA told me: “If any money is remitted by financial institutions to the CRA, it will be refunded.” That means it should eventually find its way back into your account. But life would be simpler for everyone if financial institutions simply took the Canada Revenue Agency at its word and stopped enforcing the foreign content rule. As the folks in Ottawa say, if, for some reason, the measure never becomes law “we’ll deal with it then”.