The deadline for submitting comments on the Department of Finance’s proposals to make the CCRA’s infamous “REOP” policy into law as a formal part of the Income Tax Act is drawing near. Advisors need to make sure they contact their respective industry organizations immediately if they wish their voices to be heard. Finance has asked for industry comments by December 31.

“If this legislation is passed as is,” says Jamie Golombek, chairman of IFIC’s taxation working group and VP of tax and estate planning of AIM Trimark Investments, “it will severely limit or possibly eliminate the deduction of interest on money borrowed to invest in shares or equity funds.”

Several industry organizations are submitting comments. Some examples include: the Investment Funds Institute of Canada, Advocis, the Conference for Advanced Life Underwriters and the Canadian Life and Health Insurance Association.

“We’re looking at the new rules and surveying our members,” says Ron Sanderson, director of policyholder taxation at CLHIA in Toronto.

CALU is in the process of finalizing its submission, says Ted Ballantyne, director of advanced tax policy for the Conference for Advance Life Underwriting.

Since many of the issues involved in the legislation cut across many industries, says Sanderson, groups other than those representing financial advisors will be weighing in too. Detailed comments are expected from the Joint Committee of the Canadian Bar Association and the Canadian Institute of Chartered Accountants.

For 20 years, the CCRA disallowed certain taxpayers’ losses on the grounds that the taxpayer/investor had no reasonable expectation of profit. In two landmark 2002 cases, the Supreme Court of Canada threw out the CCRA’s use of this policy to measure the viability of business and investment endeavours.

Now Finance, which writes federal tax law, wants to bring in legislation that will overthrow the SCC’s decisions by introducing a new reasonable expectation of cumulative profit test. The amendments are expected to apply to the taxation year beginning Jan.1, 2005.

Golombek is concerned that if the new legislation is passed, it will be virtually impossible for investors who borrow money to purchase dividend-paying investments to pass the cumulative profit test. For example, Golombek gives the example of an investor who buys a stock yielding a 2% dividend today with borrowed money at a 4% interest rate. Assuming the price of the stock increases each year by 7%, he says, it would take approximately 20 years of holding the investment to make a cumulative profit since this profit does not include the ultimate capital gain upon disposition.

Most investors make regular changes to their portfolio and do not want to hold on to particular investments for so many years. Therefore, he says, any losses investors attempt to write off as a result of interest deductibility could be disallowed by the CCRA.

He questions how the CCRA will define “reasonable” with respect to their expectations. (In the past, the agency was renowned for setting arbitrary time limits for businesses to make profits. For example, real estate developments generally had to make a profit, under the REOP policy, within five years.)

Golombek points out that the proposed legislation contradicts a statement in the press release that accompanied it: “These measures will reaffirm many current practices that support the deductibility of interest, including those relating to the deductibility of interest on money borrowed to purchase common shares.”

The contradiction implies that the CCRA will administer in a manner that is different from the law, as proposed by Finance. You can’t run a tax system that way. This will be one of the main points in IFIC’s submission, says Golombek