DAK,
I may have confused reporting and taxation but as the IRS is murky on these issues you can blame them as well as me!
I may be wrong on the taxation of American Eagles, but I am certain the reporting on Eagles is different from non-American bullion. I am also certain that the IRS wording on this issue (the use of 'may be') creates confusion among tax preparers.
(from the article, if you want the graph, use the link. )
"For American investors capital gains tax is 28% for gold, as opposed to 15% for equities – a tax increase of over 86%!"
Introducing Central Gold-Trust
In July of this year a new gold exchange-traded-fund made its debut as Central Gold-Trust. Similar in many ways to the widely acclaimed Gold ETF offered by Gold Bullion Securities, Central Gold-Trust of Canada is actually a “self-governing unit investment trust”, controlled by its own voting Unitowners, that trades on the Toronto Stock Exchange (TSX) under symbol GTU.UN, and is planning for future application to the American Stock Exchange (AMEX) as well.
Gold-Trust has three major differences from other gold ETF’s both existing and proposed that make it more attractive for American and Canadian investors. The major differences with the Central Gold-Trust include:
Its voting owners govern the Trust.
The units qualify for regulated investment accounts like RRSPs and IRAs;
Gold-Trust units fall into a much lower capital gains tax rate category of 16% for Americans than the open-ended gold funds like Gold Bullion Securities and Equity Gold Trust.
Structure
Central Gold-Trust is the first self-governing gold bullion unit trust in North America. Holding Units in the Trust makes the holder a direct beneficiary in the Trust itself. Unlike Gold Bullion Securities and Equity Gold Trust, there is no minimum number of units for any registered holding.
The Deed of Trust for Gold-Trust requires that at least 90% of the assets be held in the form of pure, refined gold bullion. The current Board of Trustees policy further requires that at least an additional 5% of the assets are held in the form of gold bullion certificates, that can be easily liquidated for cash, if necessary, to cover any redemptions and expenses. All of the physical gold bullion holdings must be held on an unencumbered, allocated, segregated and insured basis at all times.
Gold-Trust is administered by Central Gold Managers Inc., a company that was formed in March 2003 solely for the purpose of administering the business affairs of the Trust. The annual administration expenses of the trust are fixed by contract to 0.4% for the first C$100 million in assets, 0.3% for the second C$100 million, and 0.2% for any additional assets under management of the trust. This fee is paid to the Administrator to cover all office expenses, investor communications and its own employee’s salaries. In addition to the Administrator’s fee, the Trust pays for insured bullion vault storage, TSX listing fees, Auditors, Lawyers and C$4000 per year, and C$1,000 per meeting for each of the independent trustees. The trustees appointed by the Administrator, J.C. Stefan Spicer and Philip M. Spicer are recompensed by the Administrator and do not receive any compensation from Gold-Trust.
Unlike the proposed Equity Gold Trust and Gold Bullion Securities of the UK, the pool of gold bullion underlying the trust shares can only be increased or decreased by making an additional offering of Units, or by Gold-Trusts repurchase of Units. In the words of Stefan Spicer, Central Gold-Trust is “closed on the front end and open on the back end.” Gold-Trust shares can only be redeemed for cash, not bullion.
The stated policy of the Board of Trustees will allow additional offerings to be made on the condition that they do not dilute the equity of the existing unitholders by a single penny. It is therefore possible for additional private or institutional parties to approach the Board about investing substantially more money into the Central Gold-Trust if the new investors are prepared to cover the entire cost of the additional offering, including any commissions and any audit, legal, listing and regulatory expenses.
While these differences from the other gold bullion securities on the market may seem minor at first glance, they significantly affect the Unit price and the tax implications for Americans and Canadians. Thus, the Units may be justified as trading at premiums.
In the case of an open-ended fund, the tax authorities generally classify that any capital gains from the sale of units as being in the same category as the underlying asset, which in this case is gold. The share price of a closed-ended fund can fluctuate above or below the market price of the underlying assets. If it trades at a higher price than its net asset value, then it is “trading at a premium.” On the other hand, if the share price on the exchange is below the net asset value, then the fund is “trading at a discount”.
This property of a closed-end fund actually guarantees that it will be treated as an equity rather than as gold bullion for tax purposes in the United States and Canada. For American investors capital gains tax is 28% for gold, as opposed to 15% for equities – a tax increase of over 86%!!! This discrepancy in the tax laws arises from a quirk in history – namely the fact that the IRS classified gold bullion as a collectible not long after FDR outlawed private ownership of gold coins and bars in the USA. Gold jewelry and collectibles were the only kind of gold that were legal from 1933 until 1971, and the neither the IRS nor Congress ever got around to reclassifying gold bars and coins as money after President Nixon closed the gold window and re-legalized private ownership of gold by Americans. Nor do they have any incentive to do so in the future.
Operating on the belief that exchanges of gold money for dollar money in the US are not subject to tax, bullion dealer Franklin Sanders found out the hard way that neither the IRS nor the various state revenue commissions look favorably on people who actually read and believe the clause in the U.S. Constitution about gold and silver money. Even American Gold & Silver Eagles, which are “Legal Tender” made by the U.S. Mint, are subject to sales taxes in most States; and bullion dealers are subject to capital gains tax on the exchange of Federal Reserve Notes for gold bullion and coins. So, it is by now firmly established that regardless of what the U.S. Constitution says, the IRS plans to continue taxing all forms of gold bullion as a “collectible” for the foreseeable future with no exceptions.
One of the pitfalls that the WGC’s open-ended Equity Gold Trust fell into was that it relied heavily upon a plan to petition the IRS to reclassify gold bullion as an equity investment rather than a collectible – something that hasn’t happened in over 50 years and is not likely to happen as long as the United States flag continues to fly over Washington, D.C. The IRS thus far has not shown any signs of cooperation with the Equity Gold Trust’s request. For obvious reasons this places the Central Gold-Trust at an advantage over the open-ended ETF's such as Gold Bullion Securities and the Equity Gold Trust in attracting the investment dollars of US-based institutions and investors.
Mr. Spicer said, “Central Fund of Canada Limited” has been listed on both the TSX as CEF.A and on the AMEX as CEF since 1986. It is our planned intention to seek a listing on the AMEX for Central Gold Trust as well. This will make Gold-Trust easily available to American investors and institutions.”
Net Asset Value (NAV)
Unlike some of the gold ETFs that recently hit the market, the Central Gold-Trust does not attempt to provide a complex formula for determining exactly how much gold is represented by each unit of the trust. Instead the Administrator provides a web page where the Net Asset Value statistics for the trust are updated daily. (http://www.gold-trust.com/latest_value.htm)
At this writing, the trust has 2.3 million outstanding units backed by 87,200 ounces of gold and C$1.57 million in cash, for a net asset value per unit of C$20.96. The latest close on the TSX was C$22.25, which indicates that the fund is trading at an 6.2% premium over its asset value. For those dying to know, each unit is currently backed by about .037 fine ounces of gold, not counting the cash in the fund.
Management
The Central Gold Trust was the brainchild of Philip M. Spicer and J.C. Stefan Spicer, the Chairman and CEO of Central Fund of Canada Limited respectively, which was founded by Philip Spicer in 1961 and is the world’s oldest gold and silver bullion exchange tradable fund. The Spicer family has administered the Central Fund of Canada continuously for the past forty-two years, making them arguably the foremost experts on bullion fund management - a field with very few competitors until recently.
According to Mr. Spicer, “Central Fund of Canada already provides an exchange traded fund that is roughly half gold and half silver bullion by value, but there seemed to be a growing demand in the market for a 100% gold bullion product. That is why we created the Central Gold-Trust.”
The Spicers and their legal team worked for a full year to arrive at what they considered to be the perfect trust structure for their gold ETF before they filed their initial application with the TSX last spring. They apparently did their homework well, because Gold-Trust was approved by the Canadian regulatory authorities within a few months and they then launched its IPO for listing on the TSX in early July of this year. In fact the IPO was so successful that Gold-Trust had to issue an over-allotment within a few weeks. As the following chart shows the exchange-traded price soared in the weeks following the IPO, though it has now returned to a reasonable premium of 6.2%.
A brief biographical description of the principal officers and directors of Gold-Trust is available in the prospectus for the company.
J.C. Stefan Spicer is the President and Chief Executive Officer of Central Fund of Canada Ltd., a publicly traded gold and silver bullion investment company listed on the American Stock Exchange and the Toronto Stock Exchange. He is also Chief Investment Officer of All-Canadian Management Inc. (a mutual fund manager).
Philip M. Spicer is the Chairman of Central Fund of Canada Ltd, which he formed in 1961. He has been a longtime analyst of markets, monetary systems and gold. His career has included being a part-owner and director of Canadian stock brokerage and investment dealer firms, a Registered Investment Counsel and portfolio manager. More recently, he has been a private consultant to financial businesses.
Governance
According to the Deed of Trust, “The gold held for Gold-Trust may not be delivered by the bank custodian for any sale or other purpose without receipt of a certified resolution of the Board of Trustees specifying the purpose and giving direction in respect to specific amounts.
“No Trustee or Officer of Gold-Trust may enter the vault storage facility area of the bank (CIBC) where gold is held on behalf of Gold-Trust without being accompanied by a representative of the firm of auditors appointed as Auditors of Gold-Trust and by two officers of the bank where Gold-Trust’s gold is stored.
“The gold shall be audited annually and spot audited on occasion by bar number, refiner, weight and purity in the presence of a Trustee or Officer of Gold-Trust, at least one representative of Gold-Trust’s Auditor and two bank representatives.”
According to Mr. Spicer, Gold-Trust has its own locked cage in the bullion vault of CIBC where all of the bullion for the trust is stored in the form of 400 ounce Good Delivery Bars. CIBC’s vault is several stories underground and is equipped with the highest security features such as a mechanism that sucks all of the air out of the vault after the doors are closed at the end of the day. That and other security features make it an extremely complex and difficult prospect for anyone to drill into the vault from the outside .
According to Mr. Spicer he goes personally with the auditors, Ernst & Young, and the bank custodians to inspect the bullion and count the bars at least annually plus occasional spot audits. While the fund does not publish the actual gold bar count, it does publish total ounces held every business day on its website www.gold-trust.com and in quarterly statements that are signed by the same accounting firm that audits the bars in the vaults.
Conclusion
It appears that the Spicer family has already succeeded where the World Gold Council has yet to succeed, by making a self-governing exchange-traded gold equity trust available on the TSX that qualifies for regulated accounts such as RRSPs and IRAs and can be purchased by Canadian and US investors and institutions without incurring extra tax penalties. We will watch the growth of this fund with interest…
goldeconomy.com
and this article on confusion among dealers (I can imagine the confusion as to whether GoldMoney's goldgrams are paper assets, foreign currency, or foreign bullion). Since GoldMoney is not Eagles, Maple Leafs or Kruggerands if it is foreign bullion each sale must be reported.
mcalvany.com
David |
