With the federal budget set to be tabled on Thursday, the Canadian ETF Association has two recommendations for improving the competitiveness of Canada’s exchange-traded fund industry and levelling the playing field with the United States.

CETFA proposed the creation of a Maple Investment tax-free savings account (TFSA) and urged the government to bring back a pre-2022 taxation system for ETFs. The organization cited “competitive challenges” facing the Canadian ETF market, with the U.S. ETF market launching about three times as many new products as Canada since 2015.

Canadian investors currently hold about $300 billion in U.S.-listed ETFs, representing roughly just over a quarter of the $1.15 trillion in total ETF assets held by Canadians, according to CETFA’s written submission for pre-budget consultations in August.

“We’re on the brink of a serious issue, and if we don’t get ahead of the ETF share issue, in 15 or 20 years it’s not out of the realm of possibility that we’re going to see a hollowing out of our ecosystem,” said Eli Yufest, CETFA executive director. He added that the amount Canadians hold in U.S. ETFs has grown by roughly $100 billion in just two years.

CETFA’s recommendation of a Maple Investment TFSA is for a new TFSA category to be designed to encourage Canadians to invest in Canadian-listed stocks and ETFs, with a federal matching grant of up to $1,000 for households earning under $90,000 a year. Investors would not be eligible for the grant if they were to invest in a U.S.-listed product instead, said Yufest.

Yufest said the proposed Maple Investment TFSA has a dual purpose: to encourage Canadians to invest more of their savings instead of holding them as cash by calling it an Investment TFSA and to incentivize Canadians to invest at home.

The $1,000 government match could also be adjusted to a different rate, or Ottawa could test it out with a lower-cost pilot, such as a 20 per cent match instead, according to the CETFA proposal.

Such a program would cost the government tax revenue, but could present an upside to Canadian companies that could see higher levels of investment, Yufest said.

“There is a cost, but we don’t believe it’s prohibitive enough to not consider the idea, and frankly, we can’t think of a better time, given all the geopolitical noise,” he said. “We need to figure out how to stem the flow to the U.S. (and) think about how to repatriate the money.”

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CETFA’s other recommendation is around capital gains taxes on ETFs. In 2022, the Canada Revenue Agency implemented a change in the system, so that when one investor sells ETF units and triggers a capital gain, that gain is distributed across the remaining unitholders (including buy-and-hold investors) rather than just by the one investor who sold. This means the other unitholders could be taxed on gains they did not realize.

“They haven’t triggered any capital gains, so they shouldn’t be paying someone else’s taxes,” Yufest said, adding that this taxation policy does not exist in the U.S., making American funds more competitive.

“We have to level the playing field with the U.S.,” said Yufest.

Serah Louis is a Toronto-based reporter at the Financial Post who writes wealth-building stories for young people, explainers on complex financial topics and the latest news on the Canadian economy.