Is this a game of chess? As you may know the The Department of Finance has its eye on Horizons swap-based ETFs that provide incredible tax efficiency for those who invest in taxable accounts. There is no income to be taxed. The ETFs are designed to replicate the total returns of an index such as the TSX 60, but there are no distributions.
The Department of Finance released draft regulation on July 30th that (if passed) would eventually result in taxable distributions for unit holders after 2019. In that game of chess Horizons has brought out the big guns, lets say the Bishops or even the Queen to protect that tax efficiency.
Horizons will convert these ETFs to a corporate structure.
From this Advisor’s Edge article …
Toronto-based Horizons ETFs Management (Canada) Inc. has proposed merging 44 synthetic ETFs into a corporate-class structure in order to maintain the funds’ tax characteristics.
Here’s the list of Horizons ETFs that will be converted to the new structure.
When you run your funds inside a corporation they can share the expenses, gains and losses in income and capital from the different mandates under the single umbrella, which can create certain tax efficiencies.
The new corporation would only have to file one tax return and if it had to make distributions those distributions would be capital gains dividends. However, net income could be taxed at a higher level inside the corporation.
From that same article …
ETFs within a mutual fund corporation are not considered mutual fund trusts, meaning the so-called “allocation to redeemers” rule changes do not apply. Merging the ETFs into a new mutual fund corporation would “substantially reduce the likelihood of [income] distributions” and allow the ETFs to maintain their existing benefits, Horizons said in a release issued Friday.
The proposed rule changes will not apply to Horizons’ funds due to the wording of proposed legislation. Quite simply, or more specifically, the proposed legislation will not apply to Horizons ETFs as Horizons has stated they will move to another board, to a different chess game. They will no longer be in the Trust game, they’ll be on that Corporate board. The new rules simply will not apply.
Perhaps we can think of it as they’re no longer on the traditional chess board, they’ve moved to Sheldon’s 3-person chess board, where the rules are much different.
The question will be, will the Department of Finance follow them to that Corporate board? This might be a game of chess and now a game of chase.
And keep in mind that Horizons will play by the existing rules on that new board, in the Corporate structure. They will be on a level playing field with the nearly $160 billion of mutual funds already in that corporate structure and perhaps already enjoying certain tax efficiencies. And that game has been around for over 30 years.
If government agencies go into that space they’ll have to take on the big banks and many of the the mutual fund behemoths – perhaps the Kings in this game. These Kings are quite ‘politically connected’. More than that they’d have to change how corporations are taxed. It’s unlikely that law makers could go in and specifically target Horizons. Will government agencies go in and disrupt or shut down the whole corporate mutual fund structure?
Can you fight city hall?
Many would say that when the government wants to get you, they’ll get you. What’s that expression? “You can’t fight city hall.” Even by definition.
Is Horizons playing within the spirit of the guidelines? And that’s what it might come down to. The government agencies want that $350 million in extra income that they estimate they can generate with these rule changes over the next several years. The government wants to put an end to any favourable treatment of portfolio income and certain capital gains.
We have been here before when Jim Flaherty, the creator of the TFSA, clamped down on Income Trusts.
To add another interesting layer, Canada has a federal election in October. A new government might shred those proposed rule changes. The latest research from Nanos shows the Liberals and Conservatives locked in a dead heat.
Investors in Horizons funds might find many reasons to simply sight tight, to see how this all plays out.
And what about the bigger issues in the investment space?
But I also find it interesting how quickly the government agencies move when they’re looking to go after taxpayers and an investment firm that offers wonderful low fee investment products. I had penned on this previously with Instead of helping typical investors ravaged by fees, the government plays gotcha on total returns for the rich.
On the regulatory front, all they do is talk, talk, talk and spin in circles. This week I had offered …
Net net, Horizons states the move to a corporate structure will not create any tax event for existing unit holders and that any costs for the moves will be covered by Horizons. Horizons is there to help clients through the process.
Good luck to all.
First off thanks to Jonathan Chevreau for this article on MoneySense, The Pros and Cons of a Dividend Strategy. There’s always a lively debate on the value of the dividend and Jonathan offers up commentary from a few sources. In the end it certainly is about total returns, but dividends can play a meaningful role. You can make dividends matter, or not. Cut The Crap Investing made an appearance with Will Retiring Baby Boomers Destroy The Stock Market.
And here’s something we also considered, with 2 kids away at University, Being the landlord could save you thousands. We took a pass, we have our own home and family cottage properties that take up a lot of time and energy.
And Boomer and Echo delves into one of my favourite subjects with CPP Payments: How Much Will You Receive? That’s a wonderful comprehensive post that covers most of the moving parts.
And here’s a very interesting post and idea courtesy of MillionDollarJourney with Income Splitting Tax Strategy – Spousal Investment Loan.
On The Money Geek we discover that with respect to TFSA investment strategies 42% of us have it wrong.
And on TheHub, RBC InvestEase offers a closer look at their (ESG) Environmental, Social and Governance factor portfolio.
Thanks for reading. And remember sharing is caring. Hit those share buttons. 🙂