Investing

Horizons ETFs Assessing Impact of Proposed Federal Tax Changes

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  • May 25th, 2020 7:05 am
Deal Addict
May 22, 2003
4419 posts
1923 upvotes
Vancouver
I received my documents today. Now I have to send a copy to the bank to get them to change my book cost.
Deal Addict
Jul 15, 2009
1795 posts
904 upvotes
After you send the T2057 to the CRA, do they provide any confirmation that they've received and processed it, or do you just have to hope they don't lose it?
Member
Dec 26, 2013
438 posts
136 upvotes
Northern Ontario
Just read through this thread, can someone summarize the changes? Are swap based ETFs being phased out?
Jr. Member
Jun 17, 2018
103 posts
78 upvotes
Hamilton, Bermuda
wilyam wrote: Just read through this thread, can someone summarize the changes? Are swap based ETFs being phased out?
ETFs are now share classes in a corporate structure. Investors had to file a form with the CRA to ensure that the change wouldn't trigger a taxable event (deemed sale of ETFs).
Going forward, Horizons expects the ETFs to have the same tax efficiency as they did before the change (ie swap structure so no distributions, total return gets capitalized in NAV).
More details: https://www.horizonsetfs.com/news/Press ... eorganizat
Member
Dec 26, 2013
438 posts
136 upvotes
Northern Ontario
Is it true that with swaps you are not just deferring taxes but saving on taxes since the dividends are being taxed as capital gains when they are realized? Another question, in a taxable account when you pay income tax on dividends in a non swap ETF each year, are they taxed again when they are realized years down the road?
Jr. Member
Jun 17, 2018
103 posts
78 upvotes
Hamilton, Bermuda
wilyam wrote: Is it true that with swaps you are not just deferring taxes but saving on taxes since the dividends are being taxed as capital gains when they are realized?
Yes that's true.
wilyam wrote: Another question, in a taxable account when you pay income tax on dividends in a non swap ETF each year, are they taxed again when they are realized years down the road?
Dividends are taxed only when they are received and they don't impact your capital gain when you sell the non-swap ETF. Capital gain will be the difference between your selling price and your cost (ACB).
Member
Dec 26, 2013
438 posts
136 upvotes
Northern Ontario
Post budget, does anyone on here think differently about owning swaps and the risk that comes with them? It sounds like things faired better than first thought, but damn, reading this thread from start to finish even stressed me out and I dont own any swaps. Im looking for something to put in my non-registered account and cant decide if these swaps are right for me. The stress in this thread reminds me of an LSIF I owned years ago that had its redemptions frozen and all I could do was sit back and watch my principal dwindle. Im starting to think the tax savings that come with swaps aren’t worth the stress and uncertainty
Deal Addict
Jan 18, 2014
1417 posts
444 upvotes
Rouyn-Noranda
wilyam wrote: Post budget, does anyone on here think differently about owning swaps and the risk that comes with them? It sounds like things faired better than first thought, but damn, reading this thread from start to finish even stressed me out and I dont own any swaps. Im looking for something to put in my non-registered account and cant decide if these swaps are right for me. The stress in this thread reminds me of an LSIF I owned years ago that had its redemptions frozen and all I could do was sit back and watch my principal dwindle. Im starting to think the tax savings that come with swaps aren’t worth the stress and uncertainty
Way I see it, you really have to have a lot of money to see any significant difference.

Let's say you have $100,000 in a taxable account invested in XIU at a yield of 2.8%.
That's $2800 / year in dividends, most of them eligible for dividend tax credit.

At my income level, those dividends are taxed at 32%.
So you'd pay 32% of $2800 = $896 in taxes.

If you held HXT instead and the value of your stock went up by the same amount as the dividend yield, so $2800, and you sold that $2800 as capital gains,
at my income, that capital gain is taxed at 24%.
So you'd pay $672$.

So $896 minus $672 = $224 in tax savings, on a $100K portfolio. Not a lot.
Newbie
Jun 22, 2001
90 posts
37 upvotes
I got T5008 for the sell/buy they did to switch over. Can I ignore this slip if I've filled out all the forms and sent it to the CRA and Horizon's already?
Jr. Member
Jun 17, 2018
103 posts
78 upvotes
Hamilton, Bermuda
John47 wrote: Way I see it, you really have to have a lot of money to see any significant difference.

Let's say you have $100,000 in a taxable account invested in XIU at a yield of 2.8%.
That's $2800 / year in dividends, most of them eligible for dividend tax credit.

At my income level, those dividends are taxed at 32%.
So you'd pay 32% of $2800 = $896 in taxes.

If you held HXT instead and the value of your stock went up by the same amount as the dividend yield, so $2800, and you sold that $2800 as capital gains,
at my income, that capital gain is taxed at 24%.
So you'd pay $672$.

So $896 minus $672 = $224 in tax savings, on a $100K portfolio. Not a lot.
All this math would be absolutely right if an individual intended to have a holding period of 1 year. However, most people hold ETFs for much longer periods than this. In your example, the individual holding XIU is indeed hit with a tax bill annually for his 100k investment. The individual holding HXT isn't hit until he sells... That results in further compounding of their investment.

Assume someone earns 100k annually in Ontario (marginal tax rate of 25.38% on eligible dividends, 21.71% on capital gains). Holding period is 10 years and total return is 6%, with 3% in dividends for XIU.

He invests 100k in XIU (and reinvests all after-tax dividends):
Ending value: 100k*(1+6%-3%*25.38%)^10 = $166,629
He also has to pay tax on $38,157 capital gains, so that's minus $8,284$ in capital gains tax.
His investment has grown to $158,345 in 10 years. That's an after-tax return of 4.70% annually.

If he invests in HXT rather:
Ending value: 100k*(1+6%)^10 = $179,085
He then pays $17,169 in capital gains tax.
His investment has grown to $161,915 in 10 years. That's an after-tax return of 4.94% annually.

That's a 0.24% incremental return over 10 years, not bad. Also consider that there's reduced cash drag and less tracking error due to swap.
Member
Mar 15, 2011
467 posts
124 upvotes
Toronto
gparadis01 wrote: All this math would be absolutely right if an individual intended to have a holding period of 1 year. However, most people hold ETFs for much longer periods than this. In your example, the individual holding XIU is indeed hit with a tax bill annually for his 100k investment. The individual holding HXT isn't hit until he sells... That results in further compounding of their investment.

Assume someone earns 100k annually in Ontario (marginal tax rate of 25.38% on eligible dividends, 21.71% on capital gains). Holding period is 10 years and total return is 6%, with 3% in dividends for XIU.

He invests 100k in XIU (and reinvests all after-tax dividends):
Ending value: 100k*(1+6%-3%*25.38%)^10 = $166,629
He also has to pay tax on $38,157 capital gains, so that's minus $8,284$ in capital gains tax.
His investment has grown to $158,345 in 10 years. That's an after-tax return of 4.70% annually.

If he invests in HXT rather:
Ending value: 100k*(1+6%)^10 = $179,085
He then pays $17,169 in capital gains tax.
His investment has grown to $161,915 in 10 years. That's an after-tax return of 4.94% annually.

That's a 0.24% incremental return over 10 years, not bad. Also consider that there's reduced cash drag and less tracking error due to swap.
What about investing $100000 in a high interest savings account vs. HSAV?
Deal Addict
Jan 18, 2014
1417 posts
444 upvotes
Rouyn-Noranda
gparadis01 wrote: All this math would be absolutely right if an individual intended to have a holding period of 1 year. However, most people hold ETFs for much longer periods than this. In your example, the individual holding XIU is indeed hit with a tax bill annually for his 100k investment. The individual holding HXT isn't hit until he sells... That results in further compounding of their investment.

Assume someone earns 100k annually in Ontario (marginal tax rate of 25.38% on eligible dividends, 21.71% on capital gains). Holding period is 10 years and total return is 6%, with 3% in dividends for XIU.

He invests 100k in XIU (and reinvests all after-tax dividends):
Ending value: 100k*(1+6%-3%*25.38%)^10 = $166,629
He also has to pay tax on $38,157 capital gains, so that's minus $8,284$ in capital gains tax.
His investment has grown to $158,345 in 10 years. That's an after-tax return of 4.70% annually.

If he invests in HXT rather:
Ending value: 100k*(1+6%)^10 = $179,085
He then pays $17,169 in capital gains tax.
His investment has grown to $161,915 in 10 years. That's an after-tax return of 4.94% annually.

That's a 0.24% incremental return over 10 years, not bad. Also consider that there's reduced cash drag and less tracking error due to swap.
All good points.
Jr. Member
Jun 17, 2018
103 posts
78 upvotes
Hamilton, Bermuda
GreenFinGirl wrote: What about investing $100000 in a high interest savings account vs. HSAV?
I'm kind of hoping no one intends to hold HSAV for a very long period. I would simply compare these to estimate the total holding period return:
Return on HSAV = [100k * {HSAV yield - MER} - trading fees] * (1 - marginal tax rate/2)
Return on HISA = 100k * HISA rate * (1 - marginal tax rate)
Member
Apr 11, 2007
291 posts
516 upvotes
Toronto
owned wrote: I got T5008 for the sell/buy they did to switch over. Can I ignore this slip if I've filled out all the forms and sent it to the CRA and Horizon's already?
+1.
Can we ignore the T5008 if we already sent the section 85 form to the CRA?

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