# Horizons ETFs Assessing Impact of Proposed Federal Tax Changes



## larry81 (Nov 22, 2010)

> Horizons ETFs has determined that the exchange traded funds listed on the table below (the "ETFs") could be impacted by the changes after their 2019 taxation years.


https://www.newswire.ca/news-releas...f-proposed-federal-tax-changes-810019953.html

The party is over !


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## leeder (Jan 28, 2012)

Booo... that sucks! Horizons says it will likely not have an impact to the 2019 taxation year. That said, should people look to start selling these now (some time this year)?


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## AltaRed (Jun 8, 2009)

Depends. It may end up being a regular ETF that pays distributions going forward. What would you re-invest your money in? A Vanguard, or BMO, or iShares equivalent?


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## OptsyEagle (Nov 29, 2009)

They got off easy, if you ask me. They were blatantly flying in the face of what past tax changes, by the Finance Department, were trying to achieve. They knew what Ottawa thought of these practices and continued to do them. 

I would have ripped them a new one, if I was Finance Minister


(oh and I would have balanced the budget. lol.)


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## OptsyEagle (Nov 29, 2009)

One more thing to anyone that already owns these ETFS. I do not.

If I owned it I would start researching now about what kind of taxable distribution might come out of these things in its very first year. To be honest, I have not got my head around exactly what they were doing, but my concern that they already might have a very, very, large unrealized capital gain built up inside the ETFs, that they may need to realize when they unwind the swaps or futures or whatever contracts they were using to do their tax thing.

The reason that might concern me is, you might currently be only sitting on a small gain or even a loss, but might receive a capital gain distribution equal to double digit percentages of the value of your investment, that you will be forced to pay capital gains taxes on. It might be much easier on your taxable backside to simply sell them BEFORE that distribution is issued. I have no idea, but I doubt Horizions is going to tell you about that because if they did, that is exactly what you would do and that is exactly the opposite of what they would want you to do. Certainly no one would be buying them but I suspect that boat has sailed already.

You might find the information you need in the ETFs annual reports. Probably in the notes, maybe somewhere else. 
It's something I would be thinking about anyway, but I have always been kind of opposed to paying more taxes then I need to.


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## JAEW (Feb 15, 2019)

Thanks CMF, never would have known of this without you.
As a current owner of Horizon ETFs, OptsyEagle comments make me nervous. Mine are held in a TFSA and I would like to avoid any potential US taxes. 
I'll do a bit of research but my initial reaction would be just to sell and move onto something else. Not worth the risk.


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## Beaver101 (Nov 14, 2011)

^


> As a current owner of Horizon ETFs, OptsyEagle comments make me nervous.* Mine are held in a TFSA* and I would like to avoid any potential US taxes.


 ... ???? what's the tax impact in a TFSA on these investments???? I think the budget is referring to investments in a non-registered account.

As for potential "US" taxes, I only see withholding taxes on US investments within a TFSA unless I missed something.


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## larry81 (Nov 22, 2010)

AltaRed said:


> Depends. It may end up being a regular ETF that pays distributions going forward. What would you re-invest your money in? A Vanguard, or BMO, or iShares equivalent?


BMO ZDB is the next "bext" option from a tax saving viewpoint.

Loonie Doctor has a good article comparing the two options
http://www.looniedoctor.ca/2018/06/08/hbb-bond-etf-ccpc-corporate-account/

Personally, this will also change my general tax saving strategy, i will surely move my fixed income positions in my registered accounts instead of holding HBB in my non-registered account. So probably end up with a combinaison of VAB in RRSP and ZDB in non-registered...


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> JAEW said:
> 
> 
> > ... As a current owner of Horizon ETFs, OptsyEagle comments make me nervous. Mine are held in a TFSA and I would like to avoid any potential US taxes ...
> ...


 ... and the risk is for the US versions that the distribution that starts being paid is classed as dividends. The IRS would then then their slice which is not recoverable in a TFSA. Potentially worse, there could be one big catch up payment so that though one owned it for a year or so, the payment may go back to when it first started (similar to a MF or ETF owner buying in Dec so that the full amount of annual distributions are taxed).

If the unwinding means a big capital gains distribution that OptsyEagle suggests then the IRS is out of the picture for that part but possibly in the picture for going forward, dividend type distributions.


Cheers


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## AltaRed (Jun 8, 2009)

I don't understand this. Are Horizon ETFs not Canadian domiciled ETFs? If so, surely IRS has nothing to do with the structure and how recurring income is treated between Horizon and the investor. Whatever was due IRS has already been taken care of by Horizon on an ongoing basis.


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## AltaRed (Jun 8, 2009)

larry81 said:


> Loonie Doctor has a good article comparing the two options
> http://www.looniedoctor.ca/2018/06/08/hbb-bond-etf-ccpc-corporate-account/


That doesn't look like a terribly serious website to me. What are the credentials of the person behind this? I can't seem to find them.


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## MarcoE (May 3, 2018)

A few months ago, I was seriously considering investing in Horizons to avoid taxable dividends. After doing some research, it seemed a bit iffy, and I decided against it. Looks like I dodged a bullet.


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## larry81 (Nov 22, 2010)

AltaRed said:


> That doesn't look like a terribly serious website to me. What are the credentials of the person behind this? I can't seem to find them.


Not sure about the credentials but he go pretty deep. I personally like the touch of humor.

CCCP and PWL have similar articles as well.


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## AltaRed (Jun 8, 2009)

The difference for me is disclosure of credentials, but I've gotten off-topic. Carry on.....


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## fireseeker (Jul 24, 2017)

JAEW said:


> Thanks CMF, never would have known of this without you.
> As a current owner of Horizon ETFs, OptsyEagle comments make me nervous. Mine are held in a TFSA and I would like to avoid any potential US taxes.
> I'll do a bit of research but my initial reaction would be just to sell and move onto something else. Not worth the risk.


JAEW, these changes do not apply to ALL Horizons ETFs. They only apply to funds with swap agreements that convert interest and dividends and current cap gains into future cap gains. It would be unusual to own one of these ETFs in your TFSA -- the benefit of the structure is of no use there.
Take your time to figure out exactly what you have and whether it is impacted.


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## james4beach (Nov 15, 2012)

larry81 said:


> BMO ZDB is the next "bext" option from a tax saving viewpoint.


Yes absolutely. I've steered some of my family into this. The strategy is completely valid, as I do the same thing with individual bonds: low coupon & discount bonds have nice tax effects and completely fit into the letter and spirit of the law.

What's also nice is that ZDB has been growing in size over the years, meaning it will be a viable fund for a long time to come. BMO really innovated something useful and unique here and kudos to them (really their entire ETF lineup is quite strong). It's now at $646 M aum, quite respectable. Note that HBB only has $355 M and money has preferred ZDB over HBB over the years.

HBB was clearly exploiting a loophole and I've always warned people that this feels like it's violating the spirit of tax law.

Currently I hold XBB in my RRSP, and individual discount bonds & GICs non-registered but this is partly because I have fun with the hands-on approach to my bonds. I'd be equally happy holding ZDB non-reg, but would keep XBB in my RRSP.


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## larry81 (Nov 22, 2010)

Still no updates from Horizon !


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## andrewf (Mar 1, 2010)

I'm honestly not convinced there was anything wrong with the structure. Surely the counterparty was incurring tax liability on the transferred income.

The ETN structure has been used to similar effect in the US. I wonder if maybe the same would happen in Canada. I don't see how it could be prohibited. The main disadvantage is that you are not directly protected by collateral from the counterparty.


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## hfp75 (Mar 15, 2018)

from reading it sounds like its a proposal.... so there could be changes....


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## JAEW (Feb 15, 2019)

fireseeker said:


> JAEW, these changes do not apply to ALL Horizons ETFs. They only apply to funds with swap agreements that convert interest and dividends and current cap gains into future cap gains. It would be unusual to own one of these ETFs in your TFSA -- the benefit of the structure is of no use there.
> Take your time to figure out exactly what you have and whether it is impacted.


I held (sold the other day) HXS. I need to do some re-jigging anyways, it just pushed the issue.
I don't really understand swaps but at the time my research pointed me to HXS as a way to hold US equities in a TFSA without the worry of US dividends.
Just for comparison sake I looked at the gains of HXS vs. XSP March 17, 2017 to March 21, 2019
HXS was up 23.89%
XSP was up 17.04% adjusted for dividends 20.57% if my math is correct
difference is taxes and fees? No idea. If all things are equal should the return have been the same?


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## james4beach (Nov 15, 2012)

That 2 year period is a nice case study actually since the USD/CAD basically did not move at all over that period.

S&P 500 total return index in USD is up +24.1%
S&P 500 total return in CAD is up +24.7%

Theoretically, XSP should have returned 24.1% (hedged) and HXS, like ZSP, should have returned 24.7%. In other words all these ETFs should have had about the same 2 year return, if there were no fees.

Instead XSP returned +20.2%, much worse than expected. The hedging incurs a substantial drag on performance due to the inefficiency of the hedging process and the cost of the derivatives used. This basically shows why you don't want a hedged ETF.

HXS and ZSP, both unhedged, returned the same +23.7% which is much closer to ideal


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## john.cray (Dec 7, 2016)

JAEW said:


> I held (sold the other day) HXS. I need to do some re-jigging anyways, it just pushed the issue.
> I don't really understand swaps but at the time my research pointed me to HXS as a way to hold US equities in a TFSA without the worry of US dividends.
> Just for comparison sake I looked at the gains of HXS vs. XSP March 17, 2017 to March 21, 2019
> HXS was up 23.89%
> ...



An excellent video by Ben Felix explaining those: https://www.youtube.com/watch?v=-CCXHSv1Ld8

I would also like to thank james4beach for advising me back in the day of the overall differences between ZDB and HBB when I had to use taxable accounts for my bonds. I chose ZDB.

Cheers,
JC


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## larry81 (Nov 22, 2010)

Still no news for horizon... this look bad


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## AltaRed (Jun 8, 2009)

larry81 said:


> Still no news for horizon... this look bad


I don't know how you expect Horizons to respond more definitely when it is not clear what the Ways and Means motion will say (or when), or what the specific regulations will be.


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## hfp75 (Mar 15, 2018)

So, the Feds have stated their intent, but not laid out a pathway as of yet. It would be hard to have a definitive plan when you dont have all the information. Plus I would bet there are lobbying efforts in play right now.

Even when the plan gets laid out (legislation) there needs to be a compliance period.... I see this whole thing not being as bad as it might look at the current time.... if it is, then its 1 year away and maybe 2.

Plus in that time there is an election and Turdo will hopefully be gone by then.


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## OptsyEagle (Nov 29, 2009)

In my opinion, it was Horizon's that was in the government target scope when they came up with these rules, so I can't really see it working out well for them. The only way that can happen is with political interference. I don't see Scheer getting in the way, and companies like Horizon's are so few, I doubt they can put up much resistance.


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## andrewf (Mar 1, 2010)

hfp75 said:


> So, the Feds have stated their intent, but not laid out a pathway as of yet. It would be hard to have a definitive plan when you dont have all the information. Plus I would bet there are lobbying efforts in play right now.
> 
> Even when the plan gets laid out (legislation) there needs to be a compliance period.... I see this whole thing not being as bad as it might look at the current time.... if it is, then its 1 year away and maybe 2.
> 
> Plus in that time there is an election and Turdo will hopefully be gone by then.


Who knows, maybe Trudeau gets the boot and Scheer cancels the change .


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## hfp75 (Mar 15, 2018)

andrewf said:


> Who knows, maybe Trudeau gets the boot and Scheer cancels the change .


More of the former and less of the latter.....


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## james4beach (Nov 15, 2012)

Why would Andrew Scheer support a loophole that allows people to avoid paying taxes?


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## larry81 (Nov 22, 2010)

I received an answer from Horizon that say:



> "Larry things look bad but dont sell our swap ETF's yet, you have until december 2019 !"


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## OptsyEagle (Nov 29, 2009)

larry81 said:


> I received an answer from Horizon that say:





> Larry things look bad but dont sell our swap ETF's yet, you have until december 2019 !"


I doubt that reply was in your personal interest. I suspect Horizon's has a major business issue to deal with and they are praying investors give them as much time as they can to transition. I wouldn't for two reasons. I doubt they will be overly successful, and more importantly, they knew what they were doing and got exactly what they deserved. 

Who in the world did they think they were? Smarter then the Finance Department, it appeared. The arrogance was appalling to me. I hope I never hear of them again and I really hope other asset managers learn from their hardship. I might have punished the investors a little bit as well, but definitely, I would have ripped them a new one...and then let them bleed out.

_Revenge is a dish best served cold._ 

OK, maybe I am being a little dramatic, but I would sell them on Monday if it was me.


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## peterk (May 16, 2010)

Glad I didn't dive too deep into these! Held HBB for 6 months as my bond allocation, but then sold it all for stocks in the Oct-Dec downturn. 

Though when I did the math for HXS, the main fund for the S&P 500, it didn't even make any sense any more with the high valuation and corresponding low yield. The higher MER on HXS ate up the entire tax benefit, compared to plain old SPY.


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## PDLD (Jan 3, 2014)

Can someone please explain what the worst possible outcome might be for current holders of these total return swap etf's, if held beyond December 31? How is this significantly different than what happened to holders of income trusts or corporate class mutual funds? 

... Yes, I do realize it likely won't be good for Horizons.


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## OptsyEagle (Nov 29, 2009)

PDLD said:


> Can someone please explain what the worst possible outcome might be for current holders of these total return swap etf's, if held beyond December 31? How is this significantly different than what happened to holders of income trusts or corporate class mutual funds?
> 
> ... Yes, I do realize it likely won't be good for Horizons.


Do you want to know the worst case outcome for the investor before Horizons declares bankruptcy or after?


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## andrewf (Mar 1, 2010)

^ I think we're being a little overwrought with the doom and gloom here, guys. Worst case scenario is that Horizons will have to start issuing taxable dividends on these funds in the 2020 tax year. It should have no appreciable effect on NAV. Horizons may continue the swap arrangement or may convert these funds to more traditional ETFs. I don't see how they go bankrupt over this. Assets tend to have a bit of inertia, especially as there is potentially significant tax liability built up in deferred capital gains on some of these funds.


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## PDLD (Jan 3, 2014)

Thanks Andrew.


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## OptsyEagle (Nov 29, 2009)

I don't actually have an axe to grind with Horizons but I always thought it peculiar that they participated in this tax evasion activity after the Canadian Government showed how they truly thought about this Financial Engineering, in a few budgets ago. You will notice that no other Asset Manager followed suit with Horizons. Horizons acquired $Billions in asset with these structure, but no one that I know of, thought it a good idea to join them. Now we know why.

I have no idea what will happen to an investor on December 31, 2019 if they continue to hold their Horizons ETFs and Horizons, the company is still in business then.

The way I see it is these swap agreements worked great in not only changing interest and dividend income into capital gains but it also allowed the investor to defer those capital gains, year after year after year. So, my concern would be, what actually happened to those capital gains? Its hard to tell from their financial statements if they are still on the books or if they got "swapped" to the counterparty. If they got swapped to the counterparty, what happened to the payment the counterparty paid. *Since nothing has been taxable since these things started, I have to assume that a really big whopping taxable situation is somewhere waiting for someone to pay taxes on it. *

I might be completely wrong, but since these things have no tax deferral benefits after December 31, 2019, I can't see why one would want to stick around to find out. Now if you currently have a big whopping tax bill unrealized in the value of your current shares, then perhaps that is worth the risk. I can't see you getting any deferral of that tax liability past this year, but again, that is a guess not a fact. My biggest fear, if I were an investor, especially a new investor with not much of a capital gain built into their share prices right now, is that if they wait until December 31, 2019, Horizons will be forced to dump literally a massive tax bill onto your tax return, because the music stopped and you did not get a chair.

If I were you I would leave musical chair games to the children and get to heck out. You do not want to be the one who turns the lights out on these funds. It could be very expensive...or might not. Perhaps others have some thoughts.


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## OptsyEagle (Nov 29, 2009)

andrewf said:


> ^ I think we're being a little overwrought with the doom and gloom here, guys. Worst case scenario is that Horizons will have to start issuing taxable dividends on these funds in the 2020 tax year. It should have no appreciable effect on NAV. Horizons may continue the swap arrangement or may convert these funds to more traditional ETFs. I don't see how they go bankrupt over this. Assets tend to have a bit of inertia, especially as there is potentially significant tax liability built up in deferred capital gains on some of these funds.


Bankruptcy may not happen, but you have to admit it also might. 

Has anyone taken a look at how much money Horizons had in these funds and if so, have you calculated the lost revenue they must deal with before the end of this year. If this was a bank, a run like this would definitely be lights out, but perhaps Horizons will survive.


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## OptsyEagle (Nov 29, 2009)

PDLD said:


> Thanks Andrew.


Are you going to take that to the bank. My suggestion is a lot safer. His is quite reckless, if you ask me. Unless he can prove his position, I would err on the side of caution. But that is me. I hate paying other peoples taxes. Not even a big fan of paying my own.


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## PDLD (Jan 3, 2014)

OptsyEagle said:


> Are you going to take that to the bank. My suggestion is a lot safer. His is quite reckless, if you ask me. Unless he can prove his position, I would err on the side of caution. But that is me. I hate paying other peoples taxes. Not even a big fan of paying my own.


OE: So you think they will retroactively tax the holders of these units, unlike what they did to holders of corporate class mutual funds?


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## fireseeker (Jul 24, 2017)

The reported outstanding taxable gain on HXT is 3%.
The MER for HXT is 0.03%, suggesting the income received for managing the fund is modest.
https://www.moneysense.ca/save/investing/etfs/best-canadian-etfs/

Horizons has about 15 affected ETFs. They manage another 80, roughly, including popular Betapro leveraged funds and marijuana-focused funds.
The business is much broader than just swaps.


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## OptsyEagle (Nov 29, 2009)

PDLD said:


> OE: So you think they will retroactively tax the holders of these units, unlike what they did to holders of corporate class mutual funds?


Not retroactively. What I would be worried about is that on December 31, 2019, they realize and then distribute the tax liability on years and years of growth that was not taxed.

For example if you bought shares of ABC company at $10. Next year they are $11. The year after that they are worth $12. 5 more years they are worth $22. If you didn't sell them, you, like your Horizons fund, paid no tax on those gains because they were all deferred. Now if the government put in a new rule that required you to realize the gain, it would be realized this year (so not retroactively) but the gain would be a gain that accumulated over many, many years. The technical term for this is a BIG WHOPPING TAX BILL.

Again, all this is a guess. But where did all those tax gains go. I have seen deferral before. I have seen where they change the type of tax that accrues, so instead of paying tax on a $1 of interest, the investor paid tax on a $1 of capital gain. But in a situation, where NO TAX has ever been realized over MANY, MANY, YEARS, I wonder where that tax liability is and how much it is and who is going to be stuck with it.

Since, even I found it difficult to find out, I would not wait around. I hope I am wrong. This is not the current holders fault, but they are the only ones available to pay any taxes that might be due. If they unwound the swaps already, you might not even be able to get away, even if you sell on Monday. 

Again, these are all guesses. Wish I had more facts. If anyone else has more facts or even less disturbing outcomes accompanied with a reason why those outcomes might and should happen, I would be interested in hearing them as well.

My approach, when advising on these things is to throw you into the deep end and then hopefully you end up with a life jacket and all works out OK. Kind of a worst case scenario with hope that it turns out better. To approach a situation like this with a weather is fine attitude, no life jacket needed, it would just get in the way of our overloaded boat anyway, is not how I like to advise on these things with many unknowns, but with possible serious consequences.


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## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> ... I have no idea what will happen to an investor on December 31, 2019 if they continue to hold their Horizons ETFs and Horizons, the company is still in business then.


The swap ETFs are part of their business so I'm not so sure bankruptcy is as likely as you seem to think/want it to be.




OptsyEagle said:


> ... The way I see it is these swap agreements worked great in not only changing interest and dividend income into capital gains but it also allowed the investor to defer those capital gains, year after year after year. So, my concern would be, what actually happened to those capital gains? ...
> *Since nothing has been taxable since these things started, I have to assume that a really big whopping taxable situation is somewhere waiting for someone to pay taxes on it. *
> 
> I might be completely wrong ...


I suspect you are wrong.

The regular ETF provides total return in two slices ... the share price and the income types paid. The swaps based ETF took the extra step to convert income into a CG.

How would an investor prior to the gov't changing the rules get their total return that according to post # 21 is tracking nicely to the total return index?
From selling the ETF, which means the income component has to be built into the share price.

Unless I am missing something - *the CG from income is already built into the trading price*. 
If there was a large CG to dole out amounts the investors then some or all of it would have to be deducted from the trading price. No easy to do, I would expect.

Seems easier for them to simply make sure that on the date required, the swap arrangements are terminated and the more run of the mill activities (pay cash distributions, report types and withholding tax) start happening. 

There will be a financial hit to the structural change for Horizons Beta Pro plus possibly fewer units to spread the costs over, should a lot think they should cash everything out to avoid risk. But then again, how many that wanted to defer CG are going to want to take a single year hit for their entire holdings?


Cheers


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## OptsyEagle (Nov 29, 2009)

Eclectic12 said:


> The swap ETFs are part of their business so I'm not so sure bankruptcy is as likely as you seem to think/want it to be.
> 
> 
> 
> ...


OK. So these things made money. What happened to the tax bill? It was either paid by investors or deferred. I didn't see many t-slips being issued on these things over the last many years, so lets eliminate the idea that investor fairly paid their taxes. So, is there a deferred gain somewhere? Please let us know, because if not, ignore everything I said. Everything will be OK.

As for bankruptcy. Who knows. Anytime a company takes a revenue hit, if one does not wonder how it will effect the company, when their continuation is important to them, is beyond me. But lets forget about that one. Even if they did file bankruptcy, the investors will get their money back, just not as quickly and easily as they might have preferred.


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## PDLD (Jan 3, 2014)

OptsyEagle said:


> Not retroactively. What I would be worried about is that on December 31, 2019, they realize and then distribute the tax liability on years and years of growth that was not taxed.
> 
> For example if you bought shares of ABC company at $10. Next year they are $11. The year after that they are worth $12. 5 more years they are worth $22. If you didn't sell them, you, like your Horizons fund, paid no tax on those gains because they were all deferred. Now if the government put in a new rule that required you to realize the gain, it would be realized this year (so not retroactively) but the gain would be a gain that accumulated over many, many years. The technical term for this is a BIG WHOPPING TAX BILL.
> 
> ...


Thanks for your comments. I may take my chances and wait til Jan 1 to unload them, as I'm still working, but will retire at the end of the year (with no income other than dividends next year). I understand the risks... as well as I can, given the limited information available. If things/opinions change before the end of the year, I'll unload them and take the tax hit.


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## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> ... For example if you bought shares of ABC company at $10. Next year they are $11. The year after that they are worth $12 ... Now if the government put in a new rule that required you to realize the gain, it would be realized this year (so not retroactively) but the gain would be a gain that accumulated over many, many years. The technical term for this is a BIG WHOPPING TAX BILL.


Potentially ... but I doubt the gov't would want the complexity of forcing the income part of CG to be paid out. 

Say the stars aligned so that the swap based ETF at $10 had no income paid. A regular ETF what also had no income paid would sell for $10 as well.
What has been deferred is $1 in year one, another $1 in year two etc. I am not sure the gov't would want to get involved in sorting out what income was paid by the S&P 500 as income and whatever other total return indexes were used to correctly force only the income to be taxed. If the gov't forces the full amount including starting share price to be taxed - I would expect a battle from the industry as well as investors.

Seems simpler to do what they did with income trusts - which is to change on a going forward basis what the taxes are like or outlaw the structure.




OptsyEagle said:


> ... But in a situation, where NO TAX has ever been realized over MANY, MANY, YEARS, I wonder where that tax liability is and how much it is and who is going to be stuck with it.


AFAICT the first one was in 2010 with none others until 2013 so we are approaching a decade. 



Cheers


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## AltaRed (Jun 8, 2009)

My take would be that unless someone has very large unrealized cap gains in one of these 'affected' funds, e.g. 2-3 bagger, I'd be re-locating fast. Almost always best to avoid unknown storms over the horizon, pun not intended. I doubt there is any risk in Horizon as an entity itself, but worst case, someone would 'buy the AUM' like Blackrock buying out Claymore.


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## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> ... What happened to the tax bill?
> It was either paid by investors or deferred.


The counter party is likely buying stock and re-investing the dividends/income so AFAICT, they are paying the taxes.
I would expect that the National Bank of Canada can't use capital gains for the stock portfolio so they are likely paying regular business taxes.
https://www.looniedoctor.ca/2018/05/04/horizon-swap-based-tri-etf-benefits/




OptsyEagle said:


> ... I didn't see many t-slips being issued on these things over the last many years, so lets eliminate the idea that investor fairly paid their taxes.


The investor has not received any income so there's no T slip and has not sold anything so they don't owe any taxes.




OptsyEagle said:


> ... So, is there a deferred gain somewhere?


The deferred gain is the income paid ... which typically is dwarfed by the CG from the unit price.

Again, I doubt the gov't wants the complexity of figuring out how much was paid as income over the last nine years versus removing the advantage of converting the income. I'm not finding much for the wording of what they intend to do.


Cheers


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## andrewf (Mar 1, 2010)

OptsyEagle said:


> OK. So these things made money. What happened to the tax bill? It was either paid by investors or deferred. I didn't see many t-slips being issued on these things over the last many years, so lets eliminate the idea that investor fairly paid their taxes. So, is there a deferred gain somewhere? Please let us know, because if not, ignore everything I said. Everything will be OK.
> 
> As for bankruptcy. Who knows. Anytime a company takes a revenue hit, if one does not wonder how it will effect the company, when their continuation is important to them, is beyond me. But lets forget about that one. Even if they did file bankruptcy, the investors will get their money back, just not as quickly and easily as they might have preferred.


The counterparty was taking on the current tax liability, I think. And the deferred CG tax liability is not a tax dodge. It is fully taxable at disposition.


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## andrewf (Mar 1, 2010)

I can understand the government wanting to close a perceived loophole. It is a bit banana republic to retroactively reinterpret tax treatment it has allowed to stand for years. I don't see if being worth the damage to the credibility of the government and its respect for rule of law to chase down a few million in taxes (at best).


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## AltaRed (Jun 8, 2009)

As little as I know about it, there generally has been no retro-activity in any budget proposals at any time. I don't see it happening here either.


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## james4beach (Nov 15, 2012)

I think the talk upthread about bankruptcy is way over the top. I've been critical of these since day one and discouraged my family from using them, but I don't think anything like bankruptcy will happen, nor will the share price collapse. Probably just some taxable distribution coming at some point.

If I had units of one of these, I would simply switch to a plain vanilla ETF as soon as possible.


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## james4beach (Nov 15, 2012)

We can pat ourselves on the back for seeing these issues many years ago in this forum! 

From 3 years ago:



james4beach said:


> Let's not forget that Conservatives eliminated the Income Trust tax loophole. I don't think this is a liberal vs conservative issue. It's reasonable for any party to eliminate tax loopholes and enforce the "spirit of the law".
> 
> Like humble_pie says, I can definitely see rules to crack down on funds using cute derivatives tricks. Horizons has gotten a bit too cute in the last few years. HBB is an example; although this is a very cool fund, it's clearly intended to skirt rules about taxable interest income by transmogrifying interest into capital gains.
> 
> ...


And even from 5 years ago... looks like my timing was about right when I said the CRA might let them get away with it for a year, or five



james4beach said:


> So this is a bond ETF that pays no distributions at all.
> 
> Just like the tax-advantaged bond funds before it, I think this ETF is trying to use cute derivatives games to evade taxes on a technicality. Fundmentally, interest income should be taxed. Think of zero coupon bonds... those don't pay coupons either, but they are still taxed (one pays tax on virtual interest being accrued).
> 
> I don't think CRA will let them get away with this. Maybe for a year or five, but how long? I agree it sounds tax efficient for now, though.


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## OptsyEagle (Nov 29, 2009)

andrewf said:


> The counterparty was taking on the current tax liability, I think. And the deferred CG tax liability is not a tax dodge. It is fully taxable at disposition.


What happened to the payment. So the counterparty takes the tax liability. OK. What does the counterparty actually do. If a payment is made, where did the tax liability go from that payment. If not payment, how does the counterparty deduct against its tax liability. I assume you do not think that a small, few basis point fee, that the counterparty gets, can cover the tax liability on a $billion dollar fund do you?

Also remember. There are two tax liability for a fund investor. Their own tax liability, that comes from their buying and selling shares and the ETFs tax liability that comes from them buying and selling shares and receiving income. We are talking about the 2nd. Yes, the counterparty confuses the issue but it doesn't make the taxes disappear like a magical ride to fairyland.

I'll admit guys that I have a lot more questions then answers but it is only the losers that don't ask important questions. Anyway, I don't even own the darn things. Just trying to get you guys to think, look, ask, and maybe save yourselves some money in the best case and learn a few things in the worst case. Horizons are not the only ETFs that invest in those indices.


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> The counterparty was taking on the current tax liability, I think. And the deferred CG tax liability is not a tax dodge. It is fully taxable at disposition.


That's my understanding as well ... unless there is some way for the counterparty to get results >= the matching index in a tax free way.




andrewf said:


> I can understand the government wanting to close a perceived loophole ...


Not sure if there is an easy way to figure out whether the gov't is losing as a net result of the counterparty paying taxes as part of a business versus high income earners paying the different income type taxes on as little as 3% as year.

It does give the impression that they are fixing a "problem", which some on this thread are applauding.




andrewf said:


> ... It is a bit banana republic to retroactively reinterpret tax treatment it has allowed to stand for years. I don't see if being worth the damage to the credibility of the government and its respect for rule of law to chase down a few million in taxes (at best).


+1


Cheers


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> As little as I know about it, there generally has been no retro-activity in any budget proposals at any time. I don't see it happening here either.


Closest I can recall is the proposed TFSA penalty changes as well as defining some of the not allowed behaviour. 

The rules said it was to apply from Oct 2009 going forward, despite the legislation needed to be passed. One of the tax court cases where CRA wanted the new "100% of benefit" penalty applied over something like four years had the judge concluding that up to Oct 2009 would be subject to the 100% benefit penalty. The remainder was to have no penalty applied as the judge concluded that the barred behaviour stopped in Oct 2009 where the growth thereafter was run of the mill investing.


Cheers


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## OptsyEagle (Nov 29, 2009)

OK. Move the shells for me. We have an investor in a fund. They put in their cash. The fund gives the cash to the counterparty. The counterparty invests in stocks and bonds or whatever. Those stocks and bonds make money. Some interest, some dividends some capital gains. The counterparty pays tax on that money. OK so far.

Now what. So far the counterparty is making a fortune. Where is the investor money. At the very far end we have the ETF/fund going up in value but that is based on a Net Asset Value that went up in value. How did it go up?

Obviously the counterparty is guaranteeing something to make it go up. Now this is where it gets tricky. You see above, the counterparty was making a lot of TAXABLE income on a really big whopping amount of money that was not theirs, but earning a paltry fee for their help. Obviously the only way they can offset the ridiculous tax bill against the paltry fee is to deduct something. Usually one needs to make a payment, incur an expense, etc., before one gets to deduct something. It is possible that they can deduct an IOU. Maybe. Again this type of engineering is above my pay grade. 

In any case, if the counterparty made an actual payment, you would see that as other income in a t-slip. Since we didn't lets assume it is an IOU to the ETF. Now we know that Horizons is not going to continue with the swap program, going forward, since it would be a waste of about 30 basis points in fees/MER. So WHAT HAPPENS WHEN THEY UNWIND THIS THING and HOW WHOPPING BIG IS THE IOU. These things have been making money over the longest bull market in history. Where is it, how much is it, and how will it all get reconciled?

That is my question. I would much appreciate answers or even guesses that talk about those details. If I owned it, I would find out. Good luck to everyone.


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## OptsyEagle (Nov 29, 2009)

OK. So you guys forced me to look at the annual reports. I use to do this in my younger days to find the mutual funds that had whopping big realized losses on their books. As long as they changed out the manager, I got all my future gains tax free (at least deferred until I decided to take them) because some other investor lost money in the past. Seemed like a good deal to me.

In this case I am concerned about the opposite. Finding the data in Horizons is a little more complicated. Not on purpose I don't think, but more because we are talking about derivatives and liabilities instead of dollars and cents.

Anyway, looking at the "Statement of Comprehensive Income" issued for 2018 For HXT, I decided to highlight 2017 below, which is listed beside 2018, because 2018 was a loss year. A loss is useful in reducing a tax liability but 2017 is a gain and those are my concern.

What you will see for 2017 is the following:

Interest Income = $840,359
Net Realized Gain on Sale of Investments and Derivatives = $73,255,627
*Net change in unrealized appreciation (depreciation) of investments and derivatives *= $65,142,445

Other then the numbers I cannot tell you how the pea is moving under these shells but it is that "Net Change in Unrealized Appreciation" that I would be worried about. My guess is that the fund made money ($73,255,627) and Horizons deferred it by utilizing something in the Swap agreement. 

If I am right, what happens when the swap agreement is abolished. Can we say "Realized". Now add up those $65 million dollar entries for all the years HXT has been operating and you start to come up with a significant number.

Again, these are guesses on my part, but it has been my experience that taxes can be offset and taxes can be deferred but they rarely can legally or magically disappear.

In the mutual fund world, this datamining was a little easier, if I recall, because on the asset sheet, they would show you the market value of the portfolio and the cost base. Working out if it had a deferred tax liability, or tax benefit, to the new investor was quite easy to see. With Horizons funds it is a little more sketchy.

I suspect the $8 million difference above, between what they made and what they deferred, was probably dealt with by deducting the MER Horizons charges and deducting the 30 basis point fee the counterparty charges and a little more in accounting and administration expenses...and that is where all the taxes went, for the time being anyway.


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## andrewf (Mar 1, 2010)

It would be distributed as a capital gain. Keep in mind that the counterparties would have already paid their tax on dividend and other income on the portfolio they used to hedge their position. It would be double taxation to do otherwise. I think this whole shift on tax policy is not well thought-through because it will have ripple implications for derivative taxation. I mean, should we be allowed the deduct imputed storage fees from futures contracts for markets that are in backwardation?


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## larry81 (Nov 22, 2010)

Zero news from Horizon, two weeks and counting !


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## larry81 (Nov 22, 2010)

Almost a month without any update from Horizon... wow.


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## AltaRed (Jun 8, 2009)

The omnibus budget bill has yet to get to first reading in the Commons. Why would they comment before it passes the Commons, i.e. there could be changes?


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## tdiddy (Jan 7, 2015)

there are some really interesting EU based total return swaps that look like good products, different counter-party risks but even some developing and whole market products that i am considering


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## humble_pie (Jun 7, 2009)

tdiddy said:


> there are some really interesting EU based total return swaps that look like good products, different counter-party risks but even some developing and whole market products that i am considering



when we get into synthetic ETFs based on derivative products trading on london's AIM exchange, me i become doubtful

wait, already in north america we have ETFs w large portions consisting of synthetic london derivatives


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## Franko (Mar 31, 2012)

Any updates on these issue? I haven't found any new announcements from Horizons nor any new updates from the government re: how they plan to actually legislate these changes.


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## james4beach (Nov 15, 2012)

I haven't seen any updates either. By the way, here's a nice video from Ben Felix at PWL. It's a thorough explanation of the swap structures, and he also models the tax benefits versus a traditional ETF. What's interesting here is that he determines that, for an investor to realize a tax benefit, they probably need to hold the Horizons ETF for at least 4 or 5 years.

That points out the regulatory risks because if you think tax rules might change within 5 years, then there might be no point in using the swap ETFs.


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## hfp75 (Mar 15, 2018)

These changes will impact more then just Horizons..... it is my understand that lots of ETFs are using partial swaps....


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## Beaver101 (Nov 14, 2011)

^ Such as or can you provide other example ETFs that uses (partial) swaps? What about mutual funds - are they safe from this crackdown (for a lack of better word)?


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## humble_pie (Jun 7, 2009)

hfp75 said:


> it is my understand that lots of ETFs are using partial swaps....




more than lots. Read their prospectuses.

most ETFs are using futures, options, interest rate swaps & other derivatives to maintain synthetic positions which - as their prospectuses recite - "seek to provide the return of the XYZ index."

never have i seen a prospectus which states unconditionally that it holds the actual stocks it is tracking. I've only seen marketing literature which maintains this myth, with their Top 10 Holdings and even their audited annual lists of holdings.

read their prospectuses. Most ETFs further recite in their prospectuses that they engage in "representational trading" to generate the promised return of a particular index. Some prospectuses flesh this statement out further by openly stating that they do not hold all the stocks their marketing literature claims they hold, rather they hold securities including derivatives that have been assembled in order to generate the promised index return.

and their prospectuses - read them - will sometimes further state that the fund will lend out some of whatever securities it is actually holding to hedge funds, in return for a fee. Vanguard, for example, is on record as saying it prefers to lend out exotic securities for the higher 5% fee they can earn, while run-of-the-mill securities lending only commands a 2% fee.

canadian regulators do not require that securities loaned by an ETF to hedge funds be identified. US regulations require this disclosure, but it is so vague within the audited list of "holdings" that 99.9999% of investors will never be able to find or understand the information.

particularly egregious, imho, are the giant multinational ETFs with their vast lists of 2,500 to 4000 individual stock holdigs, located in 30 to 40 different stock exchanges around the world, some of which are notoriously corrupt (russia, colombia, peru, dubai, hungary to name a few) & extremely costly to deal in if a foreign financial institution intends to run an honest operation.

why retail investors are willing to buy the sales pitch that these giant multinational ETFs can own, trade, buy, sell, re-balance daily & pay for professional custody of publicly traded securities, all for a ludicrously tiny MER of .15%, has always baffled me. In corrupt countries with shady stock markets such as the above-mentioned, professional custody of stocks alone would cost roughly 1% of market value.

the wonderment is that neither investors nor so-called "advisors" aka salesmen, ever read the prospectuses. 

the above is an advanced idea whose time has not yet come. We are not yet even seeing mainstream financial journalists working on this issue. We are only seeing hints here & there. I've been posting hints for about five years now. Read the prospectuses to learn more.


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## hfp75 (Mar 15, 2018)

If Horizons is not able to use swaps this will impact MANY funds in Canada. Horizons TRI ETFs are the few that are advertised as full swap based structures, part of their sales is touting the swap and its advantages - the touted advantages are what is working against it with this Liberal govt.... the other partial swaps that are being used are not advertised as it would seem complex and might scare away uninformed investors.

Bottom line, its not law yet.....


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## andrewf (Mar 1, 2010)

Unintended consequences. If the concern is that capital gains have too favourable taxation relative to dividends or income, perhaps that should be addressed at the root.


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## humble_pie (Jun 7, 2009)

hfp75 said:


> If Horizons is not able to use swaps this will impact MANY funds in Canada.



may i beg to differ

i don't see any way that any federal gummint of any party is going to shut down or even crimp the style of ETFs in this country

on the contrary one can see how the gummint is fostering ever-growing families of ETFs plus ever-growing numbers of robo-advisors

these together form the easy, inexpensive, assisted retirement savings plan which all gummints want all canadians to have. The alternatives are to increase CPPIB contributions from working canadians or to force canadians to pay into some kind of sovereign wealth fund. Neither idea is palatable to canadian taxpayers.

but a low-cost voluntary program whereby one's own neighbourhood bank will be able to sell a comprehensive retirement savings plan at very low cost, that's something the gummints want & also the banks want to sell these plans & also taxpayers of all ages want this same opportunity.

we've all seen the studies that say too many seniors are reaching old age without adequate savings. We need to prevent worsening of this problem - can't have seniors starving to death in the streets or homeless under bridges as they are in some countries today - so low-cost ETFs plus low-cost robo-advisors are an intelligent solution.

i for one don't see any possibility that any gummint will crimp or curtail the ETF industry. Horizons may get a small slap on the wrist; but should not be badly hurt imho. 

btw TD's new robo advisor is right now being tried out in TDDI accounts as Goal Assist. GA is the protype of what will likely be the big green's fully-developed robo advisor.


.


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## OptsyEagle (Nov 29, 2009)

The government's intention seems quite clear to me. If you generate a capital gain, you should pay tax on a capital gain. If you generate interest income, you should pay tax on interest income. This generating interest income and paying tax on capital gains, deferred pretty much forever, is what the root of their anger came from.

Although I benefited a few times from some of these things I cannot blame them for attempting to close this loophole. It simply was not fair and therefore should not exist. Will the investment world leave it alone and not attempt to get around it again. I can't really say. I have stated on here that I think the investment funds/ETFs AND the investors that invested in them, should both have had their hands slapped a little more, so as to add more risk to the next attempt to circumvent the rules. This last part is just my opinion and I suppose there is as much wrong with the idea as there is right with it, so I will let the government deal with it in whatever way they think is best.


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## humble_pie (Jun 7, 2009)

OptsyEagle said:


> The government's intention seems quite clear to me. If you generate a capital gain, you should pay tax on a capital gain. If you generate interest income, you should pay tax on interest income. This generating interest income and paying tax on capital gains, deferred pretty much forever, is what the root of their anger came from.



in revisionist theory, the above ^^ isn't quite where it's at

most ETFs are still allowed by the regulators to declare on their T3 slips that such-&-such income is "dividends" while such-&-such is "interest" while other such-&-such is "capital gain" or "return of capital"

but in reality what the ETF managers have to distribute is income from a variety of sources, including derivatives trading & securities lending to hedge funds. Since the ETF holdings themselves are not known, the true nature of the income is hard to pin down. There's lots of opportunity for misnomenclature.

imho the regulators are wildly remiss in their duty to see to it that investors are correctly informed. But the investment industry is a self-regulating industry, so until enough consumers complain, regulators cannot be expected to do a decent job enforcing transparency, At the present time consumers are not asking for transparency, because they are still unaware that what they are being told is clouded & misleading.

things are ever so slightly starting - just starting - to change. For one thing, famous german index creator Solactive has opened a north american office recently. It's located in toronto, not in new york city (big plus for canada)

Solactive specializes in custom built indexes for ETF vendors all over the world. Solactive can even fund & operate the ETFs themselves, leaving a fund company to do nothing except lend its brand & carry out the marketing.

in toronto, Solactive-the-index-specialist has formed an alliance with TD for at least one brand-new niche ETF & i am expecting that the Solactive/TD alliance will hatch out more intriguing specialty ETFs. 

the TD fund has a convincing young manager who, in interviews, is careful to avoid saying that his fledgling ETF owns any particular stocks. Instead, he says that the fledgling is "seeking" to deliver the return of a particular index. He didn't mention that it's an index which Solactive had already built, has already leased or sold as custom-tweaked versions to other fund companies, has recently custom-tweaked a big green version according to this TD manager's requirements.

as for the "anger" which OE refers to, me i don't see any anger at all. I think some gummint officials still believe that HXT was holding stocks that paid real dividends & they believe that Horizons has been corruptly trying to call those revenues delayed capital gains. I further think that Horizon's defence may be that its futures swaps do, indeed, mean roll-over capital gains.

i also think there's merit to hfp75's view that reality is not being properly explained to investors because reality is thought to be so "complex" that it "might scare uninformed investors."

if so, that was a terrible judgment mistake which ETF vendors made many years ago, imho.

the grave issue, in my eyes, is not that ETF vendors are trading all kinds of representational samples & holding all kinds of derivatives in synthetic portfolios. The grave issue imho is that they are not telling the truth about this to their investors.

.


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## Plugging Along (Jan 3, 2011)

Thanks James for the info. I have been looking at Horizon for a while. I understand it better now thanks to your link. I may just wait a while until this is further clarified.


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## PDLD (Jan 3, 2014)

Some comments here on Horizons TRI etf's (and possible 2019 budget implications) from a Horizons representative, starting at the 11:30 minute mark... https://www.youtube.com/watch?v=JPQQArk7K_w


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## hfp75 (Mar 15, 2018)

PDLD said:


> Some comments here on Horizons TRI etf's (and possible 2019 budget implications) from a Horizons representative, starting at the 11:30 minute mark... https://www.youtube.com/watch?v=JPQQArk7K_w


Thanks for the update... basically he says they dont know but are brainstorming what the options are. I would bet they are lobbying the govt as well. He states that the govt will vote to ratify the budget in September. 

He also indicated that the proposed changes will effect the bulk/whole ETF industry and as such the proposal might change... I dont know if he is selling hope or if he knows that there are wheels in motion, the outcome would be as proposed or different... 

We will know more when the budget is approved in September. As it sits currently nothing changes for this year, and if the changes are approved he says they are looking at other structures for next year. 

I'll hold my ETFs for now and just watch and wait...

'Income Trusts' did change and these very well could too.

He made a point of discussing how the Financial Industry chases down clever options to stay ahead of itself - it was overall an interesting 45 minutes.....


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## Franko (Mar 31, 2012)

Has anyone found any updates on this topic? Seems like still no update from Horizons.


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## AltaRed (Jun 8, 2009)

Franko said:


> Has anyone found any updates on this topic? Seems like still no update from Horizons.


I don't know how there can be anything additional. Nothing has progressed as far as I know in Finance from the federal budget announcement and nothing more is going to happen this year.... with the election et al coming up.


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## leeder (Jan 28, 2012)

Fresh off the press... https://www.horizonsetfs.com/news/Press-Release/Horizons-ETFs-Proposes-Corporate-Class-Reorganizat

Haven't fully looked at the implications yet, but feels like there may not be any impact to current holders of the ETF. I could be wrong though.


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## OptsyEagle (Nov 29, 2009)

Looks like they are going to use the losses on their 2x bull and bear funds to offset the gains they get on the funds that make some kind of financial sense. Not a bad idea.

Some day the Feds should deal with corporate class funds that do this (allowing tax free mergers and then using the losses on one to offset the gains on another and distributing income from all, only after all expenses are deducted bringing the income close to zero) but I suspect it is a bigger nut to crack. They would need to specifically single out mutual funds/ETFs so as not to hurt legitimate corporations, but I have seen corporations abuse this a few times as well. I have talked about this abuse in the past a few times.


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## james4beach (Nov 15, 2012)

HBB performance has been lagging XBB. Since HBB appeared in 2014, it tracked XBB very closely until 2017. It started underperforming in 2017 and has gotten quite a bit worse in 2019, as shown here (relative performance)
http://schrts.co/JAFiqkkv

Lately, that difference has grown to be somewhat material: nearly 2% worse over those couple years.

Any idea what might be going on here? I'm trying to figure out if it can be explained with differences between their indices, or if something else is going on.

My guess is that HBB has less duration (less sensitive to rates). Therefore, in years where bond prices were strong (2017 & 2019 so far) HBB underperformed. In those years, XBB got a boost from having longer maturity & duration. The pattern seems to fit, with the divergence happening in 2017 & 2019 but not in 2018, which was pretty uneventful in bonds.

If this is the case, HBB is still fine. We're just seeing differences in performances due to where they sit on the yield curve. No two bond funds will ever be the same, and there is no "right" answer for maturity & duration.


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## andrewf (Mar 1, 2010)

No need to guess. HBB has a duration of 7.65 currently, while XBB has a duration of 8.12. Not sure if that explains the performance delta. XBB also has a 4bpp higher YTM.


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## scorpion_ca (Nov 3, 2014)

Horizons Swap ETFs: The Next Generation
https://canadiancouchpotato.com/2019/09/06/horizons-swap-etfs-the-next-generation/


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## hfp75 (Mar 15, 2018)

Thought I would update this ....

Horizons received information to day that confirms the change from an ETF structure to a Corporate class Mutual Fund structure.

If you want your unit values as they stand today to be preserved you need to :

1 - Go to the Horizons www site - in the top right corner there is a link called "ETF Corporate Reorganization" click that.
2 - You will go to another page on their www site - info you can read, but MOST important is the link at the bottom <ENTER SITE> click that.
3 - On the new www page - click <Enter Site> (yes again)
4 - Click the check boxes 'I Agree' - there are 2 and at the bottom click <I Agree>
5 - you are now in the www page that has the latest updates. Click <Register Now> enter your information, then Click <Next> finish this process.
* This registers you for email updates, In the first week of December a Joint Election Tax Package update/notification will come out to the registered user/email that you just entered.

This Joint Election will need to be completed and filed with your taxes - this should just be a one time election with the CRA. This is most important in non-registered accounts as it will preserve your original 'buy price' or 'Book Value'. If you dont make the CRA election then theoretically you will have a gain or loss. You can do this in other registered accounts but there are no tax implications - it will just adjust your 'buy price' or 'Book Value' so that there is no change.


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## james4beach (Nov 15, 2012)

Very interesting! How does this change things going forward? I'm not clear on what happens with their tax advantaged transformation of interest and dividends into capital gains.

The Horizons announcement, effective at the end of this month:
https://www.horizonsetfs.com/news/Press-Release/Horizons-ETFs-Announces-Unitholder-Approval-of-Pro



> Accordingly, Horizons ETFs expects to proceed with the Mergers on November 27 and November 29, 2019, as indicated in the above table. The ETFs will continue to trade as normal up until the Mergers, and will continue trading on the trading day following the Mergers under the same tickers.


They also say



> It is important to note that these ETFs are not expected to carry forward any tax liability into the proposed multi-class corporate fund structure, *and no historical or retroactive taxable implications* to unitholders of these ETFs are expected.


Sounds like a fresh start. Does this mean that the ETFs can lock in all capital gains _seen so far until now_, but, won't enjoy the same tax advantaged loophole going forward?

And if the loophole just continues with the new legal structure, why would the govenment be comfortable with the tax loophole continuing? The whole point was supposed to be stopping the conversion of dividends & interest into capital gains (violation of the spirit of tax law).

Can unitholders of Horizons ETF be confident that Horizons won't be nailed under the General Anti-Avoidance Rule?


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## OptsyEagle (Nov 29, 2009)

james4beach said:


> And if the loophole just continues with the new legal structure, why would the govenment be comfortable with the tax loophole continuing? The whole point was supposed to be stopping the conversion of dividends & interest into capital gains (violation of the spirit of tax law).
> 
> Can unitholders of Horizons ETF be confident that Horizons won't be nailed under the General Anti-Avoidance Rule?


Because the people that work for our government in the Finance Department are a bunch of idiots and dreamers. If they think companies like Horizon who have billions of dollars under management solely to take advantage of tax loopholes, are just going to stop, they are a bunch of dreamers.

As I said before, the government needs to make an example out of some of these financial engineering companies and perhaps even with their customers, before them and other companies are going to stop coming up with these structures that are designed solely to avoid tax.

Anyway, to answer your other question, using a corporate tax structure allows them to play the following tax games:

1) Any ETF that has expenses above their taxable income, will have losses. In the corporate structure, for example, they can take the income losses on an emerging market fund and use them to offset the interest income on a bond fund.
2) Any ETF that has capital losses on the books provides for the ability to take the capital losses of one fund/ETF and use them to offset the capital gains on the other fund/ETF.

That is pretty much all they are doing. I will add that many mutual funds are also doing this, so I would say in this structure, Horizion's has a lot more company. I won't get into the fairness of taking the capital losses from one set of investors and giving them to an entirely different set of investors, simply to avoid tax. I would think their fiduciary responsibility to protect all of their investors would be in breach here, but that is of no concern to CRA and I have not followed the entire tax trail to see if any harm is coming to anyone. It just does not feel right, is about all I can say about this one.

When the government stamped out tax deferred switching in corporate class funds, they should have stamped this one into the stone age as well. I suppose that is a lot easier said then done, but that is what I would have tried to do.


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## james4beach (Nov 15, 2012)

OptsyEagle said:


> As I said before, the government needs to make an example out of some of these financial engineering companies and perhaps even with their customers, before them and other companies are going to stop coming up with these structures that are designed solely to avoid tax.
> 
> Anyway, to answer your other question, using a corporate tax structure allows them to play the following tax games:


The government could (and maybe now should) nail them with GAAR.

I agree that the government needs to make an example of them. Too many cute games, and the intent is very clear.


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## james4beach (Nov 15, 2012)

All Horizons has to do now is create a tax advantaged ultra short bond fund, some version of ZST. It would be almost like a high interest savings account, but taxed at capital gains tax levels.

Why am I sitting here paying interest taxes like a moron?


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## hfp75 (Mar 15, 2018)

Well, I was also told that Horizons can now just file one tax return for all the swap based funds vs a return for each one. I was told it will actually be easier for Horizons.

Also, I use these products because of the tax efficiencies..... why not. Its legal...

J4B - If there was a tax advantaged ultra short bond fund I would use that too....


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## OptsyEagle (Nov 29, 2009)

When I went on my RBC DI site today they had a notification that Horizon's merger of its ETFs into its corporate structure will be effective, Monday, December 2, 2019. I went on the Horizon's site to look into it a little more and noticed that they have a link for a Section 85 election. *If you hold these funds in a taxable account and do not want a big realized capital gain you need to fill out that Section 85 form and submit it.*

Anyway, I suspect this arrangement will be even better then the old swap arrangement in that they won't be paying that 30 basis point fee to the counter-party of the swap arrangement. If anyone wonders how they will be pulling off their tax maneuvers going forward, it will be like all other corporate class mutual funds.

A corporate class fund basically consolidates the income, expenses, capital gains and capital losses, of all the portfolios within the corporate class structure. With mutual funds, the income that would previously be distributed on a bond fund, for example, is offset by the expenses of an emerging markets fund, for example that has a fairly high management fee and very little interest and dividend income. With the capital gains and losses, you might recall how 70% of all mutual funds under perform their index. Well, in a corporate class structure they take advantage when the under performance comes from losses and they use those losses to offset the capital gain distributions of the funds that make money.

Now with ETFs, this will work the same but with a few unique attributes. The first one will be offsetting taxes on fixed income. With mutual funds, their management fees are so high on all their funds, it is not difficult to take those and use them as deductions to make the small interest amounts in their fixed income funds, disappear. With ETFs, their management fees are very low. The good news is that most of these corporate class funds are those 2x bull and inverse garbage that have virtually no dividends or interest and probably still have high trading fees within its structure to use to offset income distributions on all the funds. Making the capital gains go away will be easy because those 2x bull and inverse garbage have a constant decay to them where capital losses inside the funds are almost guaranteed. Unless investors wake up to this and stop investing in them, I am sure Horizon's will be able to offset capital gains in their normal ETFs (S&P500 for example), for decades into the future.

Will the government go after this structure next. No one knows, but I suspect they will be fine for two reasons:

1) The government already went after corporate class mutual funds, a number of years back, when they discontinued their ability to switch within the corporate class structure without a disposition for tax purposes. It would not have escaped the Finance Departments attention back then, about this offsetting tax advantage, within that same corporate class structure, and they decided to leave it alone. Probably for the same reason as my next point.

2) The corporate class structure works similar to a company that owns some subsidiary companies as well. So, for example General Motors Canada might go out and buy an auto parts company. The parent company would probably just own the shares of that new subsidiary company. If that subsidiary company lost money, CRA will allow, rightfully so, for them to use those losses to offset the taxes on their profits from their other companies. This is done all the time and would be difficult to stop and if they tried would result in numerous reorganizations to prevent the punitive taxation that would result.

I suspect corporate class funds are operating under the same rules. CRA could specifically call them out by making some change for "flow through entities", but I doubt they will. If they were going to do that I suspect they would have done it back when they stopped the tax deferred switching.

Just my opinion, of course. I currently don't own any Horizon's ETFs.


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## Topo (Aug 31, 2019)

I think the question is will the expenses and tracking error remain low in the new structure. Changing the characterization of distributions from interest/foreign dividend to eligible dividend is helpful, but only marginally so. An investor living in BC in the top tax bracket has to pay 49.8% taxes on interest and 31.4% on eligible dividends. That is a saving of 18% on a distribution of roughly 2% (in bond fund or SPY for example), which amounts to 0.36% of the capital. To remain relevant, the Horizons fund cannot have expenses/tracking error that are more than 0.36% a comparable plain vanilla fund.

The situation is a bit different in lower tax brackets and corporate accounts, but still there is a level in which the tracking error would offset any tax savings.


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## OptsyEagle (Nov 29, 2009)

I don't think their objective is to turn regular income into dividend income. It is to eliminate taxable income altogether. Of course the investor will still have to pay their taxes when they sell, but as a capital gain. So effectively Horizon's is changing the various types of fully taxed income into deferred capital gains...pretty much just like before. 

Now one might ask. If they can save 0.30% in counterparty fees and get tax benefits just like before, why did they not do this a long time ago. The answer there, I suspect, was because with the swaps they could tell investors that there would NEVER be taxable distributions from their ETFs. Now they need to tell investors that it is unlikely there will be taxable distributions from their ETFs, but they cannot guarantee it. In some weird years there might be some small ones. That second statement just does not look as good on marketing brochure as the first one does, to an investor trying to avoid paying taxes.

As for the expenses. The management fee will always be a closely looked at item for any ETF, so I doubt you will see much upward movement in that, unless a lot of competitors either go away or increase their fees as well. The expenses paid to the swap counterparty will be eliminated. That was around 0.30% if I recall correctly, so management fees will drop from that benefit. They will now have a little tracking error, like all ETFs do, which will be higher then before because I think with the swap arrangement it was almost impossible to have any tracking error. With regular ETFs it is usually fairly low and I don't see any reason why these ones would be any different.


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## Topo (Aug 31, 2019)

OptsyEagle said:


> I don't think their objective is to turn regular income into dividend income. It is to eliminate taxable income altogether. Of course the investor will still have to pay their taxes when they sell, but as a capital gain. So effectively Horizon's is changing the various types of fully taxed income into deferred capital gains...pretty much just like before.
> 
> Now one might ask. If they can save 0.30% in counterparty fees and get tax benefits just like before, why did they not do this a long time ago. The answer there, I suspect, was because with the swaps they could tell investors that there would NEVER be taxable distributions from their ETFs. Now they need to tell investors that it is unlikely there will be taxable distributions from their ETFs, but they cannot guarantee it. In some weird years there might be some small ones. That second statement just does not look as good on marketing brochure as the first one does, to an investor trying to avoid paying taxes.
> 
> As for the expenses. The management fee will always be a closely looked at item for any ETF, so I doubt you will see much upward movement in that, unless a lot of competitors either go away or increase their fees as well. The expenses paid to the swap counterparty will be eliminated. That was around 0.30% if I recall correctly, so management fees will drop from that benefit. They will now have a little tracking error, like all ETFs do, which will be higher then before because I think with the swap arrangement it was almost impossible to have any tracking error. With regular ETFs it is usually fairly low and I don't see any reason why these ones would be any different.


You are right. They may not have to pay full eligible dividends, maybe only sparingly from time to time. The way that would work is if they bought for example 100 dollars of SPY, take the 2.00 dividend, and deduct their expenses. But then they would have to pay taxes on the remainder. The amount of those taxes will also contribute to the tracking error. An ETF also pays expenses, but no tax internally; they just pass the foreign dividend to the unit-holder to be taxed personally.

Horizons would pay less taxes if they have more expenses, but that is of course never a good thing.


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## OptsyEagle (Nov 29, 2009)

Not that much of this is important, but I don't think taxes the investor might or might not pay would affect the tracking error. 

As for the other point, I am suspecting that Horizon's, is expecting to receive into their ETFs, many dividends that would normally be taxable. Their hope is that by deducting all the expenses from all the ETFs that do not receive dividends, like the 2x bull and inverse and bullion ETFs, etc, they can offset all of the taxes that would have come from the dividends received on their more normal index ETFs (HXT and HXS, etc).

Whether they can do it remains to be seen, but a corporate class fund that ends up issuing big taxable distributions, will quickly lose investors, so I suspect they know what they are doing. You can go and look at all the corporate class mutual funds. Maybe some have issued distributions but it would not be very frequent any that did, it would be very small distributions. 

I will be interested to see how good it works with ETFs. I think Horizon's is about the only ETF provider that could do this well, since they have all those 2x bull/bear and inverse ETFs, that provide a steady stream of expenses and losses, that most of the other ETF providers do not have.


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## Topo (Aug 31, 2019)

OptsyEagle said:


> Not that much of this is important, but I don't think taxes the investor might or might not pay would affect the tracking error.
> 
> As for the other point, I am suspecting that Horizon's, is expecting to receive into their ETFs, many dividends that would normally be taxable. Their hope is that by deducting all the expenses from all the ETFs that do not receive dividends, like the 2x bull and inverse and bullion ETFs, etc, they can offset all of the taxes that would have come from the dividends received on their more normal index ETFs (HXT and HXS, etc).
> 
> ...


If they can find enough expenses to deduct against all the income they are receiving, then they will not owe much taxes; that could keep the tracking error down to a minimum.


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## off.by.10 (Mar 16, 2014)

Topo said:


> You are right. They may not have to pay full eligible dividends, maybe only sparingly from time to time. The way that would work is if they bought for example 100 dollars of SPY, take the 2.00 dividend, and deduct their expenses. But then they would have to pay taxes on the remainder. The amount of those taxes will also contribute to the tracking error. An ETF also pays expenses, but no tax internally; they just pass the foreign dividend to the unit-holder to be taxed personally.
> 
> Horizons would pay less taxes if they have more expenses, but that is of course never a good thing.


Is it just me or does it make no sense that they would have as much in expenses as the funds normally generate in dividends? It sounds like the swap expenses will simply turn into internal tax expenses, for the most part. The good part is that this should be less than most people's marginal rate. The bad part is that you'll pay tax on the remainder of those dividends a second time when you sell (as capital gains). I have no idea how it works out and feel too lazy to crunch the numbers  But I suspect the answer is "it depends", like most similar questions (eg. about RRSPs).


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## humble_pie (Jun 7, 2009)

my view is that ETF tracking errors occur because the "representional stocks" & the derivative portfolios which the managers do actually hold & trade in reality, differ slightly in their outcomes from what their computer models tell them their advertised index holdings should be returning.

of course they have to distribute according to the "should be" modelled return, so the tracking error handily accounts for the difference.


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## OptsyEagle (Nov 29, 2009)

off.by.10 said:


> Is it just me or does it make no sense that they would have as much in expenses as the funds normally generate in dividends? It sounds like the swap expenses will simply turn into internal tax expenses, for the most part. The good part is that this should be less than most people's marginal rate. The bad part is that you'll pay tax on the remainder of those dividends a second time when you sell (as capital gains). I have no idea how it works out and feel too lazy to crunch the numbers  But I suspect the answer is "it depends", like most similar questions (eg. about RRSPs).


That is why I will be watching it with interest. As I said, in mutual funds, it works quite well. Very high management fees from all the funds to use as deductions and a constant supply of loser funds to merge into the corp.class to provide offsetting capital losses. With EFTs, I have no idea. Obviously it is not just the fee rate charged but the amount of assets it is charged against. In other words, how many dollars of income, are we talking about, that needs to find how many dollars of expenses, to offset it.

Those bull/bear, 2x and inverse ETFs are the wild card here, in my opinion. I have to assume they have a unique feature that makes it all work. Higher fees, no dividend or interest income and continuous losses for years to come. Sounds like a real winner to me. lol. Anyway, people seem to invest in them, but are there enough idiots like them to offset the income and capital gains generated by the index funds like HXT and HXS. Those latter funds are getting fairly large as well, so it will be interesting to watch.

Perhaps I am missing something.


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## leeder (Jan 28, 2012)

Has anyone filled out the web based questionnaire at Horizons yet? For someone with a joint account holding these ETFs, I am not clear whether I should disclose 50% of the ACB and 50% of the units, while my wife discloses the other half. E.g., if I hold 1000 units of HXT at $26,000 ACB, should I be putting 500 units at $13,000 for me and 500 units at $13k on my wife's questionnaire?


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## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> I don't think their objective is to turn regular income into dividend income. It is to eliminate taxable income altogether. Of course the investor will still have to pay their taxes when they sell, but as a capital gain. So effectively Horizon's is changing the various types of fully taxed income into deferred capital gains...pretty much just like before ...


That's the way I read it as well. 



OptsyEagle said:


> ... why did they not do this a long time ago.
> 
> The answer there, I suspect, was because with the swaps they could tell investors that there would NEVER be taxable distributions from their ETFs. Now they need to tell investors that it is unlikely there will be taxable distributions from their ETFs, but they cannot guarantee it. In some weird years there might be some small ones. That second statement just does not look as good on marketing brochure as the first one does, to an investor trying to avoid paying taxes ...


Plus being a MF corporate structure wouldn't fit the "ETFs are better" marketing mantra.


Cheers


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## andrewf (Mar 1, 2010)

The flip side of the potential of having taxable distribution means now you can borrow to invest in these funds, and have the interest expense deductible from income?


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## m3s (Apr 3, 2010)

3 new Horizons ETFs


HSAV might be interesting alternative to chasing HISA promos w unrealized cap gain instead of income

Horizons Cash Maximizer ETF (HSAV) seeks to generate modest capital growth by investing primarily in high interest deposit accounts with Canadian banks. While any decision to pay dividends or other distributions is within the discretion of the Manager, HSAV is not currently expected to make any regular distributions.
MER 0.18%


HXCN might be an alternative to VCN in a taxable account.. but I'd wait to see if tax rules respond to this loop hole again

Horizons S&P/TSX Capped Composite Index ETF (HXCN) seeks to replicate, to the extent possible, the performance of the S&P/TSX Capped Composite Index (Total Return) (the “HXCN Index”), net of expenses. The HXCN Index is designed to measure the performance of the broad large-cap market segment of the Canadian equity market, with a capped weight of 10% on all constituent issuers.
MER 0.05%


HULC meh

Horizons US Large Cap Index ETF (HULC) seeks to replicate, to the extent possible, the performance of the Solactive US Large Cap Index (CA NTR) (The “HULC Index”), net of expenses. The HULC Index is designed to measure the performance of the large- cap market segment of the U.S. equity market.
MER 0.08%


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## hfp75 (Mar 15, 2018)

m3s said:


> 3 new Horizons ETFs
> 
> 
> HSAV might be interesting alternative to chasing HISA promos w unrealized cap gain instead of income
> ...



This could have been a new thread.......

Wonder what the yield should be on HSAV

.......


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## Synergy (Mar 18, 2013)

HSAV would be great inside a holdco. I couldn't seem to find any more information online....


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## james4beach (Nov 15, 2012)

HSAV web page: https://www.horizonsetfs.com/etf/HSAV
Product sheet: https://www.horizonsetfs.com/horizons/media/pdfs/productsheets/HSAV-Product-Sheet.pdf

It holds bank deposits inside the 'Corporate Class' loophole, so that interest is accumulated in the NAV but not paid out:



> Corporate Class: Tax Efficiency
> 
> HSAV is a class of shares in a corporate class structure that allows the ETF to deliver its
> returns in a tax-efficient manner. With this structure, the ETF will receive interest income
> ...


This raises a question for me: why do any of us ever pay any tax on dividends or interest at all? Clearly, anything can be put inside the Corporate Class loophole to convert anything into capital gains.


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## james4beach (Nov 15, 2012)

Personally I think the government needs to stamp this out and make an example out of those using the loophole, by giving them an excess or punitive tax -- something that actually creates a painful loss for those using the loophole.

This kind of loophole is exclusively used by the very rich. Middle class people with 60K incomes are not the people trying to evade taxes using these things. I think the behaviour has to be extinguished.


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## Synergy (Mar 18, 2013)

> This raises a question for me: why do any of us ever pay any tax on dividends or interest at all? Clearly, anything can be put inside the Corporate Class loophole to convert anything into capital gains.


Capital gains are not always the preferred source of income. Take a look at the marginal tax rates, etc.


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## Synergy (Mar 18, 2013)

james4beach said:


> Personally I think the government needs to stamp this out and make an example out of those using the loophole, by giving them an excess or punitive tax -- something that actually creates a painful loss for those using the loophole.
> 
> This kind of loophole is exclusively used by the very rich. Middle class people with 60K incomes are not the people trying to evade taxes using these things. I think the behaviour has to be extinguished.


A lot of middle class small business owners are using these types of investments. Working class people making less than private sector workers with no pension or benefit plans. Investing for the future of their business, etc.

Try opening a corporate investment account. You will see for yourself how expensive it truly is.


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## james4beach (Nov 15, 2012)

You make it sound like it's what the common man uses, but that's not what I've seen in practice. People I know who have structures like these are doctors, dentists, etc and have very significant account values (growing into millions). I have not seen any "average joe" who has a corporate account with 2M value.

They are using them as tax shelters. The very wealthy in this country use these, and lobby for them, trying to make it sound like like they are the "average joe"... they are not.

I've run a business too, I also have no pension and no benefits, and similarly accumulated my own assets. I put them into the TFSA, RRSP, and non-registered and pay the taxes. The tax burden really is not that high, but that's because mine don't add up to $5 million! I know from first hand experience that accumulating a significant amount into RRSP + non-registered _does not_ create a massive tax bill.

Let's face reality here. The people who loaded up CCPC structures have been trying to get a freebie, avoiding taxes. Someone told them it was a good idea, they saw other doctors & dentists do it, and with time they have come to think they "deserve" those tax breaks.


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## Jimmy (May 19, 2017)

hfp75 said:


> This could have been a new thread.......
> 
> Wonder what the yield should be on HSAV
> 
> .......


The product sheet lists the gross yield as 2.25%. Fees are .18% so net yield is 2.07%. https://go.horizonsetfs.com/l/147371/2020-02-05/5zn2zb

This would be good for a non reg account. I like CSAV HISA ETF from First Asset in my RRSP. The net yield is 2.11%.


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## james4beach (Nov 15, 2012)

Maybe I should clarify to what I wrote before. I realize that people have businesses and corporations, which might inevitably accumulate assets. Just happens as you run your own business, and yeah, there are people with corps who are not fabulously wealthy (I get that).

My beef is with the doctors and other very high income earners (people who normally hit the top marginal tax rate) who used these structures purely for tax advantages. They hoard assets in these to defer personal taxes. It gave a huge advantage to people hoarding passive investments.

The mechanics of this is described in this paper



> The ability of those who use CCPCs to earn more through investments than those who earn income directly, *contradicts the principle of tax integration*. There is no provision in the ITA that aligns the earnings available within a corporation with the after-tax capital that would be available to an individual. This difference is the main investment benefit conferred upon business owners.
> . . .
> Since 2000, moreover, the gap between the corporate and personal tax rates at the combined federal and provincial level, have widened from an average of 26 to 37 percentage points across Canada. The federal income tax rates have risen over the past few years *while the corporate rate has been lowered to encourage business growth* and make Canada more internationally competitive. Therefore, there is an ever-increasing incentive to hold income within a private corporation, passively investing and deferring tax.


I'm not saying everyone was exploiting this unfair advantage, but certainly there were a large number of high income earners (people who _should_ be paying more taxes) who did exploit this. They came to think of it as normal, and believe it's their right.

Business owners had an unfair advantage.

So my criticism is for the high income earners who are at the top marginal tax rate. They were abusing the CCPC to avoid paying their fair share of taxes and advisors were even recommending these corps specifically for that purpose!


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## humble_pie (Jun 7, 2009)

james4beach said:


> Personally I think the government needs to stamp this out and make an example out of those using the loophole, by giving them an excess or punitive tax -- something that actually creates a painful loss for those using the loophole.
> 
> This kind of loophole is exclusively used by the very rich. Middle class people with 60K incomes are not the people trying to evade taxes using these things. I think the behaviour has to be extinguished.




jas4 i believe u have another post in this thread critiquing personal holding corporations for professionals such as MDs & saying doctors should not be allowed to accumulate otherwise taxable income within these structures, to be taxed only eventually in the future, no?

only for the purposes of a mild debate, i'm tempted to post this by way of reply: how are these structures - corporate class & professional holdco - really any different, au fond, from an RRSP or a TFSA, or even a deferred pension benefit?

anybody & everybody can benefit, to one degree or another, from some kind of deferred taxation structure in canada. Or even, in the case of the uber-democratic TFSA, no taxation at all. Me i don't see any urgent need to single out MD's holdcos or corporate class funds for special punishment.


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## humble_pie (Jun 7, 2009)

m3s said:


> Horizons US Large Cap Index ETF (HULC) seeks to replicate, to the extent possible, the performance of the Solactive US Large Cap Index (CA NTR) (The “HULC Index”), net of expenses. The HULC Index is designed to measure the performance of the large- cap market segment of the U.S. equity market.
> MER 0.08%




passing observations ...

like the TD, Horizons funds have moved entirely to Solactive indexes

so has a much smaller toronto-based issuer of specialty ETFs named Evolve

nobody knows exactly quite what Solactive indexes are really up to. That is, nobody knows to what extent they consist of derivative instruments & representational sampling stocks.

what people do know is that germany-based but globally-active Solactive is the world's biggest producer of custom-built indexes. They have thousands of indexes on offer, all tweakable to order. Solactive indexes are also much cheaper to run than the previously popular S & P index group.

Horizons has always been known for more transparent admission of the derivative based content of its ETFs than other ETF vendors. One can see this tradition being upheld in the above quoted text. Horizons doesn't brazenly say it "holds the stocks" that constitute a particular index. Instead, Horizons states that it "seeks to replicate" the return of the stocks that constitute a particular index.

neither does TD's new prospectus language for its current generation of Solactive based index & ETF funds brazenly claim that it "holds the stocks" that constitute a particular index. Like Horizons, TDAM also states (alas, in prospectus only, not in the fast-fact condensed marketing literature) that it "seeks to replicate" the performance of a particular index.


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## james4beach (Nov 15, 2012)

humble_pie said:


> how are these structures - corporate class & professional holdco - really any different, au fond, from an RRSP or a TFSA, or even a deferred pension benefit?


The difference I see humble_pie is that RRSPs and TFSAs are available to everyone in equal measure. We give the same tax deferral advantage to everyone due to the caps. The corp shelters, on the other hand, provide a disproportionate advantage to the ultra rich because _they can become arbitrarily large_, and are only needed if someone has very high income to begin with. Therefore, they are a special advantage for the rich.

Here's a thought experiment which I think demonstrates pretty clearly how the corp shelter is only for the rich:

Imagine that hoarding passive assets inside a corp was banned altogether. Instead, the government increased the RRSP & TFSA maximums and imagine they did these two things *so that the net sheltering effect was equivalent (preserved) for all Canadians' aggregate dollars*.

In this hypothetical, that means that of all invested money in the country, the same amount that was sheltered yesterday can be sheltered tomorrow. Sounds fair right?

I think this quickly illustrates why the RRSP & TFSA are more fair for Canadians. If the government did this, immediately a huge range of income earners could use the larger contribution allowances; it's actually accessible to all Canadians. But notice what would happen: the ultra wealthy Canadians, those with perhaps > 10M, won't be able to shelter everything they have in the new larger RRSP & TFSA limits. They are, net, losing shelter space.

A moderately wealthy person, say with 2M, would indeed be able to shift to the new equivalent shelters with larger limits. This change would not hurt them. But after all, they are not the ultra rich.

Even a moderate income earner, somebody making 80K a year and accumulating investments, could now probably shelter everything they have. What's really happening is that these middle class people are "grabbing" that shelter space that the ultra rich currently use disproportionately. Is this not more fair and equal?

I am not fan of special perks for the ultra rich. I interpret the corporate class or passive investments inside a corporation as special benefits for the ultra rich.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I am not fan of special perks for the ultra rich. I interpret the corporate class or passive investments inside a corporation as special benefits for the ultra rich.



again only as a form of mild debate ... i don't personally know that many doctors who are awash w more than $10 million ... ones i know are unbelievably hard-working ...

here in eastern canada we are having excruciating, neverending, horrible difficulties keeping medical specialists in this country & preventing them from moving to the US of A where they could earn so much more. Huge numbers of ordinary people here no longer even have a family doctor. I have no reason to believe that MD accessability in central or western canada is any better.

if a personal holdco is one of the things that keeps em happy enuf to stay in this country, then i think we should try our blasted utmost to keep top-ranked ophthalmologists, neurologists, radiologists, neonatalogists, oncologists, ER physician specialist/surgeons etc at work here at home ...


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## james4beach (Nov 15, 2012)

The doctors aren't the only people using this so I don't think it's right to frame this as a "perk for doctors". The lobby group(s) are certainly framing it like that, because people love doctors. But there are also: dentists, pharmacists, lawyers, consulting engineers, oil & gas services contractors, etc.

It's not right to leave open a giant tax loophole just because some doctors use it and like it.

And if, as you say, they have nowhere close to $10 million, then they don't need a corp anyway. Why not just increase the TFSA and RRSP maximums? This is much easier to manage, less administration and complex structures, plus it's more fair to all Canadians.

I would argue that our current tax regime, perhaps if we slightly increase RRSP & TFSA, for a young person starting today has the potential to shelter enormous future amounts. I've had this argument with medical friends and showed the projections on paper just using RRSP, TFSA, nonreg. The shelter and savings really adds up to a lot over the years and if -- as you say -- these doctors are well under $10 million, this will be enough for their needs.

Let's do a quick calc. This is very relevant to myself as well, as a consultant/engineer. Say the professional starts earning good money at age 35, as many of us might after tons of schooling. They now have 30 years more work ahead of them. The TFSA alone is going to shelter roughly 600K by retirement including growth. The RRSP alone is going to shelter roughly 2300K by retirement including growth. Combine these two and the hard-working doctor we all love is able to fully shelter about $3 million already with standard shelters. It would only take a little boost to maximums and we'd quickly get a figure like $4 or $5 million of total shelter within TFSA & RRSP.

My medical friends (my age) hear this, but then they tell me that other doctors say they use a corporation. I'm just not convinced they need that. Also keeping in mind that non-reg investments can be quite efficient in many ways with cap gains taxes -- *that's another deferral freebie*!

I'm not writing all this as a poor person or socialist. I have significant investments for my age, including from running a business as much as 20 years ago... I know what the doctors are complaining about. I just think they aren't seeing the solutions in plain view. I have a lot in non-registered investments. I'm maxing out the TFSA and RRSP. All together, these offer significant sheltering and deferral capability.

Frankly I think doctors should lobby for TFSA enhancements, perhaps a retroactive catch-up for medical professionals, instead of hammering away at this CCPC issue.


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## humble_pie (Jun 7, 2009)

are the doctors complaining ^^ though? i don't know any doctors who are complaining ... they're all too busy working ...

jas4 maybe because it's late at night but somehow i don't quite get your point. Are u in a snit because you think you'll only be $2-3 million, not way past $10 million?


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## like_to_retire (Oct 9, 2016)

james4beach said:


> The difference I see humble_pie is that RRSPs and TFSAs are available to everyone in equal measure. We give the same tax deferral advantage to everyone due to the caps. The corp shelters, on the other hand, provide a disproportionate advantage to the ultra rich because _they can become arbitrarily large_, and are only needed if someone has very high income to begin with. Therefore, they are a special advantage for the rich.


So do you see all the various deductions that lower income people enjoy and are not available to higher income people, "_a special advantage?"_.

ltr


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## Synergy (Mar 18, 2013)

There are ways to tax the ultra rich without having to hurt the little guys at the same time.

These types of tax structures can be very beneficial for the little guys trying to grow a business, providing jobs in small communities, etc.

I think someone has there knickers in a knot.

While we are at it we should be shutting down the dividend tax credit. All those dirty, tax avoiding retirees strategically earning just enough so they pay no tax.


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## OptsyEagle (Nov 29, 2009)

humble_pie said:


> only for the purposes of a mild debate, i'm tempted to post this by way of reply: how are these structures - corporate class & professional holdco - really any different, au fond, from an RRSP or a TFSA, or even a deferred pension benefit?


I would say the main difference here are the maximums. The TFSA and RRSP and pensions limit to a more reasonable amount, how much can be deferred and/or sheltered. In corporations we are pretty much talking about around $500,000 per year (Small Business Deduction), since I believe that after the small business deduction is used up, the incentive to leave money inside corporations pretty much goes away. I imagine any income above that is probably bonused out of the corp., to the owner, and the taxes are consequently paid. 

Not only does an individual employee not get anything near $500,000 per year of sheltering room but you will find that the corporate owners tend to utilize the TFSA, RRSPs and sometimes pension plans, on top of their corporate incentives.

I am all for helping small business owners grow but I probably lean with J4B on individual corporations for most professionals. As for giving incentive to doctors to aid Eastern Canada, we must remember that with the current corporate tax rules a Doctor in Toronto or BC, gets the same incentive. I think we would need Provincial incentives to direct WHERE the doctors are needed, not Federal ones, if that was our intent.


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## Synergy (Mar 18, 2013)

There's very little difference between investing inside or outside a corporation. There is a tax deferral advantage that is somewhat offset by the higher corporate tax rate. Essentially, investment income is taxed at the highest personal tax rate inside a corporation. You often have to issue dividends in order to keep the tax rates comparable. Talk to a good accountant and they will likely advise you against putting together a holdco. Sometimes you have no choice as you may need the liability protection for funds that will be eventually used to grow a business, etc.


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## andrewf (Mar 1, 2010)

james4beach said:


> You make it sound like it's what the common man uses, but that's not what I've seen in practice. People I know who have structures like these are doctors, dentists, etc and have very significant account values (growing into millions). I have not seen any "average joe" who has a corporate account with 2M value.
> 
> They are using them as tax shelters. The very wealthy in this country use these, and lobby for them, trying to make it sound like like they are the "average joe"... they are not.
> 
> ...


My parents fit your avg joe with a large corp account. They are obviously not poor but you probably wouldn't guess that they were fairly wealthy, just their consumption habits are relatively modest.


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## humble_pie (Jun 7, 2009)

Synergy said:


> There are ways to tax the ultra rich without having to hurt the little guys at the same time.
> 
> These types of tax structures can be very beneficial for the little guys trying to grow a business, providing jobs in small communities, etc.
> 
> I think someone has there knickers in a knot.



"their" knickers in a knot

one has to admire how correctly he spells "hoards" & "hoarding" though. No sloppy hordes for this moderator!

i'm not really in favour of taxing the uber-rich more. I'm much more in favour of high taxes on consumption & luxury items coupled with careful provisions that middle & low income are spared any additional consumer tax.


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## AltaRed (Jun 8, 2009)

Jimmy said:


> The product sheet lists the gross yield as 2.25%. Fees are .18% so net yield is 2.07%. https://go.horizonsetfs.com/l/147371/2020-02-05/5zn2zb
> 
> This would be good for a non reg account. I like CSAV HISA ETF from First Asset in my RRSP. The net yield is 2.11%.


These rates are likely not sustainable. A look at yield history of PSA and CSAV will show that 2019 is most likely an anomaly. I think one should assume upwards of 2% and as low as A class in-house brokerage ISAs at 1.6%. Example: Scotia's DYN5000 A class is 1.6% and F class is 1.85%. Something in that 1.8% range is more likely where these things will fall on a comparative basis.


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## james4beach (Nov 15, 2012)

"Little guys" are not punitively taxed in any way. Show me an example of how a little guy, with relatively small asset value and low income, is punitively taxed... it doesn't happen in Canada.

I run into corp owners who whine about how unfair life is to them, how they are taxed so heavily, and how they are little guys (they are not). These are people with enormous incomes or huge assets... it's a kind of 'victim mentality' that privileged wealthy business people appear to get. In reality, they are not little guys and they aren't even heavily taxed. The Loonie Doctor is a great example of one of these rich whiners. The man should grow up and quit his belly-aching.

They just got _used_ to amazing and special tax advantages and have come to think of that privilege as being normal.



andrewf said:


> My parents fit your avg joe with a large corp account. They are obviously not poor but you probably wouldn't guess that they were fairly wealthy, just their consumption habits are relatively modest.


There's no problem with a corporation. Great idea to have a corp and grow your business. My opposition is to the concept of using it as a tax shelter for storing large amounts of passive investments; that can be an unfair advantage. The corporation should not be used for that.

If the income generated by investments inside the CCPC are taxed too punitively, then the answer is clear: *take those assets out of the CCPC and stop using the corp structure to hoard the assets*. You can (and still should) use the corporation for active business, and you enjoy huge tax advantages to do so!

But instead what's happening, and what the Horizons products show, is that people are trying to cling to that amazing shelter "they deserve" and business people are stubbornly trying to make it work using new tricks.

IMO, it's time to end this notion that people who have corporations "deserve" to have a special tax vehicle to shelter their passive investments. They deserve no such thing, and have been given more than enough incentives for operating their businesses.

The CCPC gives you big advantages to operate a small business. Just stop using it to hoard passive assets. I would also point out that if you stubbornly keep trying to misuse the corporate structure to hoard investment assets (with Horizons ETFs etc), beware that the day might come when significant tax penalties are brought in to penalize this kind of behaviour _and then you will really be sunk_.


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## james4beach (Nov 15, 2012)

For those of you who currently keep your investments inside your corporations, you might want to review some of the latest analysis on storing assets in the corporation vs RRSP and TFSA:

https://www.looniedoctor.ca/2019/10/25/corporation-rrsp-tfsa-simulator/
https://www.pwlcapital.com/resources/a-taxing-decision-2017/

PWL writes:



> This paper offers analysis to compare the efficacy of an incorporated individual paying personal tax on salary and dividends in order to utilize their RRSP and TFSA as opposed to retaining earnings in their corporation for investment. The analysis shows that, on an after-tax basis, *the RRSP and TFSA can accommodate greater long-term wealth accumulation compared to a taxable corporate investment account*.
> 
> This result is driven by the higher after-tax returns that can be earned in the RRSP and TFSA compared to taxable investments held in a corporation.


As you can see, this supports what I said earlier: doctors or other high income earning professionals already have excellent sheltering benefits using the RRSP & TFSA.

It is an incorrect assertion (which is made earlier in this thread) that those poor "little guys" must store their investments inside the corporation.

Something to consider, if you are still of the mind set that you must keep investments inside your corporation. Could it be that your accountant or advisor is pushing you in that direction, maybe making things more complex than they need to be?


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## Synergy (Mar 18, 2013)

Wow, not much more to say "hear". Horizons have hit a nerve.


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## james4beach (Nov 15, 2012)

Synergy said:


> Wow, not much more to say "hear". Horizons have hit a nerve.


Read my latest post. You can see that there probably is not a significant advantage to storing the investments inside the corp. You may have received poor advice in the past; maybe time to find a new accountant?

As for hitting a nerve... I take offence to your, frankly, BS claims that the poor "little guy" is being hurt. Don't pretend to be a little guy when you're not.

Our tax system is actually very fair and offers huge advantages to small business operators.


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## Synergy (Mar 18, 2013)

The taxation of investment income in a corporation is fairly complicated, but it was designed to eliminate any tax advantage of earning investment income through a corporation. 

https://ca.rbcwealthmanagement.com › ...PDF
Taxation of investment income in a corporation - RBC Wealth Management

Don't bother reading as you obviously already know everything about everyone and everything.

Depending on the province and the income source there can me a small advantage but there can also be a disadvantage.

I"m signing off as this is getting personal.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Our tax system is actually very fair and offers huge advantages to small business operators.


Just as it offers the advantage of paying little or no tax for the lower income crowd, as their "fair share" of taxes are paid by the higher income group.

You seem to have an awful big bee in your bonnet today.

ltr


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## humble_pie (Jun 7, 2009)

like_to_retire said:


> ... an awful big bee in your bonnet today



with a toorie on his bonnet
a red toorie on it
a red toorie oorie oorie ay

he wore his kilt and sporran
and off he went to war in
his red toorie oorie oorie ay


still sayin they don't hold the stocks they say they hold

still sayin they hold a dog's breakfast of derivatives, plus they hold representational sample stocks which they believe will provide the return of a specific index, plus they hold a small bundle of riskier stocks which they lend out to hedge funds in return for high fees (gotta make money somewhere)

maybe some stocks from the actual index they advertise but with all the smoke & mirrors who'd know where to find em


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## james4beach (Nov 15, 2012)

It just occurred to me that Horizons' bold use of the corporate-class to evade taxes on their ETFs might finally be what brings attention, and urgency, to tackling the corporate-class issue.

Will be kind of funny if Horizons ends up killing the loophole for everyone. There's close to $200 billion invested in Canada this way, more than triple all the money in iShares Canada ETFs.

In other words it's a very significant amount invested this way, with significant tax revenue for the public that is not being paid.


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## Beaver101 (Nov 14, 2011)

james4beach said:


> It just occurred to me that Horizons' bold use of the corporate-class to evade taxes on their ETFs might finally be what brings attention, and urgency, to tackling the corporate-class issue.
> 
> Will be kind of funny if Horizons ends up killing the loophole for everyone. T*here's close to $200 billion invested in Canada this way*, more than triple all the money in iShares Canada ETFs.
> 
> In other words it's a very significant amount invested this way, with significant tax revenue for the public that is not being paid.


 ... that $200B can't all belong to Horizon's and boutique ETFs' providers. 

The banks all have corporate-class structures in one way or another, but mostly in mutual funds. What're the chances these c-c funds offered by the banks being eliminated?


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## OptsyEagle (Nov 29, 2009)

james4beach said:


> It just occurred to me that Horizons' bold use of the corporate-class to evade taxes on their ETFs might finally be what brings attention, and urgency, to tackling the corporate-class issue.


I doubt the use of Corporate Class funds has escaped the attention of the Cdn. Finance Department. When they went after the elimination of tax deferred switching between corporate class funds, I figure they most likely would have pondered this loop hole as well. The big issue, as I see it, is that a corporate class fund is taking expenses, that are associated to one investor and allowing the manager to give the benefit of them to another investor. They are also using capital losses, associated to one investor and giving the benefit of those to another as well. Somehow that just seems wrong.

That said, it happens in the corporate world all the time. You sometimes see a company trading on the Venture exchange in the business of mining something, being taken over by perhaps a retailer or tech company. When you are done scratching your head on the reason for this merger, you notice that the miner, that traded for a few pennies a share, and had almost no net assets, did have a few hundred million dollars of tax losses, on their books. You have now figured out that the acquirer is buying a $1 of tax savings for perhaps $0.20, and the seller is happy to get anything for something they have no use for anymore.

Although I, and I bet our government, is not impressed with either of those shenanigans, their issue is how to eliminate those, while preserving it for another corporation who might invest in a new venture, where they know they will have losses for a few years, but require the ability to carry those legitimate tax losses back to their parent company, who is profitable, for tax deduction.

They certainly do not want to dissuade a companies eagerness to start a new business. Also, these tax losses allowed no deductions for the people/companies who incurred them, therefore should another be forbidden from using, what are legitimate tax losses.

That is the issue I see with corporate class funds. Also, the taxes owed on corp. class funds do eventually get paid but they almost always are deferred and end up being tax as a capital gain when other types of income were actually earned. Personally, I think it would be best to stop the use of these tax losses, by non-related entities, for both real businesses and investment funds. Even if it is not 100% fair, we do have a deficit to get rid of, so let's take the tax money and move on. Just my opinion, of course.


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> james4beach said:
> 
> 
> > ... There's close to $200 billion invested in Canada this way, more than triple all the money in iShares Canada ETFs.
> ...


There's also Fidelity Canada, Investors Group, AGF etc. to add to the list.




james4beach said:


> ... it's a very significant amount invested this way, with significant tax revenue for the public that is not being paid.


Is it?

If we assume the full $200 billion is held in taxable accounts, with a 3% income that works out to $6 billion in taxable income. Assuming it's fully taxable at top rate, where I doubt it would all be fully taxable - it's now down to $3 billion or so.

With provincial and federal overspending being reported at $4 billion to $18.1 billion at various times - addressing overspending seems more significant.


Don't get me wrong ... it would be better if it was was dealt with but there are bigger problems that make this amount of lost tax revenue inconsequential.


Cheers


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## james4beach (Nov 15, 2012)

Fairness in the tax system goes beyond just immediate revenue numbers. Watching out that we don't get rich-poor disparity is important for social cohesion and national stability.

It's also in the best interest for the rich, because when huge disparity develops (like in the US) there's a higher chance of a public backlash and punitive measures for the rich. IMO the US is getting close to that point. Having been a high income earning US taxpayer for years, and part owner of a small corp, I can tell you that I paid ridiculously little tax. I should have been paying far more; it wasn't right.

Thankfully the Liberals did close some loopholes, and that's the kind of correction which helps keep the tax system fair.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Fairness in the tax system goes beyond just immediate revenue numbers. Watching out that we don't get rich-poor disparity is important for social cohesion and national stability..


I agree, and the fact that we have a progressive, graduated tax system (meaning the more money you make, the more income taxes you pay), then there is already a greater burden on the rich. Add the graduated tax credits and deductions that favour the lower income group, I feel we are indeed approaching a rich-poor disparity that may start to influence the higher income group to get "creative" with their taxes, and we don't want this to occur. They somehow have to address this over-taxation problem.

ltr


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## MarcoE (May 3, 2018)

The problem occurs when our taxes rise higher than is the norm in other countries.

For example, consider a doctor with a small Canadian corporation. The doctor saves her money, invests it inside the corp, and pays 50-55% tax on the passive income. The doctor is offered a job in America. Don't quote me on this, but I believe that the tax on passive income in America is much lower (I'm not sure what the figure is off the top of my head). So the doctor takes the job, and her tax burden is cut significantly. And Canada loses a doctor. The same doctor might have been happy to remain in Canada if her tax burden were, say, 30-40%. But once the government began to take half or more -- she left, and we lost a doctor.

Or instead, the doctor might go to something like Horizon's ETFs, and avoid paying taxes all together. We might have been happy to pay 30-40%, but once she saw her tax burden creep to 50%+, she took the plunge and loopholed her way out.

Obviously we need taxes in Canada, because we need to pay for stuff. And we need high earners to pay their fair share. But we also need to be competitive with other countries, not tax too much, or we'll lose people and lose businesses. We need tax revenue but we also need to prevent brain drain.

50% is a psychological milestone. Once tax hits or crosses 50%, people begin to look for ways to avoid it. They might move to another country, or find loopholes, and avoiding this tax becomes a priority. They avoid the tax somehow, and then it's the middle class which is stuck with having to pay higher taxes to make up for the lost revenue.


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## james4beach (Nov 15, 2012)

By the way, from other conversations we've had, I know that MarcoE ^ is very knowledgeable about this topic.

There's a "framing" effect based on what happens in the US, because they are so close to us and many professionals can choose between these countries. I've hopped between Canada & the US myself.

An unusual thing about the US is how incredibly low their corporate taxes are. I mean unusual globally; are there any other western democracies that have tax rates that low? I doubt it.

This creates expectations in Canada to have the same goodies as the Americans. I understand where it comes from, but I think we should also remember that the US is running absolutely massive $1 trillion deficits. Many people would argue that the US cannot afford to have such low (corporate) taxes.

I think in Canada, we need to be careful about trying to keep up with the Yankees next door. Just because they do something, doesn't mean it's a good idea. And personally I think tax rates in the US are going to rise dramatically over my lifetime. There is not enough public support in the US for keeping such low corporate taxes, and low taxes in general for high income earners.

Globally -- if one looks beyond the US outlier -- as far as I know, Canada's taxes including corp taxes are very competitive. Among western countries, we are a *low* tax jurisdiction. It's easy to lose sight of this because of the US.


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## fireseeker (Jul 24, 2017)

Here are some data to chew on: Canada's total payroll taxes (including income tax, CPP, EI, etc) are far below the OECD average. 
In fact, we are only a hair above the US (30.7% vs 29.6%).
And, if I'm not mistaken, our health care is included. (Many Americans would be paying extra for health care.)

Taxing Wages 2019 (OECD)
(See page 3 of pdf)


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## MarcoE (May 3, 2018)

james4beach said:


> Globally -- if one looks beyond the US outlier -- as far as I know, Canada's taxes including corp taxes are very competitive. Among western countries, we are a *low* tax jurisdiction. It's easy to lose sight of this because of the US.


Our corporate taxes are very low for active income. Even after Trump's significant tax cuts, our corporate taxes are still very nice compared to the US -- and indeed to most countries. This is for active income. That basically means money you earn doing your job -- whether you're a doctor, lawyer, own a pet store, whatever you do in your small business.

Where they "get you" is the taxes on your investments. Capital gain taxes aren't so bad (about 25%). But taxes on interest and dividends are quite high, at 50% for most types (an exception is eligible dividends). Normally that's fine for younger business owners, who are just building their portfolio. But once their portfolio grows a bit, these taxes start taking big bites. And once passive income grows to $50,000 a year, the tax rate on active income rises with too. So if, say, a doctor has accumulated a large portfolio that's making $50,000+ a year (not unreasonable for successful professionals), then suddenly the doctor's active income (from doctoring) is taxed at a higher rate too.

I know, world's smallest violin. 

I'll add that Canada also has high estate taxes, requiring small business owners to pay for hefty life insurance policies, if they hope to leave their portfolio to their heirs someday. For doctors or lawyers at the levels described above, for example -- they're probably spending $50,000 a year just on life insurance, so that their heirs can afford the estate taxes. That's another big "tax" that doesn't exist in the States, and it can encourage "brain drain."

Brain drain is a serious problem in Canada. We lose quite a few professionals to America, sadly. Of course, the tax rate is just one small aspect of this much larger problem. There are various reasons that brain drain exists.

And yes, I too predict that taxes will rise in the future. I'm not sure how America will handle their massive debts. Our situation isn't quite as bad in Canada, but our government might have to raise taxes in the future too. Not only because of debt. With people living longer and longer, we'll likely require new and expensive programs to care for our seniors.

I agree with what was said above -- the best investments are still RSP and TFSA. It's better to take money out of a corporation, take the tax hit today, and then invest in tax shelters. Of course, another "rich man's problem" is that you can quickly reach the upper limits of these shelters. * cue world's smallest violin again *

Actually, I imagine that some rich Canadians use life insurance as a tax shelter too. At higher levels of wealth, the premiums on whole life insurance (which would be crippling to most Canadians) are small compared to the tax savings. Portfolios inside life insurance policies are tax free, similar to a TFSA. And when they need the money, they simply borrow it from the policy. This is another "loophole" I imagine some rich Canadians use. But you need quite high levels of wealth (several million at least) for it to pay off.

Estate freezes are another loophole I've heard wealthy Canadian business owners use. Again, this is another tool that only makes sense at very high levels of wealth.

There are more exotic tax shelters. I've heard (from a good source) that there is a street in Barbados lined with Canadian businesses. Rows of Canadian offices. But they're virtually empty. There is somebody who answers the phone and takes messages, that's about it. Canadians (who still live in Canada) pay a small amount every month, and they officially run their business from Barbados, and the guy answers the phone if somebody calls. They pay no taxes, since the business is registered in Barbados. Meanwhile they live in Canada. And it's perfectly legal. There are lawyers and accountants who set this up. At least, this is what I hear from people who claim to have done this... Personally, I think that someday the government is gonna come down hard on them. To me, these more "exotic" methods feel less like loopholes, more like tax evasion.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... An unusual thing about the US is how incredibly low their corporate taxes are. I mean unusual globally; are there any other western democracies that have tax rates that low? I doubt it ... This creates expectations in Canada to have the same goodies as the Americans ... Globally -- if one looks beyond the US outlier -- as far as I know, Canada's taxes including corp taxes are very competitive. Among western countries, we are a *low* tax jurisdiction. It's easy to lose sight of this because of the US ...


Question is ... did the recent US tax cuts put the US all that much ahead of Canada for corporate taxes?

BK cited lower Canadian corporate tax rates as to why their merged company with Tim's headquartered in Canada (about 10% less than the US IIRC). Valeant Pharmaceuticals International did the same with other US companies being interested to the point that special legislation was passed in the US to make it more difficult for these type of mergers/transaction.

Around that time, Canada was cited as *the* most business-friendly tax structure when the range of tax costs to businesses from statutory labor costs to harmonized sales tax were considered.


Cheers


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## MarcoE (May 3, 2018)

Eclectic12 said:


> Question is ... did the recent US tax cuts put the US all that much ahead of Canada for corporate taxes?
> Around that time, Canada was cited as *the* most business-friendly tax structure when the range of tax costs to businesses from statutory labor costs to harmonized sales tax were considered.


My understanding is (and I could be wrong)...

The CRA distinguishes between active income (selling whoppers) and passive income (investing money inside the business). Canada is among the most friendly for the former, least friendly for the latter. 

In America, it's traditionally the opposite. Their corporate taxes were high for active income (selling whoppers), but low for passive income (investing). This is probably because the rich have powerful lobbyiests in America, and they mostly make their money from investing.

Trump's tax cuts brought the corporate tax down (the selling whoppers part) so it's more in line with other countries. Before and after, America is still one of the friendliest places to invest in. Canada is generally unfriendly toward corporate investing.


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## Synergy (Mar 18, 2013)

Taxes are actually quite discouraging. There's very little incentive to work harder, earn more money, etc. It all goes to tax. Had this conversion with a colleague the other day. He's fed up and is going to retire early (42 yrs young). Smart lad, ran me through his spreadsheets, etc. and I don't blame him. Sad to see good talent retire early but it is what it is....


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## james4beach (Nov 15, 2012)

Synergy said:


> Taxes are actually quite discouraging. There's very little incentive to work harder, earn more money, etc. *It all goes to tax.*


You're wrong. It clearly does not all go to tax. Are you better off, in absolute terms of take-home pay, making 100K income or 250K income?

Using the SimpleTax estimator for Ontario: 100K gross income in Ontario leaves you with 72K take home pay while 250K gross leaves you with 150K take home pay.

In other words gross pay went up 2.5X and take home pay went up 2.1X. I don't know what planet you live on, but that's still a significant increase in my books, with real $ in your pocket when all's said and done.

Clearly, the person who earns much more gross, keeps much more net. This isn't even counting the significant tax shelter advantages of the RRSP + TFSA


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## Synergy (Mar 18, 2013)

^ it's not rocket science. Maybe someday you'll figure it out.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> You're wrong. It clearly does not all go to tax. Are you better off, in absolute terms of take-home pay..............


James it has been shown that once taxes are over 50% then taxpayers begin to see it as confiscation and they start to get creative. Often the best plans of government go awry when they raise tax and find that it actually causes government revenue to fall. I know myself, that if I invest $100, the government confiscates $51.90. Yes, by your socialist metric, my remaining $48.10 puts me ahead in absolute terms of take-home pay, but there's little incentive to invest and that's not good for an economy. It can encourage talented people to consider moving out of country.

ltr


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## james4beach (Nov 15, 2012)

I can only speak for myself of course, but I have had annual incomes ranging from 10K to 200K and in every case, I've taken home more money with higher income. There was plenty of motivation to earn more in a year.

Even at 200K in MB, the average tax rate is only 38% and significantly less with RRSP deferral. This is not a lot of tax; it's very reasonable.

Can you help me understand, since this really isn't something I have experienced. How would my taxes get over 50%? Using tax estimators it does not appear that BC,AB,MB taxes reach this level even at $1 million annual income.

It doesn't appear to happen with employment. Can you give some numbers to illustrate the > 50% tax burden?


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Even at 200K in MB, the average tax rate is only 38% and significantly less with RRSP deferral. This is not a lot of tax; it's very reasonable.


You're referring to average tax rates. I am talking about the tax on the next dollar. What do I make if I invest further and realize another $1000 income. Is there incentive to do that. How much does the government take from that next $1000.

ltr


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## Synergy (Mar 18, 2013)

like_to_retire said:


> James it has been shown that once taxes are over 50% then taxpayers begin to see it as confiscation and they start to get creative.
> ltr


Exactly. And this occurs at much lower tax brackets. When I worked in a factory during the summer while in school I remember some of the old seasoned workers use to decline overtime work - not worthwhile, it all goes to tax! While they smoked their cigarettes on break!!

More work, less time with family and friends, more stress, etc. As more of your income (relative) goes towards tax you start to question whether it's worthwhile or not. Progressive income tax has the ability to discourage hard work, etc..

I'm not sure why James has such a hard time here. It's nothing new.


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## james4beach (Nov 15, 2012)

Decline the overtime if you want, but reality is that as your gross income goes up (work more, get raises, etc), you still end up with more in your pocket.

e.g. Ontario:
70K gross leaves you with 52,707 net
80K gross leaves you with 59,580 net

The extra work has resulted in $6,873 more after tax income. Perhaps some will say "it's not worth extra work for another $6,873" but the way I see life, this isn't "all extra income going to tax".

It's $6,873 more money in your pocket because you work extra, or get a raise.

You guys are so dramatic. If all the extra income was being taxed, you wouldn't see this significant new money from the pay raise. To me this sounds more like people who are fixated on complaining about taxes instead of appreciating that with more income, they actually end up with more money.


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## Eclectic12 (Oct 20, 2010)

There seems to be lots of confusion about OT.

What's usually been the case for me is that the OT is added to the regular pay, resulting in a significant boost to CPP/EI etc. deductions as well as the WHT. IIRC, it wasn't unusual to have the pay with OT have an extra 20% or more WHT taken from it. An annual raise on the other hand would have a much lower boost to the WHT as it is spread across many more pay periods.

Eventually the inflated WHT would be fixed by a refund when the tax return was filed.


I learned early on that it was better to avoid the extra WHT by sending the OT to the company sponsored RRSP or the supplemental pension plan that could buy extra pension benefits.


Call it dramatic or call it a misunderstanding or whatever ... there are lots of people who skip OT.


Cheers


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> What's usually been the case for me is that the OT is added to the regular pay, resulting in a significant boost to CPP/EI etc. deductions as well as the WHT . . . Eventually the inflated WHT would be fixed by a refund when the tax return was filed.


Would it not be sensible to say that we should be talking net taxes when all's said and done? Isn't that what matters?



Eclectic12 said:


> Call it dramatic or call it a misunderstanding or whatever ... there are lots of people who skip OT.


Are people foregoing OT (passing up on more income) because they don't understand that the "punitive" withholdings will be netted out later in the refund? Is that what all the hullabaloo above is about?

If so I would call that some very poor business decisions based on misunderstanding taxes.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Would it not be sensible to say that we should be talking net taxes when all's said and done? Isn't that what matters?
> .


So if you were taxed at an 80% marginal rate and you got to keep that remaining 20% net. Would that be all that mattered to you?

ltr


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## Synergy (Mar 18, 2013)

james4beach said:


> Even at 200K in MB, the average tax rate is only 38% and significantly less with RRSP deferral. This is not a lot of tax; it's very reasonable


RRSP's don't reduce your taxes, they simply defer them to a later date. Yes, sometimes you may end up in a lower average tax bracket but not always. Many are left at the same or even higher levels.

Look at all the people trying to avoid clawbacks, etc. It's happening at all income levels. People are looking for ways to minimize the taxes they pay.

Who in their right mind wants to work harder only to have more of their relative income go to taxes.

As mentioned up thread, when you have to pay over 50% tax on other income it can be quite discouraging. Especially when you see how it's spent.

I pay my fair share and will continue to do so for a long time to come. I'm just pointing out that our progressive tax system has a tendency to change behaviours, discourage hard work, investment, etc.

There's probably a bunch of investors on hear who retire early and live of a dividend portfolio in which they pay little to no tax. Having a tax loophole like this is a great way to create jobs, encourage hard work, investment, etc. Not.


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## Pluto (Sep 12, 2013)

james4beach said:


> Decline the overtime if you want, but reality is that as your gross income goes up (work more, get raises, etc), you still end up with more in your pocket.
> 
> e.g. Ontario:
> 70K gross leaves you with 52,707 net
> ...


I tend to agree with you. If someone is paying a lot of tax it means they are making lots of money. I did my share of OT and it bumped me into a higher bracket. I recall other workers saying they actually took home less when they worked OT. Nuts. They didn't have a clue concerning marginal rates. We were already well paid and the net from OT was all gravy. Well paid people in higher tax brackets tend to lose their perspective. They are taxed at a high rate on money they don't need to live well in the first place. They tend to forget that. Maybe they should look for meaning in life beyond a super big bank account. 

However, its a mistake to give government the green light to tax and spend foolishly. There must be a taxation limit at which the wheels fall off the very successful capitalist wagon. I'm not sure what the limit is. Apparently in Denmark all income over the average income is taxed at 60%. Maybe that's the limit.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Eclectic12 said:
> 
> 
> > There seems to be lots of confusion about OT.
> ...


I'm talking about the confusion the WHT on steroids that OT causes. I doubt skipping the intermediate steps is going clear up the confusion.

If a retired relative is saying the 30% WHT from a lump sum RRSP withdrawal is a rip off when they know they will owe more like 10%, jumping to the end state isn't a help. Or maybe your relatives/friends are willing to let go of what they have misunderstood more easily? 




james4beach said:


> Eclectic12 said:
> 
> 
> > ... Call it dramatic or call it a misunderstanding or whatever ... there are lots of people who skip OT.
> ...


For some, that's where the confusion part comes in.




james4beach said:


> ... Is that what all the hullabaloo above is about?


No ... I am saying that a percentage is from it. I'm pretty sure those posting about paying top tax rates now where they project retirement income will be higher are in the upper levels where OT will have a lot of WHT and the tax return won't refund much or any. There's also posts by people saying their usual income is $100K+ which puts then within spitting distance of 50%.




james4beach said:


> ... If so I would call that some very poor business decisions based on misunderstanding taxes.


LoL ... not sure why poor financial literacy would be surprising as a source of bad decisions. There are lots of examples posted here on CMF regularly.


Bottom line for me is that there are two parts to the crowd that is concerned about the high tax rates for OT. 


Cheers


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## james4beach (Nov 15, 2012)

Ok, I see, it's a mix.

As for spitting distance of 50%. Even in MB (which isn't a particularly low tax province) making 200K has an average tax rate of 38% which is a far cry from 50%.

In most provinces you'd have to make around 300K salary to get in spitting distance of 50%. Is that what is leading to such a painful life vocalized by others upthread? Is the pain and suffering coming from making *300K+ salary* and paying close to 50% in taxes?

And sure, someone making 500K salary is paying a lot in tax, close to 50%. But there is virtually nobody in the country who pays an average tax rate higher than 50% overall when it's based on employment income.


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## Eclectic12 (Oct 20, 2010)

Pluto said:


> ... I did my share of OT and it bumped me into a higher bracket. I recall other workers saying they actually took home less when they worked OT. Nuts. They didn't have a clue concerning marginal rates.


For the WHT taken on the combo of regular pay plus OT, I've been bumped up four or five brackets. I can recall several pays where the net increase was ten percent, after WHT/CPP/EI etc. were all slice away.

From those I've talked to, the fix for charging WHT as if one was paid regular income plus OT as if it was paid all year long that filing the annual tax return does is what is missed.




Pluto said:


> ... Maybe they should look for meaning in life beyond a super big bank account.
> 
> However, its a mistake to give government the green light to tax and spend foolishly. There must be a taxation limit at which the wheels fall off the very successful capitalist wagon. I'm not sure what the limit is. Apparently in Denmark all income over the average income is taxed at 60%. Maybe that's the limit.


Those working less as they don't see the point of 40 to 50+% being taxed, where there is no adjustment when the final tax return is filed have clearly said for them, it's this range.


Cheers


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## OptsyEagle (Nov 29, 2009)

It doesn't really matter whether the belief is real or perceived. It is what people believe to be true that drives their motivations. As Eclectic12 is saying, if a person works like a dog, let's say 75 hours in a week in January, and gets overtime pay for that, the assumption by the withholding tax calculator that this person will work like that every week, PLUS the fact that CPP will keep withholding until their YMPE max is hit, it can certainly look to the average Canadian, with little tax knowledge, that they are almost losing as much money from taxation, as they were earning in overtime. Even the big refund they may get 14 or 15 months later will not get related back to that lost income. 

I have heard this gripe from many Canadians. I have tried to correct their thinking on the matter, but let's face it, if one thinks this way, you can be sure many others do as well.

That said, "average tax rates" are not relevant in either case (whether it is real or perceived) because we are talking about the motivation to earn "more" income and that motivation is therefore affected by "marginal tax rates". James, you certainly do not need to earn $500K, in this country, to have your next dollar earned taxed at 50% or more. That is the concern many here seem to be voicing.


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## james4beach (Nov 15, 2012)

Having lived it personally (and in fact did an entire tax return last night) it doesn't bother me that my next $ is heavily taxed. Instead, I care about my overall, average tax rate.

But I realize it does bother others.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Ok, I see, it's a mix ...


We are talking about what people do and are influenced to do ... whether the influence factor includes the big picture or not.




james4beach said:


> ... As for spitting distance of 50%. Even in MB (which isn't a particularly low tax province) making 200K has an average tax rate of 38% which is a far cry from 50%.


Not sure why the average tax rate matters to someone who is considering OT.

When I use the SimpleTax calculator with $100K employment income for a MB resident and add another $10K of OT, the tax owing is $4,340 or 43%, aka spitting distance of 50%.
There may be other deductions and/or credits that reduce this but it doesn't change that working the OT adds to the overall tax bill at a 43% clip.




james4beach said:


> .. In most provinces you'd have to make around 300K salary to get in spitting distance of 50%. Is that what is leading to such a painful life vocalized by others upthread? Is the pain and suffering coming from making *300K+ salary* and paying close to 50% in taxes?


Most who have complained about it to me are looking at what's sliced off their regular pay plus OT cheque. I know many are well under $300K a year.

This focus on average tax rates and/or income levels to hit a 50% average tax rate isn't on the radar and AFAICT does not factor into the decision about working OT or not. In fact, it wouldn't surprise me that the bulk of those jumping at the chance for OT have big mortgages or want a big/bigger boat or a bigger retirement pension etc. Those who have enough already tend to question whether it's worthwhile.


Cheers


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## like_to_retire (Oct 9, 2016)

OptsyEagle said:


> That said, "average tax rates" are not relevant in either case (whether it is real or perceived) because we are talking about the motivation to earn "more" income and that motivation is therefore affected by "marginal tax rates". James, you certainly do not need to earn $500K, in this country, to have your next dollar earned taxed at 50% or more.


This is the point I've brought up over and over. It's the "next dollar" that bothers people. It's that next $1000 that is confiscated to the tune of over 50% that bothers everyone. You can look at your average rate all day, but it doesn't change the fact that that next dollar has 50% taken by the government. Not much incentive to work or invest further.

ltr


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## james4beach (Nov 15, 2012)

By this logic, nobody in the country would ever bother working for more than $100,000 income. And yet many (including quite a few on this board) do.

It appears that quite a few people in the country still think it's worth paying high taxes on that "next dollar". And I've never met someone who turned down higher income due to the incremental taxes; apparently, others do (this is news to me!).

And by the way, the money is not confiscated. It is used to pay for important public services and infrastructure in the country. I have always been happy to pay it; we get a very good deal for the taxes we pay.


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## Eclectic12 (Oct 20, 2010)

Your guess $100K earners would be upset looks faulty to me.

The WHT on $100K income is roughly 22% while the OT WHT - no matter the size of the payment is 43% or so!!
Throw in a fourteen month to four month range to get the refund plus that a lot of people have other people do their taxes and it's not that surprising IMO that people would react the way they do.


For some reason you are ignoring the sticker shock of the OT WHT.


Cheers


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## james4beach (Nov 15, 2012)

You're right, I am ignoring the sticker shock of withholdings


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## Pluto (Sep 12, 2013)

In the meantime, I'm making more money than ever, paying more tax than ever, and somehow the tax bite now doesn't feel as bad as when I made less money and paid less tax. I can't really get into the mind of super high income earners who complain about their tax rate.


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