Why a new tax change rule is forcing advisors to act

Why a new tax change rule is forcing advisors to act

Why a new tax change rule is forcing advisors to act An article on the Financial Post reports a selling rush on equity-linked notes as financial advisors unload the securities from their clients’ portfolios.

This comes in anticipation of a tax change that will require returns on linked notes sold on the secondary market to be treated as income rather than capital gains – a measure meant to close what the government saw as a loophole exploited by wealthy investors.

Linked notes are a debt investment, but their returns are tied to an underlying asset, such as an equity index. This means they can behave like equities, but without the exposure and risk that comes with purchasing stocks.

Industry insiders countered the government’s perception of such notes being used as a loophole by the wealthy, saying that the majority of notes are held by middle-class retail investors, those who are buying mutual funds and ETFs.

“What you see now is that middle class retail investors are losing a tool that helped them save in a low rate environment,” said Scott McBurney, head of global equity-linked products at RBC Capital Markets.

The old rules allowed investors to sell linked notes prior to maturity on the secondary market and only pay capital gains on profits they made, as opposed to paying the income tax required from other debt products such as bonds. The government has said that certain investors were exploiting this rule to avoid paying higher taxes.

Linked note issuers have urged the government to not push through with the change, which was announced in March and is set to take effect at the start of next year. Despite industry input, the government is still moving forward with the change.

Industry insiders have reported cases of advisors calling clients to sell products that have experienced big returns before the new rule kicks in, though whether the clients are middle-class or wealthy investors is unclear.

“I think the government targeted the wrong product and the wrong class of investment,” Dominic D’Aoust, director of structured products at Laurentian Bank Securities, said. “Because of the change, a lot of (investment advisors) are returning their clients to the equity side, which forces client to take more risk.”


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