Horizons eyes ETFs reorganization ahead of federal tax changes

A shift toward a corporate-class structure is seen to preserve the advantages of a number of synthetic investment strategies

Horizons eyes ETFs reorganization ahead of federal tax changes

Horizons ETFs has proposed to reorganize a number of its existing ETFs in anticipation of proposed changes to the Income Tax Act that would impact the funds as they are currently structured.

The funds were impacted by a federal proposal that targets strategies used by mutual fund trusts (MFTs), including an “allocation to redeemers” methodology and the use of certain derivative transactions. In its March budget announcement, the government said those strategies open a loophole for MFTs to either inappropriately defer tax or convert fully taxable ordinary income into capital gains taxed at a lower rate.

“The decision to propose a corporate class structure follows an extensive review by Horizons ETFs of the activities and current tax positions of the relevant ETFs along with the proposed changes to the Income Tax Act,” the firm said in a statement Friday. It listed over 40 MFT-structured products that primarily use derivative arrangements in pursuit of their investment objectives.

Horizons recommended that the ETFs be merged into a single multi-class mutual fund corporation, citing improved operational efficiency, aggregation of all future gains and losses on both income and capital accounts, and substantially reduced the likelihood of distributions as outcomes that would be permitted by the reorganization.

“Under the proposed reorganization, units of each of these ETFs would be exchanged for a corresponding class of shares of a new mutual fund corporation,” the firm said, adding that it expects no changes with respect to the ETFs’ investment objectives, strategies, and fee structures. The firm also noted the wide use of corporate class mutual funds throughout Canada, with $155 billion worth of assets invested in corporate class mutual funds and ETFs.

“Even before the recently proposed changes to the taxation of mutual funds were announced, Horizons ETFs had been exploring the potential of a structural change for the majority of our synthetically-replicated index ETFs, from a mutual fund trust to a mutual fund corporate class,” said Horizons ETFs President and CEO Steve Hawkins.

“[W]e feel confident that the proposed corporate class structure will allow us to continue to offer our synthetic ETFs to investors in a manner that provides unitholders with all of the same benefits that they have enjoyed for the past ten plus years, including minimal tracking error, tax efficiency, and competitive fees,” he added.

The company also stressed that the ETFs are not expected to carry forward any tax liability into the proposed mutual fund corporation, and unitholders of the ETFs are not expected to face historical or retroactive taxable implications.

In the case of Canadian residents who hold units of the ETFs in taxable accounts, the proposed reorganization is not expected to amount to a taxable event, provided that they make a joint election with the proposed mutual fund corporation under Section 85 of the Income Tax Act as part of the exchange from their existing trust units into shares of a series of the new mutual fund corporation.

“Horizons ETFs is establishing a process to provide assistance to unitholders in taking the necessary steps to file the joint election, which will be free of charge,” the company said.


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