Tax Efficient Investing – Horizons ETFs

Tax Efficient Investing – Horizons ETFs

It’s hard to understate the game-changing force that Exchange Traded Funds (ETFs) have induced in the financial investing landscape in recent years – especially here in Canada – let alone some of the tax efficient ETFs now on the market. 

According to National Bank’s recent figures, an incredible $37 billion flowed into ETFs (and that was just the year to date!)

Yet as I have referenced many times on my site, not all ETFs are created equal. Far from it!

Horizons ETFs

With more than 1,000 ETFs now listed in Canada, it might seem hard to choose what the top funds are.

Frankly, not so. I believe there are only a few dozen funds you and I should really consider for lazy but powerful long-term investing.

Horizons ETFs has some of those products in my opinion (no affiliation), and I highlighted at least one of them in my recent all-equity, all-in-one post here where it comes to *HGRO (now *HEQT).

VEQT vs. XEQT vs. HGRO Equity ETFs

All-in-one funds with some tax efficiency too!

With just one simple ETF selection, Canadian ETF investors can get a full asset allocation geared towards their self-determined risk/return objectives.

*Information on HGRO was current to the time of this post.

Read on about the merits of low-cost investing via Exchange Traded Funds (ETFs) right here.

Pretty amazing how far we’ve come on this in just a few short years…

Some of these ETFs can now be considered what Horizons has tagged as the “great investment democratizer” — an ETF option that can suit almost every retail investor.

As one of Canada’s leading (not to mention fastest-growing ETF providers) I had the privilege of chatting with Mark Noble, Executive Vice President, ETF Strategy at Horizons ETFs about their ETF line-up including their all-one-funds and beyond. We touched on the tax-efficiency of their ETF funds, why Mark feels investors should consider larger equity weightings in their portfolios, the classic case of overcoming home bias, how Mark invests his own money, and more.

Mark, thanks so much for your time recently and contributions to this site. I’ll put my questions in bold font so we don’t confuse readers with the My Own Advisor Mark back-and-forth!

No problem Mark! I’m happy to contribute to your site and it’s a blog that I know of and follow for what you do to help Canadian investors – so keep up the great work.

Kind words and thanks.

Before any discussion about Horizons funds specifically, I want to know what you make of the inflows into ETFs in recent years. I mean, as an investor in some low-cost funds myself, it seems retail investors are catching on and winning. Quick thoughts on that?

Horizons products aside, I think this trend is outstanding for investors. Whether investors choose to own some of our low-cost and tax-efficient products, or others by several of Canada’s leading fund providers, the evidence is clear: one of the greatest predictors of future returns for the retail investor is keeping their money management fees low while maintaining a consistent investing strategy.

We’re happy to contribute to this trend including education for investors.

There was some significant eyeballs on my site after I published this post comparing your HGRO fund to Vanguard’s VEQT and iShares product XEQT.

Clearly, readers are intrigued. Some readers sent me emails wondering/seeking more details about the corporate class structure of your funds. Two questions:

  1. What are corporate class funds; do these relate to ETFs as well as mutual funds?
  2. Can we explain corporate class funds in layman’s terms?

Horizons ETFs

Sure thing Mark.

To answer part of the first question, yes, ETFs and mutual funds are regulated the same way when it comes to the corporate class structure. The regulators in Canada do not view them as different securities, which is quite different than other regulatory jurisdictions I might add.

To back up a bit, your readers are likely aware that mutual funds pool money collected from many investors and use the money to invest in securities, such as stocks and bonds. Mutual funds provide investors with access to professionally managed money – for a fee of course.

Consider an ETF as a more efficient mutual fund in many cases that can be bought and sold on a stock exchange, during the trading day. I won’t go into too many more details because your readers are likely well-versed on the ETF concept and some of the benefits they can provide.

Corporate class funds, including the ETFs we manage at Horizons, operate within a structure that allows the ETF units to be held as a series of shares within a traditional corporation. As many of your readers might know, a corporation operates with profits and losses. So, for funds as part of a corporate class structure, the taxable events like capital gains can be traded off against any potential losses or distributions to the fund owner. The ability to offset the tax liability within the fund structure can be very appealing and tax efficient for many investors.

There are a couple of key benefits of this fund structure then, and why they continue to grow in popularity:

  1. There is the advantage of tax deferral. This is a consideration for personal and corporate investment accounts since reducing overall taxes is important for many investors.
  2. Related to point 1, if investors are investing this way, then there’s no reason to realize capital gains until you want to or have to – when they sell the ETF shares So, not only is there a tax deferral but potentially lower taxes paid overall when gains are realized.

Corporate class funds, including ETFs Mark, whether they are from our family of ETFs or other companies in Canada that offer them, might be very beneficial to investors who wish to own these funds in their taxable accounts, but these funds can also work well inside TFSAs, RRSPs, and other registered accounts.

Great stuff.

OK, I’ve got more questions from readers. One of them wanted me to ask you if you see any changes coming to corporate class funds in the near future. I mean, didn’t the federal government cite these funds as having an unfair tax advantages?

Great question and yes, I suppose our regulations and laws could always change. There could be changes to the capital gains inclusion rate, or the implementation of a lifetime cap to Tax Free Savings Account (TFSA) contributions, and lots of other potential changes. With regards to the proposed changes in 2019, that impacted the TRI ETFs, these regulations have only been proposed (in 2019) but not yet enacted.  Regulatory change is usually slow and complex as policy makers have to assess unintended consequences for their proposals in consultation with the industry.  At this point the 2019 proposals are a moot point since we’ve converted to the TRI ETFs to a corporate structure that allows us to be on side with the proposed legislation.

In terms of further regulatory changes, if any were to be proposed they would likely have to fundamentally change the use of the broader corporate class fund structure. This corporate class fund structure has been around for decades so we would not anticipating any sweeping changes to occur without industry consultation Hypothetically, though if the government for example eliminated the ability of funds to use the corporate structure, their historical operating procedure is to provide transition time for fund providers to make changes.  They typically don’t want to retroactively punish unit holders and firms that have been in compliance with existing laws.  The only exception to this was the how the government managed the income trust structure changes many years ago – it was not well received!

Any methodology or changes proposed by the government to date, in that 2019 budget announcement, will not alter our approach since we’ll be able to comply with any of the legislation they’ve shared to date.

So, should investors be concerned with our corporate class structure? The worst case scenario is potentially the government forces all corporate class funds or ETFs (including all providers) to deliver the returns of the underlying indexes to investors as taxable income versus have it be deferred under the current rules of the corporate class structure. However, as long as we can operate in this tax-efficient structure to support investors, we will.

That makes sense to me Mark and I suspect it would be a seismic shift if it were to even occur. So, it seems a corporate class fund structure is very appealing for taxable accounts. Silly question maybe, but are your funds better suited for taxable accounts over registered accounts (e.g., TFSAs, RRSPs)? Can you speak to that?

Happy to!

Yes, certainly we believe our ETFs are very appealing for taxable accounts, such as HXT (our S&P/TSX 60 Index ETF) or HXS; HXS.U (our S&P 500 Index ETF) but your readers might be very interested to know that many of our funds including the HGRO fund (Horizons Growth TRI ETF Portfolio) – the all-equity fund you linked to above Mark – has outperformed many benchmark peers. We can discuss why that is in more detail.

Here is a primary link for more details.

Perfect, so that leads me to this question on HGRO in particular. Do you feel there is a competitive advantage of owning *HGRO vs. VEQT vs. XEQT?

Yes, and it has to do with our portfolio design in that fund.

Through our back-testing, when we looked at the NASDAQ, we saw an opportunity to design HGRO with a larger weighting in that index over our peers – and design the fund so it will deliver lower overall volatility and better returns. I mean, if you look at the S&P 500 right now, there’s an issue (with potential returns) when you strip out big tech.

At Horizons, we believe in a slight tilt in favour of the NASDAQ behind our larger allocation to U.S. large cap stocks. That allocation is expected to deliver very favourable long-term returns when compared to our peer group.

In *HGRO, we’re talking about an all-equity fund, that invests in your corporate class ETFs. This *HGRO fund is something I’m personally considering for my taxable corporate account or personal, taxable account in 2021. Many investors are wary of equities, too much volatility but I think many investors should learn to live with more stocks in their portfolio. What’s your take on that?

I couldn’t agree more with you!

I mean, there are the demographic reasons to own more equities with people living longer. So, returns are required for longer periods of time. I believe that needs to be reflected in any investor’s long-term strategic allocation.

Yet there are major investing risks with owning a good portion of your portfolio in bonds. For one, we know the inverse relationship between bond prices and interest rates. But I think more importantly investors are going to have to consider their risk relationship with bonds. Higher returns come from higher-risk assets such as owning stocks. This is just market dynamics at work. So, if investors are living longer, and needing more assets to draw down over time from their portfolio, it makes sense to own more equities from a tactical advantage.

I often find investors, especially do-it-yourself (DIY) investors struggle with risk concepts the most. Either they don’t take on enough risk (or are therefore far too conservative when it comes to owning too many bonds/fixed income assets for what they need) or they take on way too much risk (and tinker with their portfolio too often). Neither extreme is beneficial to good returns.

Let’s talk about your own portfolio. I mean, you’re the ETF strategist so are you an all-ETFs-guy or do you actually favour some “core and explore”? As a follow-up, do Canadians have far too much home bias in their portfolios – particularly when it comes to dividend paying stocks?

I’ll be honest Mark, I do follow a core and some explore strategy myself and I do so because it aligns with my investing tolerance for risk that I alluded to above.

I have no problem with investors owning a mix of core and explore, either our products or some of our competitor products for that matter, as long as they have a disciplined investment plan or policy in place. As we have discussed, that can be a major challenge for some DIY investors to stick to a plan.

When it comes to home bias, I think it’s another challenge to overcome. I recall one of the latest reports I read mentioned the average investor in the U.S. probably has close to 60% of their portfolio in U.S. equities. That’s not so bad given the role the U.S. market has on the world stage. Canada hovers between 2-4% of the global world market cap, so for Canadians to have 50-60% of their portfolios (or more) in just in the Canadian market I feel that’s far too high/too much home bias.

Relative to market cap size, I suspect many Canadian investors have far too much bias in financial, energy and material sectors. Now, if you have dividend paying equities in just your taxable account as part of your explore, then that makes strategic sense since I know you’re aware of the tax efficiency that Canadian dividend paying stocks provide in non-registered accounts. So, I do defend investors keeping those Canadian dividend payers like you do in your taxable for that reason.

(My Own Advisor: here are some links about that aforementioned tax treatment:

Get the 101 on our Canadian Dividend Tax Credit

Should you invest in a taxable account? If so, here are some considerations.)

But, I think if you’re going to leverage your registered accounts wisely, it’s best to diversify beyond Canada’s borders. I like Canadian banks for their dividends as much as other investors but by only focusing on that, you’re missing out on other sectors let alone the upside of other markets if you only look at Canada for investing success.

Of note, your readers may be interested to know I own some Horizons ETFs in my personal portfolio, I actually have one that is my largest single holding (that is a one-ticket solution – I will leave you to guess which one….) but I do hold some individual stocks as part of my explore.

Great insights and well-framed. I like your take on core and explore. Thanks for your time Mark!

Anytime!  I hope this information has helped your readership.

As a team, we aim to also help educate Canadians as well, I want your subscribers to know we’re happy to answer any questions about our Horizons ETF lineup, or our approach, anytime.

You can reach us by email at info@horizonsetfs.com or by phone at 1.866.641.5739. You can also follow Horizons ETFs on LinkedIn, Twitter and Facebook and send us your questions or ideas by direct message there!

Tax Efficient Investing – Horizons ETFs Summary

Clearly, Mark Noble and his team at Horizons have the customer in mind and I was appreciative of our 30-40 minute discussion recently on these key subjects. His insights about core and explore, references to focus on total returns, how as investors we need to overcome our home biases, and encouragement to think strategically towards owning more equities was, for me, very reassuring when it comes to my DIY investing plan.

This is my Financial Independence Plan.

Should you have any questions about any Horizons ETFs or their all-in-one TRI products drop them a line and I know they’ll be happy to answer anything.

Thanks for diving into this post and I look forward to your comments on these ETFs or other!

Mark

Added after posting!

Some readers had some specific follow-up questions – so here they are (thanks to the team at Horizons ETFs for the direct answers!)

Question 1: So, in holding HBAL or HGRO or the other “TRI” all-in-one fund in a taxable account, are there any capital gains to be incurred if/when those TRI funds rebalance x2 per year? I recall they are rebalanced at that frequency.

The ETFs have historically incurred capital gains (and losses) when they rebalance, however the determination of how much these capital gains are is determined at year end, and there can be instances where some or all of these gains can be offset at the fund level so they are not paid out. 

Question 2: Also, as a follow-up then, would there be any instance beyond selling HBAL or HGRO units in a taxable account by the unitholder whereby capital gains or a taxable event may have to be reported by the investor?

Yes, as mentioned the ETFs do generate some income, primarily returns from currency forwards they use to hedge out foreign currency exposure and in some circumstances potential capital gains from selling ETFs at a gain during the biannual re-balance periods.

Question 3: At tax time, each year, I assume I will get a T5 slip from Horizons summarizing my capital gains vs. dividends, etc. for tax filing needs with HGRO?

Yes, it’s very likely and I’ll explain why.

HBAL, HCON and HGRO are actually Trust-structure ETFs, the underlying TRI ETFs they hold are corporate class ETFs.  The corporate class ETFs in the underlying holdings don’t make distributions, however, HBAL, HCON & HGRO as the top-level funds, can have capital gains distributions from rebalancing portfolio and some income gains from managing the currency forwards.  In total though the level of distributions and their tax liability of the ETFs is substantially lower than competitor strategies which also make income and dividend distributions from the underlying ETFs.

Given that these ETFs rebalance semi-annually (ideally at a gain!) and use currency hedging, I would anticipate some distribution of capital gains and potential income gains from the hedging on an annual basis. Again, these distributions pale in comparison to the income received by competitor products that pay out investment income and dividend distributions from the underlying ETFs.

Question 4: Great details. So, this begs an example with a question. Is there an idea/estimate on the amount of capital gains, if any, an investor might have to claim when it comes to $20K invested in HGRO in any given year? 

Let’s take a look at the distributions for HGRO for 2020. 

HGRO paid out $0.17 in distributions last year, of which almost all of it was cap (capital) gains. That was about 1.40%, during a fairly sizable up-year in equity returns. On $20,0000, that’s about $280 in tax, of which roughly half or so would be capital gains, so in the vicinity of $140. It’s really hard to estimate what cap gains would be on a go-forward because it is dependent on market performance. 

Question 5: What might the expected, total MER be for clients owning HGRO in particular?

As per Horizons ETFs team at the time of this update (although all fees are subject to change…):

“HGRO’s MER is currently 0.16% and will not exceed 0.17%”.

A reminder for readers that MER is different than TER (Trading Expense Ratio). The TER represents the amount of trading commissions incurred when the portfolio management team buys and sells the assets for the fund. TERs commonly apply to equity funds. (Most fixed income funds do not have a TER because commissions for fixed income funds are already embedded in the price of a bond.) In many cases, the larger the fund’s inflows/outflows due to significant unit purchases or redemptions, the higher the TER.

As per Horizons ETFs team at the time of this update (although all fees are subject to change…):

“Worth noting that the Trading Expense Ratio (TER) is 0.18% but may be subject to change.”

Further reading:

Read on about MERs and TERs here.

Question 6: Fully appreciate that… Lastly, are there any foreign income / foreign withholding tax reporting using T1135 with HGRO? (I believe the answer is “no” but just want to double-check).

Mark, there is no T-1135 with HGRO as it holds Canadian-listed ETFs. In terms of withholding tax, we would expect it to impact the total return of HULC and HXQ, which physically hold the underlying, but that would be dealt with that the fund level and likely not recoverable from the end investor, since no distributions are paid out. There would be no FWT impact on any of the synthetic ETFs.

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

55 Responses to "Tax Efficient Investing – Horizons ETFs"

  1. Hey Mark. Happy New Year to you!
    Horizons recently made some changes to their Corporate Class – Total Return ETF offerings. HGRO no longer exists – replaced by HEQT – which has a distribution – currently yielding about 2%). Were there any changes to the underlying Horizons ETFs it held?

    For middle to high income earners, does it still make sense to hold say HXT (or other CorpClass ETFs) in a taxable account? (over a VEQT or XEQT?)

    Thanks for your insight – as usual.

    Eric

    Reply
    1. Happy New Year, back Eric!

      Yes, I need to update that post and interview my friends at Horizons.

      I still like the new HEQT (from HGRO) although not as tax efficient as before. You are spot on: HEQT now has a monthly distribution to compete the XEQT, ZEQT, etc.

      I have an email from Horizons that I added to a previous reply, so I’ll post it below.

      Happy Holidays to you!
      Mark

      “…I’d say since launching our first asset allocation ETFs in 2018, we’ve had three key learnings:

      1. Investors today are looking for income in their portfolios – they want monthly infusions to compliment their long-term capital growth.
      2. This is a category dominated by end-investors and the majority of Canadians holding asset allocation products do so in registered accounts, which means the Total Return strategy likely wasn’t providing any tax-efficiency benefit for them.
      3. Our higher equity weightings made it difficult for us and investors to compare these to competitor funds, i.e., our former HGRO, which was 100% equity couldn’t be compared to competitor’s growth funds, as they were in separate Morningstar categories.
      4. As well, with higher highs from the equity weighting, there were also lower lows. We listened and realized that investors don’t want to see much variation in what is ultimately a core building block of their portfolio.

      One differentiation where we haven’t changed: a larger NASDAQ weighting and a bigger global focus than our competitors with higher amounts of Canadian home bias.“

      I think for middle to higher income earners seeking the most tax efficient approach, not advice, but those Corporate Class ETFs are likely great options. To be a bit lazy and even more tax efficient than I am (!) well, VEQT, ZEQT, XEQT, or even HEQT is just fine. 🙂

      Reply
      1. Thanks for the quick response Mark. I was sure I’d have to wait until “next year” to read a response! lol

        If you do end up interviewing/talking to your contacts at Horizons, I would be all ears!!

        All the best for 2024.

        -eric

        Reply
          1. Thanks for the offer Mark.

            My main question is: When they d/c HGRO, it was replaced with HEQT. However, HEQT does have a distribution (approx 2% at this price level) whereas, HGRO had virtually no distributions. Q: Are they planning an all-in-one product where all dividends and returns will be rolled back in = no distributions to unit holder.

            Take good care

            _Eric

            Reply
    2. Hi Mark,
      I have read articles on your site over the years, but only just signed up for your newsletter. I retired 20 years ago with limited investment knowledge, but decided then that my retirement job was to be our investment adviser 🙂 This has worked out OK for us.
      I got here today because I was researching ways of limiting OAS clawback in our unregistered accounts. We are able to split income almost 50/50 but still both get clawed back. We hold mainly dividend payers in those accounts. Each year when we make our RRIF withdrawal we end up with more and more dividends! Nice problem to have, but looking at reducing taxation, if we can. Don’t know which to choose, but the Horizon funds do seem like a way to convert some of our income into capital gains. ROC might be better, but I no longer see how to do that. Looking forward to your newsletters.

      Reply
      1. A pleasure to hear from you, Graham. 🙂

        Love it: “…but decided then that my retirement job was to be our investment adviser 🙂 This has worked out OK for us.”

        Many DIY investors I know hold CDN stocks in their taxable account. I am one of them. This is after TFSAs, RRSPs are maxed out of course!

        That said, I learned years ago that CDN dividends are only tax efficient, to a point, based on other income streams. Otherwise, too much income from all sources = OAS clawback territory.

        IMO, the ways to reduce OAS clawback (there are more) are:

        1. If taxable/non-reg. investing, own stocks or ETFs for sure but focus on lower-yielding, higher growth stocks in taxable to avoid taxation of dividends and favour capital gains. Some Horizons ETFs can be great choices for taxable investing for sure, including corporate class ETFs like HXT, HXS, etc.
        2. Where possible, get RRSP/RRIF assets out sooner than later to tax-efficient, taxable accounts. See #1.
        3. Delay CPP to age 70 where possible, time for #2.

        Let me know your thoughts.

        Thanks for the kind words about the newsletter and site. It’s fun to run and engage with others!
        Mark

        Reply
        1. Mark, As we discussed by email, I am looking at initially making contributions in-kind to our taxable accounts using low dividends stocks we already own in RRIFS.

          Beyond that, we have some cash to transfer and may sell off some low capital gain dividend payers and use that cash to buy something like HXT and HXS. Other than the difference in management fees, is there any difference in how these would be taxed if we later sell them off to replace the dividend income we will have lost? What sort of long term average annual return could we expect? Same as TSX60 and S&P500?

          To some extent HXT is based on some of the same TSX60 darlings we already own. Any other suggestions? I do like the idea of buying an index instead of trying to choose individual growth stocks. I assume HXT & HXS are total return funds (Growth + Divs)?

          Reply
          1. I think that seems to be wise: sell off some lower capital gains payers over time.

            HXT, as an example, would absolutely include all the TSX60 stocks, many of the darlings you own. Just that with HXT, no dividends/distributions are paid out, so it’s not taxable income. You will however have to pay gains when you sell HXT.

            A decent article on these.
            https://www.moneysense.ca/columns/ask-moneysense/swap-based-etfs/

            I also interviewed Mark Noble from Horizons ETFs a few years ago…
            https://www.myownadvisor.ca/tax-efficient-investing-horizons-etfs/

            You should anticipate the same returns for HXT as for XIU, another TSX60 ETF that offers a mix of distributions and capital gains – XIU is also quite tax efficient based on what it owns/you own = eligible Canadian dividend paying stocks.

            If you no longer want to purchase individual stocks and want dependable long-term returns then indexed ETFs are great IMO.

            As you know, always tradeoffs with investing. Dividends are great, they are tax-efficient to a point, but at some point the combined income sources you have will have some tax consequences. Ultimtely, not advice of course, once you get well into 6-figures of retirement income (all income sources) then tax mitigation and usually not income needs becomes a higher priority. I hope to have the same issue to navigate in 10-20 years. LOL.

            If you stay with individual stocks, the ones that pay little to no dividends are ideal in a taxable account is my thinking.

            Thoughts?
            Have a great weekend,
            Mark

            Reply
            1. In looking at the Horizon Tri funds, I came across an article at looniedoctor.ca that alerted me to the danger that these funds may have when income earned in the mutual fund corporation holding the ETFs can no longer be offset. Not sure you want or allow links here, but the article is named ‘horizons-corporate-class-etf-tax’ As the article states, it will be some time (perhaps 5 years) before problems may occur, but they are possible.
              The article also alerted me to the fact that some of the TRI ETFs are perhaps less tax efficient at lower tax brackets. ( looking at marginal tax tables, even $100K taxable is in a lower tax bracket!)
              On a different subject – Total Return of HXT (or XIU) has been 10%/8% over 5/10yrs. Seems quite good, but this is quite a bit lower than high dividend banks and some industrials we own (that are part of the TSX60). Perhaps by enough to compensate for the OAS clawback? Some low dividend payers like CNR, CP and perhaps others have higher Total Returns than most dividend payers and the TRI ETFs. As discussed before, this may be the best route for us to take to perhaps control growth of our dividend income as we continue to draw from RRIFs. Maybe add some US growth stocks or funds that don’t pay eligible dividends. This without risk of investing in financially engineered funds with possible rule changes after I get too old to know 😉

              Reply
              1. Yes, the LoonieDoctor has a great site related to some of these Horizons details.

                Yes, there are risks for sure. But, I believe (personally) these risks are much longer-term including if more tax system changes occur.

                I stand by my previous posts that little to no dividends or distributions are tax efficient in taxable accounts. But, there is also the returns to be mindful of. XIU is a stellar fund, one of my favs. for years, and is fairly tax efficient = CDN dividend tax credit.

                My personal approach over time is instead of owning HXT or even XIU, even though I like both, is to unbundle XIU for income and I’ve been gravtitating to owning lower-yield, higher growth stocks in our taxable accounts. Examples like CNR, CP, WCN, ATD, and even TOU.

                I believe you would need a $1M taxable portfolio with those payers to incur any major tax headaches but very good long-term savers and investors might approach that once TFSAs and RRSPs are maxed out beforehand.

                Again, U.S. stocks have a bit of their own headaches in taxable accounts but stocks like Amazon and Google and the like would be fairly tax efficient since they focus on capital gains.

                Mark

                Reply
                1. We are bit between rock and hard place. Two parts of income we can’t do much about:
                  – CPP/OAS constant and indexed ~$42k
                  – RRIF withdrawals according to MWR schedule. ~$70k this year. Hasn’t changed much because income in accounts has recently been almost as much as the withdrawal (based on wife’s age)

                  Assume everything split between us.

                  Only variable that might be controlled, is the income in the unregistered accounts. Current holdings all produce grossed up dividends. Our holdings also all have significant unrealized gains, so selling and converting to non-dividend payers mostly doesn’t make sense from tax perspective.

                  That leaves just the annual transfers in from RRIFs that we can control.

                  Based on what I have learned from our discussions, those should go into low div CDN or US or ROW growth stocks or an ETF or two that will achieve same end. Unfortunately won’t make much difference, but at least it is a plan! May just have to grin and pay the taxes 😉

                  Thanks for listening 🙂

                  Reply
                  1. Ya, seems the sum of your taxable, forced income per se is challenging but a great problem to have.

                    Seems to me you’ll need to start selling some capital, slowly, over time, realize some gains given RRIF withdrawals will go higher for sure over time + inflation-protected government benefits like CPP and OAS will also be higher over time.

                    You’re in a tremendous income zone for retirement it seems but I can appreciate it’s annoying tax-wise!!

                    Happy to listen! Keep me posted on your plans, curious what you decide!
                    Mark

                    Reply
                    1. Hi Mark,
                      In trying to simplify our accounts, I sold off some individual holdings and have ended up with about $40k in US$ in my RRIF and $6500 in a taxable account.
                      For the RRIF, one possibility is to invest it in the S&P500. A fund like VOO trades at $451. This would mean I could buy 88 shares. BMOIL says that is OK. I could even buy just one!

                      For the taxable account, I guess I could do the same and buy just 14 shares.

                      An issue that comes up, is how to reinvest any income. Ideally I would like to have these accounts on autopilot in case I am not capable of managing them. I suspect that dripping is not possible, nor would I want it in taxable account.

                      Thinking that HXS.U might be a match for the taxable account due the smaller denomination and automatic re-investment? Still wary of it for larger amounts.

                    2. Nice to hear from you, Graham.

                      If striving to simplify your accounts, few better ways to do that than owning a low-cost ETF that invest in the U.S. market/S&P 500. Great choice.

                      VOO = VFV are great ideas, and BMO and iShares have a few great similar funds as well.

                      Just be mindful for taxable investing, not advice, that you’ll have some withholding taxes for any U.S. ETF in a taxable account but you can recover it, as part of a foreign tax credit.

                      https://www.moneysense.ca/columns/ask-a-planner/withholding-tax-on-us-etfs/

                      The ability to reinvest dividends and distributions should be an easy decision these days with any brokerage and doing so will likely come down to “optionality” = in that do you want the income, now, as cash or are you taking a total return approach and reinvesting? Either way up to you! But, yes, DRIPping ETFs or stocks in a taxable account can be a headache to maintain your adjusted cost base.

                      I know folks that own lots of HXS or HXS.U and are very happy with it to date.
                      Mark

        2. In thinking about this a little more, I came to the conclusion that we should maximize the dividend income in our TFSAs. This could make sense for any retirees in a tax bracket that attracts any taxes at all on dividends in unregistered accounts? But even more so as we reach OAS clawback. Why pay tax on dividends that you will soon draw for income?

          Proposed plan, is to gradually sell off high dividend payers with losses or low capital gains in our unregistered accounts and invest proceeds in solid low dividend/growth stocks or ETFs. At same time, sell low yield holdings in TFSAs and replace with high dividend payers similar to those we have sold in taxable accounts.

          During year, if need be, we can draw supplemental income from TFSAs. Then at beginning of next year use RRIF or other income to replace the amounts drawn and make the new contribution.

          For us, this will not happen overnight! Interested in your comments!

          Reply
          1. Cool, Graham.

            We own a blend of ETFs and stocks in our TFSAs. We have done that since those accounts were opened up in fact, back in 2009.

            I am biased to that approach since I like both income, if we need it, and growth, because we want it there 🙂

            Eventually, we’ll want income from those accounts for living expenses but not near-term. Our approach is to live off dividends and sales of stocks/ETFs from our RRSPs and taxable accounts for the coming 20 years or so, then tap TFSAs as we get older, once other income streams come online like CPP, OAS and a small workplace pension.

            So, I like the call of “gradually sell off high dividend payers with losses or low capital gains in our unregistered accounts and invest proceeds in solid low dividend/growth stocks or ETFs.”

            Dependable income is always great. Growth is always better if you know you’ll get it!

            We currently own a few lower-yielding, higher growth stocks in our taxable accounts but nothing I can do there, since there are meaningful capital gains and I don’t want to incur them now.

            Have a great weekend!
            Mark

            Reply
    1. Sure…HGRO is now HEQT and now pays a monthly distribution. It’s not as tax efficient as it was before but it remains very good and I recall the structure was changed to compete with XEQT, ZEQT, etc. – to compete with other all-equity ETFs.

      I actually emailed Horizons about this, and this was their reply to me over email….hope this provides some insight!

      Happy Holidays to you!
      Mark

      “…I’d say since launching our first asset allocation ETFs in 2018, we’ve had three key learnings:

      1. Investors today are looking for income in their portfolios – they want monthly infusions to compliment their long-term capital growth.
      2. This is a category dominated by end-investors and the majority of Canadians holding asset allocation products do so in registered accounts, which means the Total Return strategy likely wasn’t providing any tax-efficiency benefit for them.
      3. Our higher equity weightings made it difficult for us and investors to compare these to competitor funds, i.e., our former HGRO, which was 100% equity couldn’t be compared to competitor’s growth funds, as they were in separate Morningstar categories.
      4. As well, with higher highs from the equity weighting, there were also lower lows. We listened and realized that investors don’t want to see much variation in what is ultimately a core building block of their portfolio.

      One differentiation where we haven’t changed: a larger NASDAQ weighting and a bigger global focus than our competitors with higher amounts of Canadian home bias.

      Reply
      1. Hey Thanks so much Mark, really appreciate the time. I think part of the change that is drawing me away from it was away from a “Total Return” fund. Their reasoning might make sense for them, but I was looking to utilize the Total Return strategy. Thanks again.

        Reply
        1. Well, they still have their TRI/corporate class funds? HXS and HXT are examples and individually, they are more tax-efficient than HGRO was since that was a wrapper fund.

          Happy New Year!
          Mark

          Reply
  2. Hi Mark,
    I have a question about the wrap structure of the Horizon etf’s and counterparty risk. I believe that the Canadian Couch Potato website, years ago, stated that Horizon funds could not exceed 10% –a risk considered acceptable I presume. But I notice that, for example HSX is currently at a 40% counter party risk held by National Bank and CIBC I believe. Is this something we should be concerned about? I have a chunk of change in my cash account invested in HSX , HBAL and HBB . Is there anything to worry about? Can you offer an enlightenment on this issue?
    Thanks!

    Reply
    1. Great, detailed question that I cannot answer 🙂 I will share with Horizons team directly and see if they can reply to this thread.

      Thanks James.
      Mark

      Reply
  3. There may be some misunderstanding – regular rebalancing within these funds should not result in any taxable event or distributions to the unit holders – that’s kind of the point with these funds. They are very good options for a taxable account. The pre-emptive restructuring of the ETFs that took place in 2019 was a deemed disposition unless you filed an election w CRA. Horizons was very good at providing instructions on how to do that, my complaint was with my discount broker who didn’t provide any notice of the event. For those that have noted that their broker now shows the incorrect book value of these holdings, they will correct that (and return to your original book value) if you send them a copy of your election (section 85 election) with CRA. Hope that’s helpful!

    Reply
    1. Thanks for the info John. Spent some time reading on Horizons website and looks like they have three all in one, rebalancing ETFs with no distributions. As you said, very good option for taxable accounts. Helpful point on the book value as well, appreciate it.

      Reply
    2. Thanks John P. I’ll seek clarity from Horizons ETFs folks first and I know they are monitoring comments but they also have a lot on the go. I will pose this question to them directly and get back, but that was my assumption until I started thinking about it more. If you sell assets in a corporate structure, gains or losses can be offset. Since the HBAL, HGRO, etc. are holding the funds themselves and not corporate class funds then I think gains incurred may be a taxable event at rebalancing.

      Again, I will ask 🙂 Therefore, you believe we should be “good” going forward?

      Very helpful and I did read about various section 85 provisions on various sites.

      Reply
      1. Hey Mark – looking at this thread closely, I can see some of us, including me, are talking about the corporate class (swap structure ETFs) – in particular HXT, HXS (your reader, BK, above, mentions there is a third) which have (intend to have) no distributions whatsoever; while others, including you, are more interested in the ETF portfolios like HBAL and HGRO which are different and appear to indeed have distributions (though not distributions of dividends). I only hold HXT and HXS so can only speak directly to those, I’ve just looked at the product sheet for HGRO. I agree it would be great to have Horizons provide a breakdown of which of their products achieve which tax efficiencies. Thanks for the coverage of this area!

        Reply
        1. Most welcome John.

          I just emailed Horizons ETFs and I know they are great to get back to me. I like HXT and a few other funds but I prefer HGRO given it’s a simple all-in-one and considering that myself for a taxable account.

          Reply
        2. Here are the answers from Horizons – re-posted in the article!

          So, in holding HBAL or HGRO or the other “TRI” all-in-one fund in a taxable account, are there any capital gains to be incurred if/when those TRI funds rebalance x2 per year? I recall they are rebalanced at that frequency.

          The ETFs have historically incurred capital gains (and losses) when they rebalance, however the determination of how much these capital gains are is determined at year end, and there can be instances where some or all of these gains can be offset at the fund level so they are not paid out.

          Also, as a follow-up then, would there be any instance beyond selling HBAL or HGRO units in a taxable account by the unitholder whereby capital gains or a taxable event may have to be reported by the investor??

          Yes, as mentioned the ETFs do generate some income, primarily returns from currency forwards they use to hedge out foreign currency exposure and in some circumstances potential capital gains from selling ETFs at a gain during the biannual re-balance periods.

          Reply
  4. If you hold the “TRI” ETFs (like HXT, HXS) it’s important to keep your eyes open for structural changes. When they restructured these last year there was a deemed disposition (a taxable event) unless you filed an election with CRA. Horizons was very good at providing support and instructions on how to make the election, but I wouldn’t have known about the restructuring except through my own research (I hold these through RBC Direct who did not provide or forward notice to me).

    Reply
    1. Good on the team to flag this John. I recall reading about those elections which might be a concern in a taxable account for sure.

      I’m tempted to own HGRO in a taxable account at some point. The only thing I need to keep in mind is any HGRO rebalancing may be subject to capital gains incurred. I wonder if the Horizons ETF team can speak to that? I assume I will incur a capital gain if HGRO rebalances at a gain during the year? Thoughts?

      Reply
      1. I began helping my Mom with her investments a few years ago and we shifted her entire non registered account into a basket of the Horizon tax efficient swap ETFs (HXT, HXS, HXDM, HBB). Thinking was geared towards simplicity as tax efficiency as she doesn’t currently require any income from her non registered account.

        We went through the same paperwork last year with the change in structure of these funds, but avoided any capital gains with the election to CRA. Although a little onerous I found communication from Horizon was good and hopefully a one time occurrence. We do have the same issue with her online brokerage (TD) showing the inflated book value; maybe a good reminder to ensure you keep track of ACB on your own as well.

        Enjoy the posts and discussions on this site, keep up the good work Mark!

        Reply
        1. Yes, I read about that BK – thanks for sharing your example as well re: election to CRA.

          I’m more curious about holding such funds and then the go-forward capital gains hit now and then when these funds re-balance. More specifically, with HGRO in a taxable account because it holds the corporate class funds.
          My understanding could be wrong but if they (Horizons ETFs) rebalance HGRO in a taxable account, you’re on the hook for a potential gain at that time. Thoughts? I’ll see if Horizons can weigh in.

          Reply
          1. Good question, would like to know as well. All in one ETFs like HGRO that automatically rebalance weren’t around when we set this up a couple years ago. Would certainly be a nice option for taxable accounts; we don’t rebalance as often as we should within this account to avoid the capital gains and changes in ACB.

            Reply
            1. fyi…re-posted in the article!

              So, in holding HBAL or HGRO or the other “TRI” all-in-one fund in a taxable account, are there any capital gains to be incurred if/when those TRI funds rebalance x2 per year? I recall they are rebalanced at that frequency.

              The ETFs have historically incurred capital gains (and losses) when they rebalance, however the determination of how much these capital gains are is determined at year end, and there can be instances where some or all of these gains can be offset at the fund level so they are not paid out.

              Also, as a follow-up then, would there be any instance beyond selling HBAL or HGRO units in a taxable account by the unitholder whereby capital gains or a taxable event may have to be reported by the investor??

              Yes, as mentioned the ETFs do generate some income, primarily returns from currency forwards they use to hedge out foreign currency exposure and in some circumstances potential capital gains from selling ETFs at a gain during the biannual re-balance periods.

              Reply
    2. I hold HXT and got hit with the deemed disposition. The paperwork was very complicated and my tax software (Studio Tax) did not have the fields to fill in the required data. I wound up submitting my taxes and immediately writing an appeal to CRA which was awarded some 3-4 months later. Now I have the new headache that my online brokerage lists my book value at the deemed disposition level, but it should properly be at the pre-disposition book value, which was much less. A record keeping and reporting headache for sure.

      Watch out for HXS – the trading expense ratio (TER) offsets any savings of foreign withholdings tax.

      Reply
      1. So that’s the thing right Bart, with any rebalancing in a taxable it’s a deemed disposition then – potentially subject to capital gains? Sorry to hear about the CRA headache but could this have happened to any other fund? Or, would managing a stock (or fund rather) without deferral of distributions be more straightforward for most common investors? Curious on your take.

        Reply
        1. Yes, that’s exactly the case – the whole point of HXT was to avoid dividends or capital gains until I melted it down in retirement. Having a major taxable event pre-retirement would negate the whole effort, but any who invested in HXT knew about the regulatory risk so we can’t exactly call foul.

          I built my portfolio as a CCP with individual ETFs, using HXT in a taxable account for the bulk of my Canadian exposure. I got carried away with trying optimize specific holdings in RRSPs vs. TFSAs vs. taxable accounts and I’ve since learned that I overlooked the after-tax allocation in my RRSP. If I were to start from scratch, I’d probably put VEQT in all accounts and call it a day – I’m not sure the incremental gains of splitting it up as I have is really worth the headache or will produce a life-changing difference in the end, and will make rebalancing in RRSP meltdown more difficult – I’d love to hear others’ thoughts on that.

          If we see a combination of a major market pullback and budget threats to increase the capital gains inclusion rate from 50% to 75% or more, I may liquidate HXT and roll over to an all VEQT portfolio. If we don’t, I’ll likely leave it as-is and direct new funds to VEQT till I retire.

          Reply
          1. Interesting Bart.

            Maybe I should just stay the course?

            Meaning – taxable = CDN stocks only.
            Put any ETFs, CDN stocks, U.S. stocks, etc. = registered. This way, no capital gains to worry about 🙂

            VEQT is interesting but would likely only put that into registered.

            As for RRSP meltdown, stay tuned, I have some news to share in my next Weekend Reading on a new venture!
            Mark

            Reply
            1. Yes, this is exactly as I have it with some VUN in a taxable account as well to balance out the roughly 1/3 Cdn, 1/3 US, 1/3 EAFE/EM allocation I’ve got.

              I’m looking forward to your RRSP meltdown ideas! This is a topic I have been reading lots on over the last couple of years.

              Reply
              1. Same. I’m trying to find some case studies and means to draw down my RRSP responsibly while trying to manage other income streams in the coming years. More to come 🙂

                Reply
  5. I think one thing I’d really like to see is a breakdown of all the risks associated with this approach, over and above regular ETFs that hold the assets directly.

    Like if some counterparty should default, what are the worst case outcomes? I know there are more, but I don’t think its ever been aggregated in one location.

    Reply
  6. Over 1,000 Horizon ETFs, but you only need consider a few dozen? So who’s selling the rest to whom? I doubt they’d continue to offer them is there were not buyers.
    I’ll stick to suggesting that one select from 20 or 30 quality DG stocks (Cdn & US) which are just as tax efficient, with no fees, will provide sufficient diversification, and are likely to provide one with more net income than a bundle of ETFs.

    Reply
    1. Thanks cannew. I’m still a fan of many dividend paying stocks, and own many, but as you know we have some different philosophies on how much diversification one needs 🙂 You’re in a great place with your dividends > expenses but most of us aren’t quite there yet!

      Just like many other investments, there are funds to avoid for sure. I think Horizons ETFs deserve some consideration based on their structure and approach.

      Happy New Year!

      Reply
      1. Hi Mark,
        speaking of diversification what do you think of bitcoin as a new asset like Gold ? prices of bitcoin has been flying like crazy the volatility is insane and yet i hear of more people and now i read about bloggers and institutions who’s betting that prices will keep going up.
        I know that no one has a crystal ball but would consider putting any amount of money into Bitcoin ?
        Thanks

        Reply
        1. I thought of buying QBTC or QBTC.U (US $$) in my TFSA in particular, early 2021 for the TFSA. I did not. I bought some XAW and figured the latter was a simple approach to diversification.

          I understand the premise of bitcoin and the technology that supports it but I see much of this is really about speculation at this time quickly driving up prices. Is this the real deal? Are these investors onto something more than the masses? Maybe. I don’t know.

          I do believe however if you’re OK to risk some money (risk = potential for reward, not a given) then I would only personally “risk” no more than 10% on any collection of risky investments in a portfolio.

          I feel this way because the same things that can make you wealthy can also make you poor when it comes to risky investments.

          Thoughts?

          Reply
          1. Mark it’s really insane that at today’s prices less then 8 bitcoins is worth 1 million dollar…what ? 8 bitcoins 🙂
            but to me and I’m 100% sure to you and most people here if we have a choice of 1 million$ in stocks or 1 million in bitcoin I’m sure will chose the stocks portfolio because 1 million $ in stocks produce income and gives you ownership in companies all over the world , bitcoin with the volatility that comes with it will give me a heart attack.
            I’m thinking of throwing 1 or 2k into bitcoin or blockchain just for fun and let it ride either way 🙂

            Reply
            1. I’ll take a $1 M diversified stock portfolio all day myself Gus but I don’t own any bitcoin yet. Just seems far too speculative for me. I’ve gotten this far by being boring. 🙂

              Reply
        2. I don’t understand crypto currency. Is it an investment or is it currency? How is Bitcoin valued?

          No regulator. No insurer. Created by people solving math puzzles?? Digital wallet… Cloud or computer. Security…much hacking. Wild fluctuations. Anonymity. Supports much illicit activity.

          Reply
  7. I hold HHL (Horizons Health Care Leaders) and it is a solid dividend payer. I think I may have it in the wrong account. I bought it, as a very new investor, inside my RRSP. I should have had it in my TFSA but it would cost me dearly, come tax time, to have a withdrawal from my RRSP.

    Reply
    1. It seems to me Horizons ETFs are structured well for both taxable and tax-deferred (RRSP, RRIF) or tax-free investing (TFSA). You can always reach out to them for guidance but I can appreciate they don’t offer direct investing advice.

      Reply

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