Swap ETF Evolution To Corporate Class (Part 2: Rise of the Resistance)

Horizon’s Total Return Index (TRI) ETFs use a swap structure. That makes them very tax-efficient by tracking the total return of an index (capital gains plus interest/dividends) and only paying it all as lightly taxed capital gains when sold. Tax deferral and reduction. The complex swap structure also made them unique in Canada and very beneficial to high-income investors. A perfect target for the T2 Legislator.

Unsurprisingly, that triggered the Trudeaunator Government’s typical Gatling-gun-precision legislative response. This legislative risk was the most anticipated risk of using a swap ETF. The intent of the initial legislation was to force these ETFs to payout taxable income annually. However, the collateral damage of that legislative change potentially impacts all mutual funds and ETFs operating as trusts – as described last week.

Credit: Modified from Terminator 2: Judgment Day, TriStar Pictures, 1991.

Rise of the Resistance

Earlier this year, the tax advantages of the TRI swap ETFs looked to be terminated. However, just this month, the much-anticipated Terminator Resistance was released for PS4 and XBox. Concurrently, Horizon’s human resistance mounted a response and morphed the Swap ETFs from individual “mutual fund trusts” into a group of Corporate Class ETFs. Coincidence?

Younger-me would have spent the last week blowing up cyborg assassins. Instead, older-slower-reaction-time-me spent the week wading through the nitty-gritty details of the Corporate Class ETF changes at Horizon. Some of these ETFs have an excellent risk premium for the big-savers or big-earners that must use a non-registered personal account, invest through a corporation, or income split using both (like my wife & I do). However, we wouldn’t want to take the risk of using this innovative fund structure unless it is robust and not just a stop-gap solution until the next Legislator sequel.

My immediate questions about the corporate class ETFs:

  • How does corporate class work compared to a regular ETF?
  • How well do the funds in the corporation gel together?
  • What would distributions look like and how likely are they to occur?
  • Is this just a round of Tax-Whack-A-Mole or is it robust?

I am honestly pretty excited about what I found, but you should form your own conclusions if you are considering these products.

Disclosure: We have held HXDM, HBB, and HXX in our portfolio at various times. I don’t have any at present, but I likely will again in the future. I have no other financial relationship with Horizon at the time of writing this.

Corporate Class vs Regular Mutual Fund Trusts

Mutual Fund Trusts

Regular mutual funds and ETFs are legally “mutual fund trusts“. Each ETF is a separate fund trust. As a trust, they must distribute all income received each year to their unitholders. They use allocation to redeemer methodology to do this. This is to avoid double taxation of capital gains for investors redeeming units. The Federal Government recently made changes that will also ensure some capital gains are taxed as soon as possible for existing investors that don’t sell their units. That is logistically very difficult to implement. Hence, ETFs and mutual funds that make regular distributions have been given a one year reprieve while the potential splatter caused by this Gatling-gun approach is explored.

Mutual Fund Corporations

A mutual fund corporation side-steps this impending issue completely because it is a totally different business model and legal entity. Allocation to redeemer methodology does not apply to “Mutual Fund Corporations.” The reason is that they are not a trust, holding investments and passing income through to the trustees. They are a corporation.

Each ETF in the corporation is a different class of shares or “series”. This allows them to have different values and make different distributions. So, for the end-user, it looks basically the same as any other ETF. However, behind the scenes, they are all part of the single large corporation.

Investment income is fully taxed as business income at the General Corporate rate. A mutual fund corporation doesn’t receive the Federal abatement. So, the tax rate is even higher than other corporations. Excess income can be dispensed as eligible dividends. Just like every other regular Canadian large business. Our imperfect tax integration means that the combined personal and corporate rate is higher than if the money were earned personally. Music to the taxman’s ears.

horizon etf tax

So, if poorly organized, a mutual fund corporation may not have much of a tax advantage. In fact, there is a tax inefficiency favoring the government. This makes it a less attractive target for the Trudeaunator. The key to a corporate class structure being tax efficient is how it is organized to offset investment income with expenses between its family of funds and between fiscal years. This makes understanding the details of the corporation’s business model vital.

How are Horizon’s Corporate Class ETFs organized?

The swap contract structure is maintained.

The Trudeaunator Government’s objection to the swap ETFs was the use of allocation to redeemer methodology to re-assign income to their market makers. Not the swap contracts. Swap contracts offer a number of advantages like low tracking error, lower costs for Canadian indexes, and avoidance of foreign exchange and withholding taxes on dividends for non-Canadian indexes. These synthetic ETFs are also routinely used to index some difficult to access markets like commodities. So, Horizon is keeping the synthetic swap structure.

How does the swap structure affect business income?

The value of the total return swap contract increases or decreases in size as the total return of the tracked index changes. However, the income or loss will only be realized when a swap contract is settled or partially settled. That could happen for a number of reasons.

When is a swap settled to trigger a gain (income) or a loss (expense)?

Horizon and National Bank could voluntarily settle the swap.

This is actually partially how Horizon will manage income. For example, if the swap is at a significant loss, then Horizon will settle it, book that loss, and then get a new contract. That loss can then be carried forward. So, when income is realized later, it can be offset by the previous expense to reduce or nullify taxable income. Analogous to tax-loss harvesting of capital gains by individual investors. However, an important difference is that “superficial losses” can apply to capital gains. In contrast, this is business income.

This will be helpful if a swap is forced to settle, or partially settle, at a less advantageous time.

A swap could also be forced to settle or partially settle.

One way that this could happen is if the contract is downsized. If the funds keep growing, this is avoided. However, it could easily happen if a large client redeems a big chunk of shares while the swap is in a positive marked-to-market position.

Another trigger to settle a swap would be if the counter-party exposure exceeds 10%. That could happen if there is a large market move. The most violent market movements tend to be down – which would be booked as an expense. While less common, a huge rise in an index would trigger income. Update 2021: Horizon was able to book a lot of expenses in the 2020 Covid crash. That gives some nice runway to offset future income.

It is very likely that eventually there will be some net income in one fund or another. However, the corporate structure has another layer with which to manage that. The funds don’t exist in isolation, as they do as trusts. The income and expenses are pooled amongst the entire mutual fund corporation.

Pooling Expenses and Income: Horizon’s Secret Recipe

Through the pooling of income and expenses, the income generated from the investments can be used to pay expenses. Expenses from the higher-fee funds can also be used to offset the income from less expensive funds. A gain in one fund can be offset by a loss in another.

Of course, the obvious concern would be the balance between income and expenses. If expenses (fees) are raised to prevent net income, that would be a loser for investors. If there is excess income, then the corporation would pay tax on that. Same as losing money to a fee – except the government gets it instead. Horizon feels confident that their income and expenses will largely balance out. Being a skeptic, I pushed them on this, and in the end, I think this is where things get interesting.

The TRI ETFs are baked in with the BetaPro ETFs. Some commodity ETFs are sprinkled on top. Like a loaf of bread.

I like the doughy middle of the loaf.

The TRI ETFs could generate some hefty income/gains and have reasonably low fees. This is the approach I like.

Follow an index. Rebalance only when I need to and with lazy precision. It may seem sedentary and a recipe for financial obesity. However, that is my goal. A big doughy portfolio with minimal effort.

Like the warm doughy center of a loaf of bread.

However, low-fees could spell “distributions” in a corporate structure.

The Horizon TRI swap ETFs are passive index trackers. Their fee range is competitive: 0.03% for the Canadian HXT and 0.25% for HBB (Canadian bonds). The swap structure is very cost-effective for REITs and preferred shares, making their MERs about half that of traditional ETFs. Fees for the funds covering foreign markets are slightly higher (0.30% to 0.50%). This is competitive with regular ETFs when you factor in foreign exchange and the heavy taxes on foreign dividends. The downside of this low-fee investing approach in a corporate class structure is that it is hard to offset that income with expenses.

How do corporate class mutual funds and other corporate class ETFs manage distributions?

Most corporate class mutual funds have little difficulty consuming income due to their higher active management fees. There are also some other corporate class ETFs, like from CI First Asset and Purpose Investments. The CI First Asset funds have low MERs (0.15% & 0.25%), but only cover Canadian large-cap equity (CSY) and Canadian Short-term Bonds (FGB). The Purpose Investment funds have a broader selection and a more active management approach with higher fees (0.5-1.5% range). Despite those fees, they still make regular distributions. At least the distributions are tax-efficient eligible dividends or return-of-capital.

Fortunately for me, others like the crust.

So, for the corporate income and expenses to balance out without raising expenses, Horizon’s TRI swap ETFs are going to be bedfellows with some other funds that have significant expenses by their very nature. Their BetaPro line of ETFs and commodities ETFs.

The BetaPro ETFs are designed for active traders.

They provide daily contracts for leveraged investing (2X bull leverage), shorting the market (inverse), leveraged shorting of the market (2X bear), and a volatility index ETF.

I don’t invest this way. I mostly take the passive index investing route. However, many people do try to win at market-timing. One reason that I don’t is that I can’t tell the future precisely enough to time short-term entry and exit points well. That is vital because the contracts required to invest with leverage and shorting are an extra expense. This expense drags on performance if the ETF is held for a significant period of time.

If you can time well enough to make an outsized profit, then great! I cannot. Few can.

Commodity markets can be difficult to trade and have more fees.

This is actually one of the areas where derivative contracts are the norm. If you want to trade in this space, there will be contractual costs for doing so.

The mix of funds makes for a complimentary buffet.

The traders using BetaPro or trading in commodities are going to incur those expenses as part of their investment plan and pay for that via their management fees. It is a cost of doing business for their strategy and these funds have an MER in 0.75%-1.5% range. Further, the inverse funds that short the market will have the fees, but not generate income from interest or dividends.

I wish the traders success in their endeavors. Mostly, I am pleased that they are potentially enabling my TRI ETF tax-reduction and deferral by allowing me to negate income without my management fees going up.

The fact that the BetaPro, within the family of funds, bet on opposite sides of the market also seems helpful. When one is generating income, the other side is generating a loss. This offsetting of gains and losses both now and on future income gives great flexibility to manage net income (and therefore distributions). For a corporate class structure to be really efficient, expenses and income need to be generated by different funds at different times.

Altogether, I think this mix of funds together into a corporate class structure is appetizing.

It addresses one of my biggest concerns (income not offset by expenses) while not really penalizing anyone with extra fees that they wouldn’t already be paying for their investment strategy. For a market to work, there must be people with different beliefs and approaches. In this case, some like the doughy center and some like the crust. To each their own, but together we are minimizing the leftovers that the tax-hounds will gobble up.

There are even some All-in-One Asset Allocation flavors.

For those looking for a tax-efficient low maintenance solution in tax-exposed accounts, Horizon also has bundled some of the corp class ETFs into self-rebalancing funds. There are HGRO, HBAL, and HCON versions. They are similar to the Vanguard, iShares, and BMO offerings in some ways. Different in others. I do an in-depth comparison of these ETFs in different account types in my DIY Investor’s Hub.

What if corporate expenses don’t offset income?

Only time will tell if the mix of funds and expenses in the corporate class will be able to avoid net income. If there is net income, then it may become necessary to distribute that. This would be less frequent and in smaller amounts than a regular ETF, but it could happen. This is a “management risk”. So far, Horizon managed to book significant expenses with the 2020 Covid crash. Only time will tell if this plus the expenses of the trading-oriented ETFs will suffice.

Any income-leftovers would be taxed at the general corporate rate. Horizon’s corporation will be domiciled in Ontario for a combined Federal/Ontario tax rate of 36.5%. [Update: The rate is 36.5% because a mutual fund corp doesn’t receive the 10% Federal Abatement]. That tax would reduce the net asset value of the fund units. It would only be 36.5% of the net income – which still may be very small compared to a conventional ETF. How that is distributed amongst the different ETFs and who receives eligible dividends is not clear.

Will the government simply unleash the tax hounds on Corporate Class Funds?

I honestly think that nothing is safe from a desperate government. However, I think this structure is much more resilient than the previous one.

No longer a lone wolf, but part of the pack.

The previous swap ETF fund trust structure was more complex and relied on nuances of the allocation to redeemer methodology. Horizon was the only one doing it and the benefits were mainly for highly-taxed high-income investors. Easy prey as a tax-the-rich-using-a-loophole political gesture.

Multiple companies use corporate class funds with $157 billion invested in them. That is a much tougher adversary as a pack than the ~$5 billion that the Horizon funds rolled into the corporate structure were on their own. Horizon is quick to point to this as implicit security. However, corporate class mutual funds have been on the legislative menu before.

There was a recent attack in 2017. The Federal Government legislatively ended the ability to move between different series in a corporate class fund without triggering capital gains. They are not immune. However, there are some good reasons why the government continues to tolerate the corporate class structure. These carry more weight to me.

Why I think the corporate class structure is more robust.

It is a straightforward corporation. This would make it hard to target without impacting how other financial corporations operate. Not impossible, but difficult. A major move against financial corporations would also make Canada an outlier in the world. Investment capital outside of registered accounts has wings. It would fly away. So, there would be significant collateral damage.

Plus, I don’t think there is a strong motivation to go after this structure. The reason that I say this is that the investment income is being fully taxed as income. Not, the half-rate of capital gains. Not the lower rate of eligible dividends. Income. As mentioned earlier in the article, tax integration makes this less tax-efficient than directly investing. It only becomes tax-efficient if the business is well managed. It is hard to believably spin a business that is managing its finances well as “tax-avoiding”.

Of course, collateral damage, flight-of-capital, and fuzzy political spin hasn’t stopped governments before. There are many sequels in the Legislator franchise already.

Tax Savings vs Management & Legislative Risk

Risk and reward are joined at the hip with investing. The potential reward of decreased tax-drag on tax-exposed investments by using corporate class ETFs is easy to mathematically model. The risk of further legislative aggression is much more difficult to quantify. There is also a risk if Horizon is unable to manage the income well. That could mean corporate taxes on the net income and eligible dividend distribution.

For those looking for a simple and tax-efficient option, I compare the Canadian All-in-One ETFs in my DIY Investor Hub.


  1. Another brilliant post, just skimmed over it, need to read it a few more times !
    Thanks again for doing all this legwork and communicating with Horizons. You deserve sainthood!
    Impossible to unpack the intricacies till your investigative reporting!
    Keep up the good work.

    1. Thanks Lyndon. This was a really interesting post to work on. I suspect no one else will dig into it this deeply. However, these products have some major potential for those investing in tax-exposed accounts. That includes me and I needed to know the details to feel comfortable. I previously used some of these ETFs where the risk premium was large (HBB and HXDM) where I figured it was worth the risk for us. When the legislation was first proposed, I looked at some of the other options. Neither were great: traditional corp class mutual funds (fees too high and didn’t gel with my investing approach) and the European non-distributing synthetic funds (tax complexity/risk). After dissecting this restructuring and the legislative issues, I am both relieved and my interest is rekindled.

  2. Thanks for this detailed explanation. Sold out of HBB when the last budget was announced. Held on to HXT and HXS (due to large capital gain situation). Will sign the documents on the Horizons website to convert to this Corporate Class structure for the existing holdings but not going to add to positions for a while yet. HXS and HXDM are most appealing due to re-characterization of foreign income to capital gains, and HBB for re-characterization of interest income to capital gains. For those approaching a drawdown (retirement), the utility of these funds is lower as one will need the income thrown off by the conventional versions of these ETFs anyway.

    1. Hey Ticdoc. I am updating an online tool to directly compare these ETFs to their traditional counterparts. HXDM and HBB are my top choices also.

      I actually think that their utility is unchanged in retirement. One needs regular income, but that doesn’t need to be interest and dividends per se. You would want a mix of assets that dampens volatility as drawdown is approached and in the first years afterwards to minimize sequence of returns risk. That generally means bonds, but HBB would do that. In fact, it is more tax efficient to take capital gains for income as needed. It is also more flexible to smooth income than regular interest/dividends where you get them regularly without control. This becomes really important if you have a large corporate portfolio where income requires you to dispense more dividends to release the RDTOH. That could mean taking more out than you need or leaving RDTOH trapped in the corp. I have actually been thinking about this a lot lately as we will be transitioning from pure accumulation to some reliance on my wife’s investment income (to income split) over the next couple of years as I scale back further.

      1. When you build your calculator, take a look at ZDB (discount bonds) in corporate accounts. Just as tax efficient as HBB but without the complex contortions and risk of future Tax Act changes- Justin Bender did a comparison of HBB and ZDB in his blog a while back.
        I too Like BRK.B as a US investment. Replicates the total return of the index over a 10 year holding period and no dividends to worry about so no annual taxes. Jus capital gains taxes when you sell. (of course the inclusion rate on capital gains is subject to change at the whim of the Govt.)

        1. Hi Ticdoc,

          Actually HBB is more tax-efficient than ZDB. Justin Bender’s estimate was 0.22%/yr. I actually modeled it over different time periods, including a legislative attack for a taxable account and a corporate account last spring. It will be repeated with the most recent numbers in the calculator. The efficiency varies by income level and account type, but HBB comes out ahead. Also, while moderate duration bonds can have some capital gains/losses, they are of a small magnitude compared to equities. So, the impact of a forced capital gains realization is generally less than the annual tax savings.

          I also think the capital gains inclusion rate is a potentially important variable and will make it adjustable in the upcoming simulator.

  3. Thank you for the great analysis. I sold my Horizon HXS ETF when the budget changes were announced, but now I will take a second look. I remember reading somewhere on your site (comments?) that HXS is not the most tax efficient or cheapest way to invest in the S&P in a corporate portfolio, but I can not find the reference. What are your thoughts on this right now ? What US ETF did you chose for yourself?

    With all the changes thrown around at us, I just gave up and constructed my own index with individual securities, a ghost ship portfolio if you want, but I know this is not optimal for the US holdings tax wise. It works beautiffully for Canada though and I have been getting index-like results or better since close to 5 years now.


    1. Hey Mai. I am actually right in the middle of re-looking at the tax-efficiency of HXS and others. It is a mix of fees, FWT, corp tax, and personal tax that I am building into an online simulator for all of the swap ETFs vs a traditional comparator. I am currently using a complex solution (QQQ and BRK.B in my corp, IUSV and IJS in my RRSP). HXS may be simpler and better than my QQQ/BrkB in my corp solution. Stay tuned.

  4. Thanks for your efforts with the research and this website.

    So to clarify and confirm for me – these funds, e.g., HXS, HBB, are a good option for a CCPC investment account? I’m coming up against the $50,000 passive income threshold that’ll affect my CCPC’s small business rate in the near future. Am I right to be looking for low distribution investment options, which these Horizons TRI funds would be, as they have no taxable passive income distribution until I sell the shares in the future? Are there any other competitive low- or no-distribution investment options out there for a CCPC in this situation?

    Thanks again.

    1. Hey MD.
      I think that makes good sense to me if you are looking to keep working/earning/spending the same. I decided to work less and lower my active income, but that has been a recent decision. I built my portfolio with the plan of minimizing the passive income issue while continuing to work hard. Keeping income out of the corp is key (having built a large RRSP and TFSA to put the big income-producers helps).

      There are pretty limited options. The option that I use is to split my US funds to use some QQQ (<1% dividend) and maybe some Brk.B (no dividend) in the corp and I have IUSV and IJS in our RRSPs or my wife's account - but that is less diversification and more complicated. The main dividends in my corp come from Canadian dividend-paying ETFs. I touched on the other corp class ETFs from other companies in the post, but they are also limited (Canadian bonds and Canadian market) with higher fees and more probability of distributions than the Horizon products. I also looked at some non-distributing synthetic ETFs on the Irish stock exchange, but that would have been really complicated and may still have some tax issues. I personally think that the Horizon TRI funds are the best option and now with the corporate class change to put them on more solid ground, I am considering some changes to use them more. Even without hitting the passive income limit, the ability to control my income better with the corp class swap ETFs is very attractive.

      1. Beautiful, thanks so much for taking the time to reply.

        If I may ask a couple of more noob questions: I would be planning to make lump-sum purchases of these Horizons TRI funds a few times a year; is it pretty straightforward to keep track of adjusted cost base for that? What tool do you recommend for doing so? I haven’t really invested in ETFs in my CCPC account before, and am wondering how to best track ACB’s and provide the info to my accountant.

        Thanks again.

        1. Hey MD,
          Honestly, I just keep my transaction records and account statements from my MD Direct/qtrade account and give them to our accountant. I used to give him an excel spreadsheet, but he always redid it all anyway.

        2. @MD I would recommend Adjusted Cost Base.ca for tracking ACB. They seem to have all the transactions you could ever run into including those originating from the fund side. Just be sure to download an Excel copy of your work just in case they ever go under.

          I own Horizons TRI funds and tracking the ACB is quite straightforward as you rarely get fund initiated transactions (e.g. return of capital, etc.) that will affect your ACB. Having said that, it’s always a good idea to eyeball the CDS Innovations database after each year and check what your fund did.

  5. These are great pieces, providing a much clearer and more detailed analysis of the promise and perils of the new corporate class structure than I have found anywhere else. And much more entertaining!

    We own several of the index-tracker ETFs in corporate as well as taxable individual accounts. One niggling concern that I have relates to the fact that there are theoretical scenarios where losses and liabilities of one or more of the ETF classes (i.e. the Beta Pro ETFs) could have a direct, adverse impact on the NAV and market value of other ETF classes (i.e. the index trackers). The theoretical risk is acknowledged in the following extract, from the Horizons ETF Corp. prospectus dated November 15, 2019 (top of page 40):
    “Each class and series of the Company has its own fees and expenses which are tracked separately. Those fees and expenses will be deducted in calculating the NAV of that class or series, thereby reducing the NAVof the relevant class or series. The liabilities of each class of shares of a Company are liabilities of the Company as a whole. If one class or series is unable to pay its expenses or liabilities, the Company is legally responsible to pay those expenses and as a result, the NAV of the other classes or series may also be reduced. Similarly, if the liabilities of a class of shares of the Company are greater than its assets, the other classes of shares of the Company may be responsible for those liabilities.”

    This passage appears in the “Risk Factors” section of the prospectus, which of course includes every conceivable risk, no matter how probable or remote. What I’m wondering is whether the risk of classes of index-tracking ETFs being left holding the bag for losses incurred by one or more of the more of the more speculative ETF classes is realistic enough to be concerned about. I don’t really have a sense of whether it’s realistic to suppose that one of the speculative classes of ETF could suffer losses that couldn’t be covered internally, and so would have to be covered by other classes. I’d be interested in your thoughts on that subject?

    Thanks again for your great work.

    1. Hey Rick. Thanks for the great addition to the conversation. This kind of critical thinking and skepticism is healthy when examining products. It is also what I am tossing around too and thanks for posting. That description of company responsibility for liabilities would describe any corp class family. I actually think that the Beta Pro should generally work out because a liability for the bear version and bull version will move in opposite directions. There will be winners or losers for investors picking a side, but the company should have a neutral position. Minus the costs of the contracts which the higher fees extracted from the NAV of those products should cover. On the indexing side, if one market was decimated while the others were not, I could see an impact. That is unlikely amongst the equities or preferred shares ETFs because global markets are so interconnected. I think they’d all sink together. Bonds are pretty stable, so I can’t imagine decimation there. The volatility tracking ETF is going to erode over time due to the cost of the contracts (which is predictable). It could have a spike up, but volatility doesn’t usually spike down. So, while a theoretical risk for any corporate family of funds, I actually think the risk of that is low with this set-up. I would be more concerned if there were a small number of funds (to manage across) or some unbalanced leveraged funds (only bear or only bull). Does that make sense?

  6. Thanks for your reply, which does indeed make sense.

    I do have one follow-on observation, upon which you might want to comment. Suppose that “Fernando” and “Yogi” are the bull and bear versions of a particular leveraged Beta Pro ETF (i.e. share class). Suppose also that as the result of some extraordinary market events over a short period of time, Fernando does exceptionally well but Yogi does exceptionally poorly. Let’s say that before these events each of them had a net asset value of $10 million. As a result of the events, Fernando’s NAV shoots up by $20 million to $30 million, but poor old Yogi’s NAV declines by $20 million to negative $10 million: i.e. Yogi has incurred a liability of $10 million that cannot be discharged out of its assets [I’m admittedly not sure it is realistic to envision Yogi suffering such severe losses as to get into a negative NAV situation, but let’s assume that it is.]
    As you point out, at a corporate level the losses of Yogi are exactly offset by the gains of Fernando. However, while Fernando’s entire $20 million gain accrues to its unit holders, I suspect there is no mechanism for making a cash call on Yogi’s unit holders to make up the $10 million shortfall in Yogi’s assets. Presumably then, the $10 million cost of discharging Yogi’s net liability would be allocated in some fashion to all share classes. If so, then investors in share classes other than Fernando and Yogi would be bearing part of the risk of the strategies followed by investors in Fernando and Yogi. Of course, this would only be a concern to the extent that there is a realistic possibility of Yogi (or any other share class) getting into a negative NAV situation.


    1. After thinking about this, the only way that I could see the liabilities of one ETF impacting another is if the NAV of the losing ETF went below zero. However, the way that the inverse and leveraged ETFs contracts are designed is that they move as percentage basis. Not dollar for dollar. That way they cannot actually go below zero. I found this article which explains why a leveraged or inverse ETF cannot go below zero. Thanks for the great point – you stretched my brain and I learned something!

      1. Thanks for your further analysis. I missed your reply of Jan 15 when you first posted it. I have just read the article you referenced, which I found very interesting. It’s reassuring (at least for someone investing in the index trackers that are part of the same corporate structure) to know that the inverse / leveraged ETFs’ asset value cannot become negative. I must say that reading the article certainly did not inspire me to rush out and start buying inverse/leveraged ETFs!

  7. Thank you for the detailed insight into a complex topic. I wondered at the utility of these funds in a personal corporation that is quite young? As someone who is 2 years into their practice and just trying to set up a good foundation for my corp, my research to date has suggested passively mirroring the market with a portfolio similar to VCN + VXC/XAW + VAB is a very reasonable tactic. I personally don’t have any VAB currently because I’m using my mortgage as a bond equivalent.

    You’ve proposed a very interesting product that I expect would suit my corporation well in the future but what about now? I’m a few years away from reaching the passive income limit. Until that limit is reached would I be better off staying with VCN/VXC or are there benefits to getting into the HXT/HXS products and staying there long term?

    As a side note do you feel Horizons use of mirroring the S+P is a reasonable substitute for the full market mirroring of the vanguard products?

    1. Hey Cog. Passive index investing is the way to go in my opinion.

      Regarding now vs the future is an interesting question. There are several dimensions.
      1) If going to hit the passive income limit while quite young and likely to continue earning and investing for a long time, then using something like a corp class ETF sooner rather than later may be helpful. The reason is that it would delay hitting the passive income limit and then slow its shrinking. If waiting until it is hit, they can still slow the loss of the SBD, but not halt it. It will continue to shrink as the dividends of the pre-existing investments continue to grow.
      2) Income in a corp can cause a second problem. You need to be giving dividends to yourself to release the withheld RDTOH. If not, that is a >30% tax drag. This is not an issue if you are spending a lot and therefore giving yourself a bunch of dividends anyway. However, for the person who is not spending much, salary to get RRSP room and then keeping as much in the corp as possible may be better.
      3) Eligible dividends flow nicely through a corp. If I used VCN in my corp and some corp class ETFs for my foreign markets and bonds, then I could have much more VCN before getting into passive income problems.

      Regarding S&P 500 vs broader market. If using conventional ETFs, the broader US market includes some mid and small-cap which historically have boosted returns slightly over long time periods. That premium may be lower moving forward for a bunch of reasons, but no one really knows. What I am doing personally is using HXS (S&P500 corp class) in my corp and some US small-cap-value (IJS) in our RRSP or personal account. That is a bit more complicated and there is something to be said for keeping it simple.

      1. Thanks for the reply.

        Currently I take a salary that is slightly higher than required to achieve max RRSP contribution. I do not take any dividends. The goal has been to leave as much in the corporation as possible.

        If I interpret your response correctly, this might end up being superior? Also, under this scenario the tax benefit of a corp class ETF would be eliminated as I’m not taking dividends? Therefore invest in a non-corp class such as VCN etc?

        My confusion comes in that would this not be the situation with the most benefit from corp class? If I’m leaving the lion share in the corporation then corporate investment income will be higher and I’m more likely to approach the passive income limit? I presume it would never worth it to take a dividend and remove money from the corp just to decrease the tax drag of a corp class ETF?

    2. @Cog For HXS, I personally use Vanguard’s VXF in order to capture the entire US market. Problem is I have to balance them in a 4:1 ratio which, as TLD pointed out, is not simple and adds to my portfolio workload.

      FYI, Horizons has just released HXCN which offers better coverage of the Canadian market (95%) than HXT (TSX60 only) – worth looking into.

  8. Excellent info! I really appreciate this blog! Horizons just released HXCN and HULC. Would you rather use HXCN due to broader coverage or should I just stick with HXT? Also, any insight into HULC? I don’t really understand its role over HXS and why horizons would introduce it. If it has no distributions it seems like it is just like HXS, except without the 0.3% swap fee, but with a ~0.3% foreign withholding tax.

    1. @Abdoc John Bogle once said that with index investing instead of looking for the needle you buy the entire haystack. So, if you take his advice to heart, it just makes sense to invest in the entire market rather than just a specific segment. To choose specific segments in the belief that you can get better performance is not something a passive investor would do. But there are investors out there who try and that is why funds like HULC exist.

      Your post implies that you are already invested in HXT. If so, bear in mind that selling HXT just to buy HXCN will likely trigger capital gains (the TSX has done well recently) and a tax bill. To avoid the tax bill consider buying iShares XMD – the combination of HXT/XMD in a 3:1 ratio will give you the entire Canadian market. Unfortunately, this creates more work for you going forward as you’ll have to manage 2 funds and keep them in balance. Plus, XMD is a traditional Cdn equity ETF so it will throw off taxable dividends and gains.

      Mind you, triggering capital gains isn’t necessarily a bad thing. In fact, I’m crystallizing all my capital gains by liquidating my entire MPC portfolio so I can issue a capital dividend to my wife. A side benefit of this is a clean slate and I can stop bothering with HXT/XMD and use HXCN exclusively. I just hope the rumours about a hike in the capital gains inclusion rate in this year’s Federal budget won’t come true….

    2. Hi Abdoc. For HXCN – it adds a bit more diversification compared to HXT by adding in some smaller companies than the TSX60. Not sure that I’d sell and switch (unless part of my overall plan) but could be better moving forward. Historically the TSX 60 has outperformed the broader Canadian market but no in knows if that will continue or not. HULC is interesting – I am thinking about it. The MER is lower without the swap and that also makes it less complex. The fund would pay 15% FWT but I wonder if any of that is reclaimable by the fund corporation. The other question is whether it will make distributions. They say not, but it isn’t as easily controlled as a swap is. Need to think on it more and investigate.

  9. Thanks LD, your website is excellent and such a valuable resource for MD’s. Our family is indebted to you for your advice.

    Anyway I just wanted to chime in on these swap ETF’s. As you have warned the tax issue is not completely resolved. I was just listening to BNN : https://www.bnnbloomberg.ca/etfs/video/john-hood-discusses-the-hxt-and-hxs~1323724
    And the guest John Hood stated as much.

    I know the track record of the CRA oh so well and with “More ‘No'” and the Trudeaunator scrounging around for every last nickel and dime, I’m afraid that the CRA will likely go after these swaps as well.
    But of course to generate maximum revenue, the CRA will stay silent for a couple of years and then retroactively impose arrears, interest charges, late fees and failure to pay fees on the people who continue to buy these swaps.

    I’d stick with the QQQ, Brk.B, SPY, DIA in the Corp account as you are doing.

    1. Thanks for passing this along Monterey. I agree that anything that is a bit out of the mainstream and delays or is even perceived to delay/reduce tax will be on their radar. Having viewed the clip, I don’t think this guy is adding any new info about the swap ETFs per se. He brings up issues with leveraged ETFs and inverse-ETFs in general. I think the corp class structure is pretty robust. The swap usage is still a potential legislative vulnerability in my opinion. I don’t think they’d be able to retro-actively ding people on these other than forcing a realization of capital gains. That to me is the biggest threat. However, with the last legislative attack and looking at some others, the most likely result of a legislative maneuver would be to force regular distributions moving forward (who knows – I don’t put anything past them either). That would still be more efficient in a corp class structure than regular – although not as good as the swap/corp class combo. As with all investing, I think that there is a potential reward and risk with all of these products. Some have a better risk-reward balance than others (why I made the Corp Class ETF Comparator to give some sense of potential benefits). In general, the US tracking swap ETFs are a bit less beneficial (I have used a combo of QQQ and Brk.B as an alternative also!). Their new HULC.TO etf I find interesting – it is corp class but holds US stocks directly rather than as a swap. Low MER, low potential distributions, and basically tracks the SP500. Plus it sounds like HULK!

  10. Thank you so much Dr. Loonie,

    If you are able to find a bit of spare time, could you please consider adding HXEM (Horizons Emerging Markets Equity Index) to the Corporate Class Swap ETF Comparator?

    Thanks again!

    1. Thanks David. I will do that when I circle back. This is good news. I actually chatted with some of the Horizon folks back in ?January and mentioned the missing piece of their suite was emerging markets. They thought it would be hard to cost effectively do, but looks like they found a way. I will also add in HULC which is a more cost effective way to cover US large cap than HXS.

  11. Hello,

    First off let me just say this post is amazing!! I’ve been looking into these swap ETFs for a while but due to the looming regulatory issues a couple years back, I waited. As you say, don’t invest in what you don’t understand. You’ve done a great job of explaining the new structure to help people make better decisions on their investments.

    Wondering what your thoughts are about holding them in a leveraged account? You mention in the first article to make sure that it is within an account where other investments are returning a profit to keep eligibility with CRA interest to be tax deductible. I get that. So the CRA won’t care that these ETFs will only return capital gains as long as other investments within the same leveraged account are?
    I’ve had several people try to sell me on corporate class mutual funds with fund managers that are “better than the rest” etc.. but this seems like essentially the same thing (ie: long term investment that allows for deferred capital gains) but at a much lower cost.

    1. Thanks B. If using a mix of these and income yielding investments in a leveraged account, I would track where the borrowed money goes. The borrowed money goes to investments that have interest/dividends for the loan interest to be deductible. If all the money is borrowed, it could become a debate. On the one hand, the corp class ETF’s goal is to minimize distributions as a part of their policy. On the other hand, it is possible – if the pool of funds net gains more than expenses.

      1. In my situation I’d be aiming to build a diversified leveraged portfolio by investing in some solid Canadian dividend stocks, HXS, HXDM and HXEM with a 20-25 year investment horizon. This would somewhat mimic my registered accounts but with ishares etfs instead of horizons. The plan for the leveraged account is to 1) make my mortgage tax deductible 2) use the dividends to pay down the mortgage faster and 3) once the mortgage is paid down use the dividends to pay down the initial loan. I figure this will help turbo charge my current savings towards retirement. Adds some risk obviously but going to keep the HELOC within my comfort level. I guess my worry is that the SWAP etfs could not be considered a profit generating investment if they are prohibited from paying distributions but that doesn’t seem to be the case. They don’t want to pay distributions but it is possible that at some point they will have to. Given that, plus having them in the same account as some dividend paying stocks, I’m more confident that it won’t effect being able to claim the loan and mortgage interest as a tax deduction.

        Thanks again for sharing your knowledge and time through this blog.

  12. I keep coming back to this blog for amazing info! Is there any issue holding HCRE in an RRSP or TFSA? Thanks in advance,

    1. Hey Abdoc. There is no issue. The MER is slightly lower than their conventional counterparts. If they ever did get forced to pay a dividend or realize a capital gain, it would be tax sheltered in those accounts anyway.

      1. Thanks! And just to confirm, I believe I read somewhere that holding horizons foreign equity ETFs with a swap fee like HXS or HXDM, are better not help in a registered account?

  13. Hi LD and all,

    Would you be concerned about (really high) counterparty exposures? The counterparty exposure for HXS is now 50.24%!



    1. This is a great question. It is money owed to Horizon by National Bank. So, I am not really concerned that National Bank will be unable to pay. However, they are not technically allowed to have that much counter-party risk. So, I am not sure how that will be handled. Will they need to settle the swap? That could trigger some income that would need to be offset within the larger corporate structure. If it couldn’t, then it is possible that some eligible dividends would need to be paid out. Not sure.

      1. I was surprised to learn from Ontario MD’s post that HXS’s counterparty exposure was so high. I have always been under the impression that the swaps’ counterparty exposure is limited by regulatory requirements to 10%. But a Google search led me to this post on a reddit forum, which is useful because it contains an explanation provided by Horizons to an enquiry from Couch Potato on this very topic:
        I was surprised and somewhat concerned to learn that the 10% regulatory limit on counterparty exposure disappeared at the beginning of 2019. On the other hand, the explanation from Horizons is somewhat reassuring in explaining how they use swap resets to harvest tax losses, and how the elevated counterparty exposure is at least partly due to the resets.

        1. Thanks Rick. I was talking to one of the people at Horizon as the pandemic was unfolding and he mentioned that they had locked in a lot of losses to use as a long runway before needing to make any distributions. Honestly, lucky timing. My main concern was a swap being forced to settle due to the 10% counter-exposure (and generating income). With the 2019 changes, sounds like that is no longer an issue. The main concern would be if National Bank went bankrupt – if that happened (very unlikely), there were would be a major financial crisis across the board for everyone. So, not a major concern for me personally. Thanks for posting the link.

  14. LD-

    FIrst – thanks for all the work you’ve done in compiling your experience. I know the site has slowed down but remains hugely valuable for a lot of us. I regularly come back to review the RESP and other detailed sections. So thanks.

    Since the original post Horizons has released total return products that cover emerging markets (HXEM) as well as the HULC. In some of the comments you’ve suggested that you were considering switching to each. Looking through the SIM lab I see neither are included yet. Id be interested in your thoughts but my sense is the risk premiums for a corporate account:
    1. HXEM – the risk premium of HXEM relative to a benchmark ETF (say XEC) will be in the order of about 0.35%? I’m using the ‘inputs’ of the HXDM/XEF comparison to do some back of the envelope calculations….. the MER/swap differences and distribution differences being roughly the same between the HXDM/XEF and HXEM/XEC comparators
    2. HULC – this is a bit out of my league. But MERs between this and comparators about the same and without a swap fee (0.08% vs. 0.09%) but one loses (and reclaims) the foreign withholding tax on distributions from the underlying fund constituents for both but since the fund itself doesn’t distribute itself there’s no “net Canadian tax drag” getting to a risk premium of about 0.34%.

    Both lightly traded with large bid-ask spreads plus the usual caveats around the total return funds but each looks compelling relative to the alternative options.

    Thanks again.

    1. Thanks Osler. You highlight the issues with these new ETFs. Actually one of the things I have been doing in the background is upgrading my portfolio builder. I just put the beta of Robocorp SWAT up on the site (without any fanfare). I has the option to use these and the other swap ETFs and compares them to the conventional ETFs using the specific corp or personal income. It then optimizes across account types by looking at the net fee/tax drag for each ETF and the difference between accounts. It does so in an after-tax asset allocation way (ie discounts for the estimated tax for different account when rebalancing). It is a bit complex because you enter your current income and it also models a tax-efficient drawdown strategy to come up with the withdrawal tax rates in retirement. On the ETF selection tab, it displays the fee and tax drag for the different ETFs in different accounts.

      It is located here https://www.looniedoctor.ca/robocorp-swat-testing-page/

      Have fun!

      1. Thanks for this. Fun it was.

        We’re mid transition from a broker/AUM model to a self-directed ETF based model plus we’re dual MD/dual corp so had to use a few creative entries to the inputs. A couple surprises that maybe you could help explain:
        1. TFSA – suggested holding international developed markets (XEF) exclusively here. I have been using the assumption that holding Maple here would be best optimizing the TFSA tax benefits. Is this because I could use the eligible dividends in the corp – and presumably this would change if income requirements from corp declined?
        2. Corp – suggested holding EM here through IEMG. Would have thought HXEM would be the preferred ETF for this with the fee/tax drag clearly in favour of HXEM (0.63% vs. 1.57%)

        Very helpful and eye opening. Again – appreciate all your work and thoughts.

        1. Thanks Osler
          1) Yes, Non-NA developed usually ends up in TFSA and Canadian in corp. Two reasons. One is that yes the eligible dividends flow more efficiently out of the corp due to the tax credit the generate. The calculator looks at that effect across the lifespan. While working, if you give out enough dividends to live off of, then it saves compared to giving ineligible ones. However, even if you aren’t giving out enough dividends and it generates drag from the RDTOH collected in the accumulating years, that may be made up for by the efficiency in the retirement years (it simulates this lifetime efficiency in the background). The other reason is that it compares the efficiency between accounts. Even if a Canadian ETF had the same tax rate in the TFSA and corp, the drag is equal. On the other hand, the drag of XEF in the TFSA is 0.48% compared to 0.52% for HXDM in the corp – so a slightly worse drag by 0.06%. This is what I mean by it tries to maximize efficiency across all accounts by minimizing the overall fee/tax drag.

          2) Congrats! You found the first bug! It should be HXEM in the corp. There was a simple coding typo. I just fixed it. Thanks and please let me know if you find other things that don’t make sense.

  15. Excellent site and the Horizon’s swap based ETFs were thoroughly researched and presented. Thank you for the time and effort you’ve put into this. Trying to take the lazy way out to see if HGRO can handle the equity portion of my portfolio. It’s got HORIZONS US LARGE CAP INDEX ETF (essentially S&P 500), HORIZONS S&P/TSX 60 INDEX ETF, HORIZONS INTL DEVELOPED MKTS, HORIZONS EMERGING MARKETS ETF, HORIZONS EUROPE 50 INDEX ETF. The inclusion of HORIZONS NASDAQ-100 INDEX ETF ETF skews heavily towards US and tech. If it weren’t for the tax efficiency bit, I’d be sticking to the VEQT or XEQT for my all-in-one equity.

  16. I’m sceptical about these Horizons products. If this was such a good idea, why isn’t BlackRock/Vanguard/BMO offering similar products?

    1. Nothing wrong with skepticism. Any provider would need to have a business case to profit from an ETF before opening it and I don’t think that these would appeal to the larger providers. These are a niche family of ETFs and that is what Horizon specializes in. Horizon has been in the space first and occupied it. These products likely appeal to a very small potential market that face really large tax burdens. So, hard to make a good business case to flood the market with them from multiple providers. Just my opinion.

  17. “These products likely appeal to a very small potential market that face really large tax burdens. ”

    I agree with the above comment, as I’m part of that potential market. But government debt is an issue:


    Governments would like to increase revenue, but there’s a political cost to that. One major exception are high income earners looking for ways to decrease their tax burden. If anything, there may be a political benefit – rather than political cost – to targeting such a group. A major political party ran their 2021 campaign precisely doing that:


    There’s a repeated history in Canada of financial products being introduced to mitigate taxes and the government subsequently putting an end to it.

    I’m not certain that I necessarily agree with your idea that other ETF providers don’t sell similar products because it’s a niche market that’s already occupied by Horizons.

    Horizons large cap Canadian stock ETF has about $3.5 billion in assets. Their US stock ETF has about $2 billion in assets. Their Canadian bond ETF has about $2 billion in assets. And their all cap Canadian stock ETF has about $1 billion in assets.

    This is not a niche market. Any ETF provider in Canada would very much like to have ETFs of that size. As to Horizons having first mover advantage, iShares had a similar advantage for Canadian ETFs in general, but that didn’t prevent Vanguard and BMO from entering the field and successfully taking market share from iShares.


    There are 40 ETF providers in Canada. One of them has over $10 billion in assets using this type of strategy. Why do none of the other 39 try to enter this market?

    The bottom line on this strategy is that Horizons does well and its “fat cat” customers do well both at the expense of the government. Since the government sets the rules, I’m not certain this will last. Anyone using this strategy must consider the possibility that they will be forced to realize unrealized capital gains.

    1. Governments can do pretty much anything, and taxes collected from the rich (generally seen as someone else) tend to be the most palatable. So, yes, definitely a risk. I guess each person has to weigh for their own situation whether a potential capital gain event (at the cap gain inclusion rate) at some point (due to a currently non-existent and unknowable rule change) is worse than paying full tax rates on income (a certainty) along the way. I am providing information. People can decide what to do with that for themselves.

  18. The underlying issue here are the tax consequences of unwanted investment income. In a CCPC, investment income can result in the ABI tax rate increasing from 12.2% to 26.5% (Ontario, 2022). In Ontario in 2023, the top rate for eligible dividends is 39.34% and the top rate for foreign dividends is 53.53%. In a CCPC, the tax on foreign dividends may be in the range of 62.65%.


    This can be relevant to some CCPC owners and some investors in the accumulation stage, so this group may want to minimize investment income. Stock investing, as opposed to fixed income investing, is one solution. But stocks can still result in cap gains and dividends. Low turnover stock portfolios (index investing comes to mind) and use of ETFs can mitigate cap gains. As for dividend income, Canadian stocks will be more tax efficient than foreign stocks. But 39.34% isn’t small. Horizons products are one possible way to mitigate the problem, but aren’t the only way. Larger companies tend to have larger dividends than smaller companies. Value stocks tend to have larger dividends than growth stocks. It’s easy to find ETFs for small and growth US stocks. There are significant nontax issues associated with small caps and growth stocks, but it is an option. If you tilt to small and/or growth in taxable accounts, you could have a large and/or value tilt in your tax advantaged account, as a counterbalance. But for Canadian stocks, there really aren’t good options for small/growth ETFs.

    1. Yes. There are multiple approaches, of which corp class ETFs are one. I have written about them pretty extensively around this site. Here is one basic article that I wrote around the time the passive income rules came out. Whether the passive income rules will affect an incorporated professional and by how much actually depends on how they earn, invest, and spend. Here is a calculator that models it over time at a steady income/spend and an article discussing how it works.

      I would be wary of building a much less diversified portfolio because I am trying to control income. Value vs Growth and Small vs Large Size are also factors that may influence expected returns. The Horizon ETFs are a pretty low effort way to control income and stay pretty diversified. The indices they cover do tend to have a large cap tilt. Asset location (matching different types of investments to different account types) is an option. I have done a lot of work on that on this site. It is pretty complex. I have made calculators that do the asset location math using ETFs. Most are “pre-tax” asset location and SWAT uses “post-tax” asset location (with the option to use or not use the corp class ETFs). There are actually many variables and assumptions that go into attempts at tax optimized asset location. Again, an asset allocation that suits your risk tolerance and a diversified portfolio would be my primary concern and attempts at asset location or tax optimization secondary.

    1. The Liberals also campaigned on “making the rich pay their fair share” in 2015. The Minister of Fairness brought in the 54% tax bracket and attack on corporations. That resulted in me spending less, working less, and starting a blog 🙂

      I agree governments target small voter groups like high-income earners, but we can’t predict if/how that will unfold and there are always unintended consequences. The original plans to gut private corporations was drastically back-pedaled when it became apparent that it was more complicated in the real world than the academics advising them had let on. In fact, they actually broke tax integration in a way that benefits wealthy corporation owners in Ontario and New Brunswick. Today’s deficits are tomorrow’s taxes or inflation. However, we can only operate with what we currently know, or we leave money on the table by cowering in fear or shooting at ghosts. The threat of increasing the capital gains inclusion rate is another good example. Hasn’t happened yet, but it could. It has before to deal with T1’s deficits. In regard to the corporate class ETFs, the government could try to target them. However, they are basically a business and paying tax under corporate rules rather than the outlier that they were previously. So, that is harder to target without breaking the broader business tax code.

      As I said previously, governments can do pretty much anything. There is a risk of using a tax-efficient option (the risk of the rules changing) and risk of not using it (paying more tax due to fear of a rule change that doesn’t come or comes far enough down the road that you still end up ahead from the interim savings). That is a personal decision.

  19. What is the risk of not using the tax efficient option? I’ll get dividend and interest income that will be taxed now and at high rates than unrealized capital gains. That will result in increased AAII, which may mean ABI taxed at the general corporate tax rate instead of the small business rate.

    What is the risk of using the tax efficient option? That’s more difficult to say, as it really depends on what the government does, and there’s uncertainty about that. In the best case scenario, the government does nothing. After all, Horizons has had a large cap tax efficient Canadian stock fund for a bit more than 12 years, and so far the government hasn’t closed it. In the worst case scenario, the government takes punitive measures such that owners of the tax efficient option will wish they never heard of Horizons. I assume – with the emphasis on assume – the scenario that the government will effectively close the tax efficient option. That may mean unrealized cap gains will have to be realized, resulting in increased tax bills. And realized cap gains will mean increased AAII, so possibly less ABI taxed at the small business rate.

    Besides the CRA and politicians, there may be another group that would like to end these Horizon products. BMO’s largest Canadian stock ETF has assets of 6.6 billion. For Vanguard, the comparable number is 4.6 billion. The largest Canadian stock ETF in Horizons corporate class structure has assets of 3.7 billion. As mentioned previously, there are 40 ETF providers in Canada and only one (Horizons) provides this type of product. Horizons has more than 10 billion in assets in this class. If this class was closed, that money would very likely leave Horizons for other ETF providers.


    In the last 3 years, HXT (Horizons largest Canadian stock ETF) has about doubled its AUM to 3.7 billion. In that same time period, the Canadian stock market has gone up nearly 19%, so most of that growth is due to new ownership. These products may be a victim of their own success. The more assets they attract, the more likely it is that action will be taken against them.

    1. The thing is that even if there were a forced capital gain in the future (if), that is still taxed at a partial inclusion rate. You could have double the capital gain from the corp class converting income to CG just to break even with having paid that as tax on foreign dividends/interest along the way. So, there is some runway there (if something were to change). Also, the corporation would get the non-included half of the gain added to its capital dividend account. That could save tax if you pay out some capital dividends (tax-free) instead of regular ones – great for tax-planning. That could easily more than offset any issue with the passive income rules (which currently are net beneficial in ON/NB). Also, if you grew capital gains large enough that you trigger the passive income rules, then that implies you also saved a lot on the way from the regular income either by time-lapse or by size of your portfolio. Further, if you are flowing money out of your corporation, then the bump from passive income rules allows you to give some eligible dividends instead of ineligible ones which attenuates the impact. Or you can pay more salary for one year to lower your active income and top up personal accounts. For all of those reason, I personally don’t think the threat is a big deal. Particularly, for corporations.

      Sure, competitors want less competition. Doesn’t mean that they can do much about it. I think this is shooting at ghosts.

      You can feel differently.

  20. In the last 3 years, VCN (Vanguard’s largest Canadian stock ETF) AUM has increased almost 19%. So effectively there’s been no new ownership. I haven’t checked about what’s happened to the AUM of other ETF providers, but I doubt it is greatly different. If the growth rate of HXT persists and if I had to make a prediction, I would say that within the next 3 years, the government will take action.


  21. Please ignore what I wrote about the growth of VCN in the last post, because it’s wrong. And the growth of HXT in the last 3 years has been 83%.

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