Horizons’ mutual fund corporation offers a broad suite of low-fee corporate class ETFs that track a variety of indexes. Their corporate structure still has a pretty big non-capital loss pool. That is a good thing. At the current “burn-rate”, it wouldn’t have any net taxable income for about five years. However, that could increase or decrease depending on a mix of unpredictable factors. If there is net income, then that changes the tax efficiency of these ETFs substantially.
Horizons are pretty good at coming up with innovative solutions. They would hopefully see a tax berg on the horizon and make adjustments in advance. Still, I think it is a useful exercise to consider what a tax berg strike could look like.
Disclosure: I use a variety of these corporate class ETFs in our personal and corporate taxable accounts. I don’t plan on jumping ship any time soon. However, I do think situational awareness is important for anyone using these products. I am a fan, but also invest with my eyes open and contingency plans.
Corporate Class ETF Tax Efficiency
When there is no net income in the mutual fund corporation, corporate class funds are extremely tax-efficient. There is no tax until units are sold and even that is taxed favorably as capital gains. In contrast, if there is net income, it may become very tax inefficient. As described in the preceding post, the tax hit is relative to a conventional ETF alternative. That looks different if the comparative conventional ETF growth is comprised of capital gains, eligible dividends, foreign dividends, or interest. So, I will model a Canadian Bond, Canadian Equity, US Equity, and a Non-North American Equity ETF.
The amount of net income in the Horizons’ ETF corporation could be small or large. It would likely be assigned proportionally to the ETFs that generate the income. Importantly, with Horizons’ swap ETFs the income is generated when they settle swaps. That helps them to manage income, but it is all regular income for tax purposes when they do realize it. This makes predicting the amount of income potential difficult. It is not just the dividend or interest yield. So, I will simulate from no net corp income (working as intended). All the way up to corp income that would clearly sink the corp class ship.
Conventional vs Corp Class Swap Bond ETF
Under normal conditions, the tax advantage of HBB vs conventional bond ETFs at a high personal rate is big. In a corporate account, it is huge. There would be no taxable income until the units are sold. Even then, it would be at the favorable capital gains rate. I am a big fan. However, let’s examine what it could look like if things go wrong.
Risk of Generating Income
The counterparty risk for HBB is currently 0.05% and it is not likely to be a fast mover. So, settling swaps to realize net income in this ETF seems highly unlikely. If Horizon does have net income and assigns it proportionally to the ETF that generated it, HBB is unlikely to have any.
However, I will illustrate how the taxes work when there is net income in Horizons’ corporate class ETF corporation. I have no idea how much net income there would be, if any, but I will use 1% corporate income assigned to HBB. For Horizon’s HBB, the underlying bond index yield to maturity is 4.41%. The management plus swap fees can be up to 0.25%.
For the conventional ETF, I used ZDB. It holds discount bonds. That should be more tax-efficient than a regular bond fund and would be my conventional ETF of choice to hold bonds in a taxable account. The main role of bonds in a portfolio is to decrease volatility. Some people like the psychological advantages of income, but it is the after-tax total return that really matters. The current weighted yield to maturity for ZDB is 4.68%, and the coupon is 1.97%. I modeled that as 1.87% interest (net of the 0.1% MER) and a 2.71% capital gain and applied tax at the top Ontario marginal rates. When capital gains get distributed can vary depending maturity and turnover of bonds in the ETF, but I will just pass them all through for this illustration.
ZDB vs HBB at Different Levels of Mutual Fund Corp Income
I mentioned that I think 1% corporate income tax being assigned to HBB is very unlikely. However, that is really hard to predict. It is currently zero and looks to be that way in the near term. Still, modeling different levels of net corporate income shows the HBB would be a worse option if it were assigned the tax bill for income representing more than about 0.7% of its net asset value.
The above model used the top Ontario personal tax rates. At an income of <$60K, ZDB had a higher total return (even with no mutual fund corp income) due to the higher fees of HBB and minimal taxes at low personal income levels.
Fee & Tax Drag plus Tax Deferral
The other aspect to be aware of is that this illustration is moving the total return through all at once. The corporate class ETF also has more tax deferral. The conventional ETF would make distributions and have a fee & tax drag of 1-1.8%/yr. That is 1.1% from fees and interest plus 0-0.73% depending on how much of the capital gains are realized from turnover. The corporate class ETF would have a fee drag of 0.25%/yr plus a tax drag of 0.395*net corporate income. That would be just 0.25%/yr when the mutual fund corporation is functioning as intended with zero net income.
When working well, that means faster growth using a corporate class ETF because of less tax paid each year. Whether that translates into more after-tax money when you sell the ETF depends on the current vs future tax rate. Tax deferral is generally good because of the assumption that you will realize the income at a lower tax rate in the future. However, a higher future tax rate could make it worse. Like, if you normally sit in a low tax bracket now and realize a massive capital gain in a single year in the future. That requires more complex modeling to explore. Perhaps, a future post.
Conventional vs Corp Class Canadian Equity ETF
This is a bit easier to do an apples-to-apples comparison with. I will compare HXCN (Horizons’ Corp Class Canadian All Cap Index ETF) to VCN (Vanguard’s Canadian All Cap Index ETF). They both have MERs of ~0.05%. They track very similar indexes. The index yield has been around 3% of eligible dividend income recently. For the simulation, I will use a total return of 8% (3% dividend and 5% capital gain).
Risk of Generating Income
The current counter-party exposure for HXCN is 25.33%. Not crazy high, but the need to settle swaps down the road to manage the default risk is definitely not zero. Using the same methodology as I did with bonds (except eligible dividends instead of interest), the after-tax total return of either strategy at different levels of net corporate income is shown below.
Consequences on Tax Efficiency
When functioning well, the corporate class ETF is more tax efficient. However, mutual fund corporate taxes are much higher than personal taxes on eligible dividends and capital gains. So, it doesn’t take much net corporate income to make it worse than a conventional ETF. There is no tax berg looming currently, but it wouldn’t take a big tax-berg just over the horizon to do serious damage. This was at the top personal tax rates.
In the lower personal tax brackets, under $54K in Ontario, the conventional ETF is more tax efficient than Horizons’ perfectly functioning corporate class ETF. That is because the eligible dividend credit at that income level is higher than the tax on the dividend. However, at higher income levels there is a tax reduction for HXCN. Plus, tax deferral. No tax until you sell and realize the gain rather than annual dividend taxes.
Fee & Tax Drag/Deferral
Similar to the bond ETF, VCN pays out eligible dividends every year. That would be about 1.2%/yr fee and tax drag in the top Ontario bracket. In contrast, HXCN has a fee drag of 0.05%/yr with no tax until selling. If there were corporate net income, that would add some annual tax drag. Again, that tax deferral could be good or bad depending on current vs future tax rates.
Conventional vs Corporate Class US Equity ETF
Here is a definite apples-to-apples comparison. VFV is Vanguard’s Canadian-listed S&P 500 ETF with an MER of 0.09%. Horizon has HXS which is a corporate class swap-based S&P 500 ETF. It has a management fee of 0.10% plus swap fees of up to 0.30%. The counterparty exposure is currently 35%. Not scary, but not insignificant either.
In more recent history, the dividend yield of the S&P 500 has been around 2%/yr. I will use a total return of 8% for the model. I will also assume that foreign withholding taxes are fully recoverable. They would be in a personal taxable account.
Risk of Generating Net Income
The counterparty exposure for HXS is currently at 35.52%. That is getting up there, but not the highest that I have seen. If the US continues to lead world markets, then that will grow. The swap contract counter-party is National Bank. While it is extremely unlikely that a major Canadian Bank would default, the risk isn’t zero. I think that if it did, then guns, ammo, and toilet paper would be the most valuable currency. However, Horizons would need to settle some swaps if National Bank was looking unhealthy and the counter-party risk was high.
When functioning as intended with no net corporate income, HXS is more tax efficient compared to a conventional ETF while in the top marginal tax bracket. However, you can see that it would not take much corporate income tax to change that.
At a personal income of under $54K in Ontario, the conventional ETF is more efficient net of taxes and swap fees. However, HXS could potentially pull ahead due to its tax deferral. If sold in the future at a lower tax rate.
Fee & Tax Drag/Deferral
VFV generates ~2% in foreign dividends every year. That translates ~1.1%/yr fee and tax drag in the top Ontario bracket. In contrast, HXS has a fee drag of 0.40%/yr with no tax until selling. If there were corporate net income, that would add some annual tax drag. Again, that tax deferral could be good or bad depending on current vs future tax rates.
Conventional vs Corp Class non-NA Equity ETF
Both BMO (ZEA) and iShares (XEF) have Canadian-listed conventional ETFs that hold non-North American developed market stocks directly. So, the foreign withholding taxes are largely recoverable in a personal taxable account. They both have MERs of 0.22%.
Horizons’ HXDM is a swap-based corporate class ETF that covers similar territory, but less mid-cap exposure. HXDM also has a management fee of 0.22%. Plus, swap fees of up to 0.30%. Their counterparty exposure currently sits at 22%. Not too bad.
These conventional ETFs pay big dividends historically. About 3.15% before fees and taxes. I will use that and capital appreciation for a total return of 8% for the model.
Much more efficient. Until it isn’t.
Because the massive foreign dividends are so tax-inefficient, HXDM could be hit with a pretty significant amount of corporate tax before becoming worse than its conventional counterparts. That said, Horizon’s corporation has been burning its non-capital loss pool by a little over 2%/yr for the last couple of years. So, it is not inconceivable at some point in the future.
When functioning well with no net corporate income, HXDM is much more tax efficient than conventional ETFs in the top tax bracket. It even comes out slightly ahead at the lowest Ontario marginal tax rate.
Fee & Tax Drag/Deferral
ZEA or XEF generates ~3% in foreign dividends every year. They both have tax efficient structures to minimize foreign withholding taxes. That translates ~1.8%/yr fee and tax drag in the top Ontario bracket. In contrast, HXDM has a fee drag of 0.52%/yr with no tax until selling. If there were corporate net income, that would add some annual tax drag. Again, that tax deferral could be good or bad depending on current vs future tax rates. However, the efficiency of capital gains compared to foreign income gives it some latitude.
Variable Risk & Consequences
The simulations show that the risks and consequences of using a Horizons’ corporate class vs a matched conventional ETF vary. The risk is real, but I don’t think it is imminent. Horizons’ non-capital loss poll currently sits at ~$2.9 billion. They are shrinking it by ~$550 million per year.
The future course is uncertain, but there should be time to see tax bergs and adjust course. Still, I hope that the post has given you more situational awareness to keep your eyes on the horizon.
Some of the ETFs are still extremely attractive to me. Like HBB and HXDM. I am less enamored with the Canadian market ETFs. I will summarize why.
Risk of Realizing Swap Income
The actual risk can vary based on the risk of having to settle swap contracts and taking on income. That is unpredictable. However, the counter-party risk is one way to look at it. For example, it is extremely low with HBB. It is getting up there with HXS at 35.52%. HULC may be a good alternative. It covers almost exactly the same index, but holds stocks directly and is corporate class. So, there is no counter-party risk and potential conversion of capital gains to income. It is a very different index, but HXQ also holds stocks directly. That said, higher levels of counter-party risk can definitely be tolerated. For example, HXE currently has 59% counter-party risk exposure!
The other factor that may influence the risk of realizing derivative income is growth. A big reason why HBB has such small counterparty exposure is that bonds are slow-growing. That, and I suspect Horizons recently used the bond bear market to book losses. Still, a total return index for bonds is not a rocket compared to equity markets.
Consequences of Realizing Swap Income
The consequence needs to be compared to the alternatives. While the corporate class funds are functioning well, they are generally more efficient than conventional ETFs. That is most apparent at high personal taxation levels. In contrast, if there is a low personal tax rate, or the ETF is held in a tax-sheltered account, then they may not be very attractive.
The bond ETF is attractive because it would normally produce income. Even relative to a discount bond ETF. However, swap-based corporate class ETFs covering Canadian dividend paying markets are riskier. They may have slightly lower fees at times. However, eligible dividend income is pretty efficient, and if the corp class swap ETF realizes net derivative income – that edge is lost extremely quickly.
Foreign market corporate class ETFs have more wiggle room relative to their conventional peers. That is especially the case with high dividend payers – like non-NA equity markets. Not only are foreign dividends taxed as regular income. They also have foreign withholding taxes. Those foreign taxes were not an issue in this simulation.
Horizons’ Corporate Class ETFs held in a Corporation
I used a personal taxable investment account for the emergency drills today. However, using a corporate account, like a professional corporation or other CCPC, also factors into the risk. Jumping ship from a corporate account is less scary. You would be realizing a capital gain, but corporate investing handles capital gains exceptionally well. I sometimes even harvest capital gains on purpose to lower my overall tax bill. That is part of why I like the corporate-class ETFs for my corporation. Even though I know the risks. I will simulate what that could look like in some future posts.
This posts has complex material. I try to be accurate and complete, but this is complex material. If I get something wrong, please let me know (with references if applicable) so that I can fix it. There are also many nuances and variables that could impact the risks and benefits of your own situation. None of this is financial advice or recommendations. It is to illustrate concepts for you to consider when doing your own due diligence.
Do iShares, Vanguard or BMO have corporate class ETFs?
Hey Park,
Not that I am aware of. They are pretty rare. Purpose Investments have some, but not many. There are quite a few corporate class mutual funds out there still, but corporate class ETFs are very rare other than Horizons and not near the same diversity.
-LD
Do iShares, Vanguard, BMO or other ETF providers have corporate class ETFs?
Hey Park,
The big providers don’t that I am aware of. Purpose Investments has some, but not many, corp class ETFs. There are still quite a few CC mutual funds from various providers, but the ETFs are very rare.
-LD
Sorry about the duplicate post; I didn’t think the first post was accepted, so I wrote a second one.
My guess is that a good portion of the money in ETFs from individual investors comes from taxable investors with marginal tax rates of approximately 50%. For such investors, tax efficiency is important, and a more tax efficient ETF structure would be an attractive marketing feature.
https://www.advisor.ca/tax/tax-news/why-use-corporate-class-funds/#:~:text=There%20are%20more%20than%20%24850%20billion%20in%20mutual,but%20only%20%2459%20billion%20is%20in%20corporate-class%20structures.
The above 2012 article makes a case for the increased tax efficiency of corporate class mutual funds, and notes about 7% of mutual fund assets were in that class. I don’t know what the number is in 2023, but my guess is that it hasn’t changed much.
The corporate class structure isn’t new and doesn’t look like it’s that popular. If the structure is more tax efficient, the lack of popularity among investors puzzles me.
Greater tax efficiency means less tax revenue; the more popular it is with investors, the less popular it is with the CRA. If the present corporate class structure was more efficient and has been around for years, I would have expected the government to do something about it.
Hey Park,
They are definitely a niche product useful for a small subset of the population. I think that there needs to be enough appeal for a company to do it. With mutual funds, the fees are also quite high. With the ETFs, the fees are reasonable but they are pretty complicated under the hood for the average DIY investor. For an institutional level investor/advisor, the potential risk of income generation in the fund corp structure is hard to quantify and scary from a regulatory standpoint if you are responsible to manage other people’s money. I think the combination of corp income and fees has kept the lid on most funds. Horizons is interesting in how they’re managing all that. We’ll have to see how it unfolds.
-LD
I’m going to spend some time looking through your articles on corporate class ETFs, and the following is based on an initial cursory glance.
I sense that one reason Horizons has been tax efficient is due to losses from 2020. But the history of stocks markets is that they go up with time. If they didn’t, I wouldn’t invest in them. If tax efficiency is predicated on losses, then for a long term investor, that’s a problem. And if tax efficiency persists due to future losses, then you’ve got a considerably bigger problem than tax inefficiencies outside a corporate class structure.
Tax efficiency also becomes a problem, if there is more selling than buying of these corporate class funds. And the greater the imbalance, the greater the problem. Tax efficiency is the major selling point of these funds. If the perception is that they are no longer tax efficient, then there may be a run for the exit; see preceding paragraph. I believe you mention Horizons has a undisclosed plan for this. Such a run would not be good for Horizons, and if significant enough, might be disastrous. My guess is that the primary goal of that undisclosed plan would be to look out for the interests of Horizons; a secondary goal would be the interests of fund owners.
What happens if Horizon hits the iceberg and doesn’t have a solution to the problem, and everyone who owns the fund bails in order to realize their capital gains, avoid a future of under-performance?
I understand that anyone continuing to hold the ETF would still have equity in the underlying assets that it holds. But if there’s a run on the ETF, does that affect the ability of people who hang on too long to sell? Presumably the volume of trades remains high enough that you can still get your money out? Except I can’t imagine that anyone would want to buy these ETFs if they hit a net corp income of 5%.
Hey Zach and Park,
That type of “run on funds” like a run on banks would be the armageddon type scenario. It is unlikely and they would likely transition back to a conventional ETF structure before then. I bet there would also be a way for them to pause redemptions. If it were somehow allowed to happen, the last people out would get clobbered. They’d need to settle swaps to get funds and realize progressively larger chunks of income from the swaps. That would mean progressively more tax and reduction of NAV for the shares. It would be devastatingly bad.
The much more likely scenario (I think) is that at some point as markets inevitably rise, there will come a time when there is almost some net income or maybe a small amount of net income, at which point they would shift everything back to a mutual fund trust structure (on a tax deferred basis) just like they did moving from trust to corp class a few years ago. However, this is why I wrote this series. I think if you are investing using these ETFs then you should be aware of the issue. And know in your own mind what would make you disembark the ship.
-LD
Is it a correct assumption that with enough market growth, the tax efficiency of the corporate class ETF structure will be materially impaired? If so, your post indicates these Horizons funds could undergo a second metamorphosis into a conventional ETF structure, and this metamorphosis could be tax free.
Based on the above, how long will it be, before market growth becomes a significant issue? Since the bottom of the July 2022 bear market, XIC (proxy for Canadian stock market) is up 11%. From a quick internet search, the average bull market goes up 112%. So the tax efficiency of these Horizons funds could be lost within 5 years?
To circumvent this problem, the corporate class ETF structure could be changed to a conventional ETF structure. I doubt that conventional ETFs from Horizons will be better than those of the main ETF providers. And there is a chance that they will be worse. But if you’ve got unrealized cap gains in Horizons ETFs, it may not be straightforward getting out of those ETFs.
One should also consider closure risk. If AUM go less than $200 million, then that risk becomes more pronounced. I think the risk is small, but IMO, it’s greater than with the large ETF providers.
With the conventional ETF structure, the behavior of the other investors in the ETF usually isn’t that important. But with the corporate class ETF structure, it is. Are you receiving adequate compensation for taking that risk?
I’d like to correct myself. The July 2022 “bear market” was not a bear market, as the decline was 16%. Nevertheless, XIC is about that same as it was 28 months ago. A good return over the next 5 years is not unrealistic.
Thank you for highlighting the nuances of the inherent risks associated with these Horizons ETFs in balance of the tax benefits these ETFs provide. I realized you left out Developing markets like HXEM. From your SWAT calculator it seems like the potential tax savings is very significant given the high tax + fee drag in ETFs like IEMG/XEC even in tax sheltered accounts. How does their counterparty exposure compare though? And how bad would it be relative to other markets if there’s net corporate income? I’d imagine it would be very similar to non-NA developed markets?
Hey Mark,
HXEM currently has a negative counterparty exposure as the emerging markets have lagged. In terms of efficiency, they have room to move relative to conventional similar to HXDM vs conversational does.
-LD
Thanks Mark for writing this 3-part series. It is extremely insightful and comprehensive in nature. It is much appreciated!
The asset allocation ETF HEQT (formerly HGRO) is now showing approx. 2% annual yield. Since all the underlying ETFs are Total Return ETFs, where is that income generated from? Is it all from rebalancing?
I did not really like that the all-in-one asset allocation ETFs are distributing income now since that was the main reason I had it in my non-reg account and I liked the diversification (hence I did not go with the individual Total return ETFs). I feel like I am at point where I will “disembark the ship” with my new contributions to non-reg account 🙂
Hey JP,
I think the potential yield and composition of the distributions on those asset allocation ETFs remains to be seen. There can (and have been) distributions before due to rebalancing. They did recently do some shuffling and likely will do some more. I think why they made the change may be partly to hold some conventional ETFs that may offer better diversification. For example, the corp class are under-exposed to mid and small cap areas of the markets. People also seem to love eligible dividends which are generally pretty tax-efficient. Maybe that is a factor. I don’t know what they are planning or thinking, but I would be very surprised if the distributions are at the level of conventional ETFs. As you say, that is supposed to be the attraction of those funds. Maybe there will be a lower yield or so heavier on the eligible dividends and capital gains. I am totally speculating, but interested in how it actually plays out. I don’t think we’ll get a good sense of that for a year or two. The yield on their site is just projection forward of the most recent distribution in August.
-LD
Thank you for this series, it is very informative. I can not wait for your thoughts on retirement planning with a medical corp. It is very hard to get any info on that subject and my accountant tells me that I will die with the corp in place.
So I plan is to live off the dividends and distributions paid by the corp (it is less of a hassle that to figure out when to sell stocks for cap gains). At this point, the dividends would easily cover a comfortable lifestyle. Since my income is over the 500K small business limit, I have also accumulated a lot of potential to pay out eligible dividends over the years. I just do not need more dividends once the eRDTOH is depleted annually. Complicating that equation come the changes in the alternative minimum tax on a personal tax level.
It is a never ending headache and one huge mess. Just thinking about it makes my head spin. You mentioned in your videos that your financial planer told you that it would make no sense to keep accumulating at x rate, so you slowed down. When do you arrive at this point? Do you aim to completely empty your corp in your retirement years?
Hey Mai,
I am definitely going to spend significant time on drawdown and retirement. I have a bunch of the research done, but haven’t had a chance to write!
If you can live off the dividend yield alone, then you have way more than enough. Your corp will grow beyond that. So, if at that stage then earning less or spending more could make sense. That is skill too – hard to flip to spending or to start exploring other ways to spend time than working after a life-time of career focus and saving.
The alternative minimum tax change could complicate things for those just using a corp. However, it won’t kick in until higher income levels at least. We have actually slowly built-up significant holdings outside of our corp over time. So, we will have some regular taxable income as well. Our retirement plan is corp divdiends to keep the RDTOH flowing and use GRIP when it makes sense. Then, supplementing from our RRSP and personal accounts. We’ll likely still die with a large corp and without touching our TFSAs. We plan to make donations of appreciated stock from the corp to charity (we already do) and use the CDA. We’ll use the capital dividends from the CDA for splurges and to pass on something for our kids. That is the high-level plan. There are lots of variables. It is pretty hard to plan the next 40 years. However, the good news is that you can see how it is going and make incremental adjustments along the way. We aim to have spend or donated as much as we can while we are alive to direct that and enjoy it.
-LD
Hey LD,
This might be an insane idea.
I’m an early career physician and have been crunching numbers. Based on career trajectory and loose retirement ideas, I’d need to start investing outside of XEQT once reaching ~800, 000 to ensure I don’t start eating into my passive income SBD later on in my career – which is fast approaching.
So I’ve been exploring these low dividend or no dividend options. This article and others really doesn’t give much confidence to a 30-something year old who will be in the market for 40+ years (hopefully). It seems to me that it’s inevitable these corporate class ETFs will all convert to paying dividends just as they did with HBAL etc.
I was explaining this to a friend recently who countered with investing in Berkshire Hathaway. It seems to make some sense. It owns the underlying assets. It pays no dividends. The only downside of course is that to my knowledge you’d have to buy american funds.
Have you given much thought to berkshire, or potentially other such assets that operate similarly? One possibility would be using berkshire for broad american exposure and then biting the bullet on low-dividend ETFs for canadian and international market exposure.
Thanks,
Hey TechnicalDoc,
Not totally insane. There are a number of things to think about.
1) If you do hit the passive income limits, in Ontario and NB it doesn’t matter. It is actually good currently. If not in Ontario/NB, passing out some eligible dividends to live off attenuates that hit. So, consider how complicated you want to make things to avoid it.
If you are worried, there are some options:
1) You can use separate ETFs. Hide the high dividend payers (like Non-NA developed markets, eg XEF or ZEA) in an RRSP and TFSA. For Canadian dividends, they are pretty efficient in the corp so keep there. US in corp – the dividends for the total US market are actually not that high.
2) If you are worried about the dividends beyond that, then QQQ is low dividend paying and 100 large US companies. It is light on value, but BRK.B and the Canadian markets are heavier on value stocks. Canada is also heavy on financials and oil/gas etc which QQQ excludes.
3) If you have to hold bonds in a taxable, then ZDB or HBB.
The main downside of #1 is more complexity for trying to optimize asset location. I made the Robocorp SWAT calculator to automate the math, but there are lots of inputs. Having to manually rebalance is a bit of work, but takes me about 30 minutes now and I do that 4 times per year or so. The main downside of #2 is that you are taking more concentrated risk than the broader US market and missing out on some small cap exposure. There isn’t a downside to #3 if ZDB is used. HBB has the usual corp class risks.
I have used these approaches. I talk about it a bit towards the end of this video. I am in Ontario and we spend enough that it doesn’t matter currently. However, we’ve built a large portfolio and only exceed the passive income limits when I do it on purpose. The other thing to remember is that when you hit the passive income limits, it means that you have a big portfolio. You could consider spending more or earning less if when it starts to be an issue in real-time and the problem solves itself.
-LD