Swap-Based ETFs and Budget 2019

March 20th, 2019 by Potato

I’ve perhaps been one of the more paranoid bunch on the topic of swap-based ETFs. They offer some attractive tax benefits, particularly for high income earners, so some people are naturally excited by them, but I’ve been kind of ‘meh’ on them and haven’t included them in my various tables of model portfolio options (and not without a disclaimer). The benefit isn’t quite as large for people in middle tax brackets (which I believe is the core of my readership) vs high-income earners who love them, and there’s that ever-present legislative risk. Perhaps it’s because I owned units in some income trusts in 2006, but this seemed like one of those too-good-to-be-true bits of alchemy (international dividends into deferred capital gains! poof!) that was begging to be closed.

I don’t see details yet, but it looks like Budget 2019 is going to address it:

To make Canada’s tax system more fair, Budget 2019 proposes to:
• Prevent the use by mutual fund trusts of a method of allocating capital gains or income to their redeeming unitholders where the use of that method inappropriately defers tax or converts fully taxable ordinary income into capital gains taxed at a lower rate.
• Improve existing rules meant to prevent taxpayers from using derivative transactions to convert fully taxable ordinary income into capital gains taxed at a lower rate. [page 209 of the English Budget 2019 PDF]

Horizons has a short note up on their site here.

If you don’t yet own any, perhaps wait a bit longer before making the switch from vanilla ETFs. If you do own them, for now, I suppose just wait and see specifically what happens with them. In the meantime, Ben Felix put up a good video on how the swap-based ETFs work.

Update: Thanks to Reddit user DavidsonWrath for pointing me to additional details, which are very dense legalese.

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