Investment Q&A

We are very comfortable with the Horizon (not Harvest, now Global X) structure. Several years ago, changes were made as the government was questioning the methodology. Under the current structure we would expect no CRA issues as it was developed in tandem with the government to ensure it works. Essentially, the funds use derivatives with third parties (Canadian banks) to swap dividends for capital gains. The third party takes the dividend and 'swaps' capital gains back to the fund. Thus, the funds do not generate income in the typical sense and thus do not pay out distributions. There is a swap fee, which would be the main drawback. Governments can also change their mind. But even in the latter case, no 'more' tax would be paid it would just revert to 'regular' taxation and likely the past would be grandfathered (change would only be on a go-forward basis). But as noted, we would see this as extremely unlikely. HXS is the total return fund on the S&P 500, HXT on the TSX 60. Harvest Funds are different, in that they typically offer income funds. But covered calls are treated as capital gains, and if a portion of the distribution is return on capital then taxes can be deferred. For example, some of their funds (listed here) have the entire distribution as return of capital so no current taxes are paid, but ACB declines and tax burden is shifted to capital transactions, not income.