It’s been a stressful few months for investors using the popular swap-based ETFs from Horizons. These funds have been available since 2011 and have attracted some $5.3 billion in assets because of their innovative, tax-efficient structure. But when the federal government released its budget in March 2019, it looked like the days of swap-based ETFs might be numbered.
The day after the budget, Horizons issued a press release saying the company was “actively pursuing alternatives to mitigate any potential future tax impact on the ETFs or their unitholders.”
Following the release of draft legislation in July, Horizons has developed new a plan for keeping its swap-based ETFs alive. The funds will be restructured, but when the dust settles, the company expects the ETFs to continue operating “in a manner that provides unitholders with all of the same benefits that they have enjoyed for the past ten-plus years, including minimal tracking error, tax efficiency and competitive fees.”
Let’s take a detailed look at the expected changes to these ETFs, and what they’ll mean for unitholders.
A tax-efficient structure
First, some background on the structure of these ETFs, which are unique in Canada. Rather than directly holding the individual stocks and bonds in their benchmark indexes, Horizons’ family of 44 ETFs use an instrument called a total return swap. If the stocks in the index experience, say, a 5% increase in price and pay a 2% dividend, the swap would gain 7% and investors in the ETF would receive that return minus fees.
Most of the swap-based ETFs in Horizons’ lineup are inappropriate for Couch Potato investors, but many buy-and-hold indexers use the Horizons S&P/TSX 60 Index ETF (HXT) and Horizons S&P 500 Index ETF (HXS) for the Canadian and US equity markets, respectively, and the Horizons Canadian Select Universe Bond ETF (HBB) has also been popular with investors looking for tax-efficient exposure to bonds.
Swap-based ETFs have a number of advantages. The first is they’re virtually guaranteed to deliver the same return as the underlying index, minus only a fee that is known in advance. Traditional index funds sometimes lag their benchmarks by larger amounts, which is known as tracking error.
But their biggest advantage is tax efficiency: rather than paying dividends or interest in cash, swap-based ETFs are designed to pay no distributions at all, which means unitholders receive no taxable income. All of the gains are deferred indefinitely, and they’re only taxable when you sell your units, at which point they’re taxed as capital gains. That means the swap structure can result not only in tax deferral, but also a significant tax reduction.
The problem is that any strategy for reducing taxes eventually faces the scrutiny of the Canada Revenue Agency. The CRA has put the kibosh on a number of tax-advantaged investments over the years, including income trusts and forward agreements, and it recently squashed one of the advantages of corporate class mutual funds (much more about these later).
The 2019 budget seemed to make swap-based ETFs the next target. On page 371, the government proposes to introduce new legislation aimed at funds that “convert the returns on an investment that would have the character of ordinary income to capital gains,” which of course is what swaps are designed to do.
But it’s important to clear up this misunderstanding: the government has never specifically targeted total-return swaps. That’s a key point, because even after the Horizons ETFs are restructured, they will continue to use swaps to deliver returns to their investors.
It’s not about the swap
So if the government has no issue with swaps, then what’s the problem here?
It has to do with an accounting technique called the “allocation to redeemers methodology.” This gets complicated, but the important idea is that it was originally designed to prevent situations where there would be double taxation when a mutual fund investor sells some of her units, and the fund in turn sells some securities to free up cash to pay that investor.
The allocation to redeemers methodology is intended to prevent this double taxation by allowing the mutual funds to claim a deduction that offsets the capital gain claimed by the party making the redemption. This is not a tax loophole: the CRA has issued several rulings approving of the practice for some 20 years. However, the government believes some mutual funds and ETFs have been misusing the methodology.
Swap-based ETFs have been using the methodology to allocate income (as opposed to capital gains) to their market makers, the financial institutions that ensure there is always an inventory of ETF units to buy and sell on the exchange. As a result, the government believes what was supposed to be a tax-neutral transaction has turned out to be a form of tax avoidance.
The bottom line is that the new legislation would prevent swap-based ETFs from using the allocation to redeemers methodology. As a result, the ETFs would no longer be able to offer their unitholders the same tax benefits they enjoy now.
A touch of corporate class
All right, let’s move on to the plan Horizons has drawn up to address this problem.
Later this year, the company will merge all 44 of its swap-based ETFs into a single mutual fund corporation, with each ETF being issued as a different share class. “The corporate class structure is expected to preserve all of the benefits offered by these ETFs under their synthetic investment strategies,” says the Horizons press release.
This is going to need some unpacking as well, so here goes. The vast majority of mutual funds (and remember, ETFs are simply a type of mutual fund) are organized as trusts. Trusts don’t pay any tax as long as they pass along all of their dividends, interest and capital gains to their unitholders. You may have noticed that when you receive a T3 slip from your ETFs or mutual funds at tax time it’s described as a “Statement of Trust Income Allocations and Designations,” and there are different boxes for eligible dividends, capital gains, other income, and so on. Now you know why.
But not all mutual funds or ETFs are set up as trusts. Instead, some are structured as corporations. A mutual fund corporation typically owns several portfolios of stocks and bonds with different investment objectives, and each is assigned a different share class. For example, it might issue a share classes for bonds, another for Canadian stocks, and a third for foreign stocks. These share classes are referred to as “corporate class funds,” and each can be purchased separately.
Unlike a trust, a mutual fund corporation must pay taxes on its net income, and it can only distribute lightly taxed eligible Canadian dividends and capital gains to its shareholders. A corporation can also aggregate all of its income and expenses, even across the various share classes, giving it some control over how much it distributes to each one. For these reasons, corporate class funds are offered as tax-efficient options by most large mutual fund companies, as well as by two Canadian ETF providers (Purpose ETFs and CI First Asset).
By setting up a mutual fund corporation that covers all of its swap-based ETFs, Horizons should be able to comply with the new legislation proposed in the 2019 budget. The allocation to redeemers methodology is only relevant for mutual fund trusts, not corporations, so the new structure would sidestep this issue and stay out of the crosshairs of the Canada Revenue Agency.
What does this mean for unitholders?
Following the conversion, the day-to-day experience for investors in the Horizons funds should not change. They’ll continue to trade on the TSX with the same tickers, although Horizons says their names may change slightly to reflect the new corporate class structure.
Inside the new corporation, the investment strategy will also remain largely unchanged. Each individual share class will continue to be tied to a total return swap, just as it is now. Horizons has also said the management fees and swap fees will stay the same.
That said, if you’re a unitholder of any of the affect ETFs, you’ll need to take some action in the coming weeks.
First, you will be asked to vote in favour or against the proposed changes. If you hold one of the affected ETFs in a self-directed account, your brokerage is responsible for sending you the relevant materials. If you hold the ETFs in a managed account, speak to your advisor.
In practice, many individual unitholders will not bother to vote, and proposed changes like these virtually always get passed anyway. So if you choose not to exercise your vote, it’s not likely to make a difference.
Much more important is that each unitholder will have to make a joint election under Section 85 of the Income tax Act. This is a part of the tax code that allows an individual to transfer (or “roll over”) property to a corporation without an immediate tax consequences. Horizons has created a web page about this process (updated November 20, 2019).
If you fail to make this election and continue to hold on to your ETF units, you could potentially face significant tax consequences. Your old units may be subject to a deemed disposition, which means the CRA would consider them to be sold at market value, and any accumulated capital gains would be taxable in the current year.
What are the risks?
Should investors be concerned about additional risks in the new corporate class structure? And what is the likelihood that the new ETFs will continue to deliver the returns of their underlying indexes with no taxable distributions?
Impossible to know, of course, but it’s possible the mutual fund corporation will earn income that cannot be fully offset by expenses, which would require it to pay income taxes, something mutual fund trusts normally don’t do. If that’s the case, holders of the corporate class ETFs might see higher tracking error.
If the new corporate class ETFs are forced to pay distributions in the future, the good news is they would be in the form of tax-efficient eligible Canadian dividends or capital gains, even if the share class is tied to an index tracking foreign equities or bonds, since corporations can’t distribute other types of income. (At tax season, you would get a T5 slip rather than a T3.)
Horizons says they don’t expect tracking error or taxable distributions to be a problem, as they believe there will be enough losses and expenses to offset any income received within the corporation.
Perhaps the most obvious question is whether these changes are simply kicking the can down the road. The government has consistently shown its willingness to shut down tax-reducing investment fund structures. So what’s to stop them from targeting total return swaps directly, or simply disallowing the corporate structure for mutual funds?
Horizons readily admits that the federal government ultimately can do whatever it wants. For its part, the company argues that there are approximately $157 billion of assets in corporate class mutual funds in Canada, so a decision to shut them down would have a huge impact on investors. That’s true, but in 2016 the government did take away one of the biggest benefits of corporate class mutual funds: the ability for investors to switch from one share class to another without realizing capital gains. It’s not a stretch to imagine they could take further steps if they believe corporate class funds are costing them significant tax revenue.
That said, if you’re a unitholder in these ETFs, it would appear you have nothing to lose from voting in favour of this new structure and continuing to hold on to your investment. If, ultimately, the funds are forced to distribute taxable income, or even if they’re closed altogether and you’re forced to liquidate your holding, it’s still in your best interest to make the Section 85 election now and defer the gains as long as you can.
Horizons has created a useful FAQ with more information.
@Vladimir: The Horizons documents are clear that both spouses need to make separate elections if the ETFs are held in a joint account.
Thanks for confirming. I was confused after reading IC 76-19R3, but it does say that all T2057 forms are required even if one designated person files them. I will send both T2057 forms when we receive them in the described manner to the Sudbury Tax office, which is the Horizons’s tax office, before we file our personal tax returns.
“10. Two or more transferors may elect to transfer the same property, or a number of partners may transfer their partnership interests. In these situations, one designated person should file all the completed T2057 forms and a list of all the electing transferors simultaneously at the tax centre serving the transferee corporation. We will accept the signature of the person that the transferors authorized to act on their behalf if that person has provided proof of authority. The designated person has to provide the address and social insurance number, or the corporation account or business number for each transferor resident in Canada.”
Thank you for this great article, Dan.
Do you know of any US domiciled low-fee ETFs that use some sort of structure to effectively convert income into capital gains, like the Horizon funds? I am a dual US-Canadian citizen living in Canada, and it causes a lot of complication if I were to own a non-US domiciled ETF in a taxable account, i.e. something like the Horizon funds discussed in the article (as it would likely be a “PFIC” under US tax law, resulting in a bunch of extra paperwork).
Thus, if you are aware of a US ETF doing something like this, that could be a nice option for dual citizens like me. Thank you.
@Reader L: I am not aware of any US-listed ETFs that use the swap structure.
Hi Dan
Thank you for this information. I have contacted Horizons about the specifics. For example on their website you need to state the ACB of your ETF.to complete the form, I was not sure how to calculate this accurately.. I assume this is the Market Value as of November 30th for HXT?
Then they stated the following:
“Lastly, you may want to contact your broker once completing the section 85 election to let them know you have done the election and ask them to reset the ACB to where it was pre-conversion for these ETFs (BetaPro and Commodity ETFs converted Nov.27 and the Total Return Index ETFs converted Nov.29th). To reiterate, your November statement should contain your pre-conversion ACB. Currently, you may notice a sell and a buy for these ETFs on your system, that is expected. If you elect to not do the section 85 rollover then you’ll have a new ACB. The reason you have to contact your broker to have them reset the ACB is because they won’t know who did the section 85 election.”
I contacted Qtrade, and they told me I need to reset it, but I am quite confused as to how, and if it needs to be tied to a date?
@Lauren: As long as you did not make any purchases of HST after October 31, you should be able to use the book value that appears on your October 31 statement. You will likely need to ask Qtrade to do this for you.
I just contacted QTrade and they told me that the book value is the number of units I purchased times the price at the time of purchase, they gave me this number. Is this correct?
Nowhere on any of the statements does it state the book value. And I assume this is NOT the same as the market value?
I purchased HXT in 2017, and have not bought or sold any units since that time.I checked my history, and there does not appear to be any other activity related to this ETF.
Obviously I need to start to calculate the ACB of my ETFs in my cash account. I have read the white paper, but find it a bit confusing. I plan to use acbtracking.ca as this looks simpler.
@Lauren: Yes, the book value is your cost for the holding (unit cost x number of units). So if you have a record of the purchase in 2017, and you have not made any subsequent purchases, then that will be the book value to use. Most ETFs require you to make adjustments when there are distributions, but one of the good things about swap-based ETFs is that they make no distributions and therefore the recordkeeping is very simple.
I’m a bit surprised the book value of your holdings is not on your monthly statements. That’s a pretty standard piece of information.
Thanks Dan. Your article and all your answers to queries has been very helpful. And yes, now that I did the calculation, the number is there on my report under “cost”. It was just not clear to me, so thank you very much.
Re: my question about US-domiciled funds using equity swaps, thank you for getting back to me, Dan. BTW, I have searched and couldn’t find any. I’m wondering if maybe US tax law doesn’t allow funds to do this (or discourages it).
I filled out the section 85 election but still haven’t gotten an email. Anyone get theirs and print and mail it in yet?
Horizons sent an email on December 23 saying, “This message is to inform you that the electronic package containing your Joint Tax Election(s) in prescribed form is expected to be delivered the week beginning January 6, 2020.”
Thanks, Dan, for your help with this. I wasn’t aware of this change until I read your article today
Dan and Dan, thanks for the question and answer – I was wondering the same.
Hi Dan,
Might not be the best spot for this so sorry in advance;
Previously you wrote that there were no direct hold broad-market ETFs, and as such only recommended VWO or VEE (and XEM and US equivalent) for your withholding tax analysis. ZEM was classified as an iShares wrap. This no longer seems to be the case; ZEM has grown massively in the past 2 months and now holds 1.2 billion in assets, with only 5% being held in the iShares wrap. It holds over 800 EM stocks directly. I was wondering if you could update your analysis sometime to reflect ZEM as a direct-hold EM etf, and touch on the implications of it? I suspect it’s better to hold these shares for withholding tax instead of the iShares EM funds.
@Solar: You are correct that ZEM now holds most of its stocks directly and therefore should have less drag from that second layer of foreign withholding taxes in an RRSP. Justin is working on updating his white paper on this subject and this should be covered in that update.
Hi,
So If I understand this correctly, the only units that need to be included in the Section 85 election are the units that were purchased before November 27th and held after that date (through the conversion date)? Units that are subsequently added after that date would not need to be included in this election because they would already fall under the new structure?
Example: A purchase of 100 Units of HXE 18-Nov 2019
A subsequent purchase of 100 units 2-Dec 2019
A subsequent purchase of 100 units 4-Dec 2019
So when filling out the election, I would list 100 units that would have moved from the prior structure to the new structure? Not the 300?
I just spoke with Q Trade too and I see they made the adjustment for my HXE shares on 2-Dec 2019. The action used for the transaction was called “offer payment” So I figure this really is only about the 100 shares that were held over this crossover period. There was no price, commission or net amount listed for the transaction. But I do see that my adjusted cost base has been adjusted to a new number for my entire holding which is 300 shares.
So I suppose I have two options? Treat the 100 shares as a sale on Dec 2nd at a certain price and then treat the new 100 shares as a buy on Dec 2nd which adds to the subsequent shares purchased after Nov 29th. The original 100 shares are treated as a taxable event for the 2019 tax year.
The second option would be to fill out the Section 85 election to remove the taxable event from the original 100 shares and calculate the adjusted cost base accordingly.
I do see that event though as of right now, there is no document or price attached to the conversion, the adjusted cost base of the 300 shares I hold of HXE has been changed by Q Trade on my Portfolio views page. When I adjust the 100 shares to a specific price (The 2-Dec event) the new adjusted cost base for the 300 shares matches what is given to me by Q Trade. So it may be easier just to not go through the Section 85 process.
I’d love to hear any thoughts or comments on this. Thank-You!
1.) With regards to how to split number of shares and ACB with a co-owner in a joint taxable account, the following note was given in the Horizons questionnaire for those that own an undivided interest in the Merging ETF units with another party:
Note 2:
Each co-owner of property owned is required to submit their own questionnaire indicating the respective ownership interest (i.e., percentage) in the Merging ETFs Units. For example, if Ms. Smith and Ms. Doe owned an undivided interest in 100 units with Ms. Smith owning 30% undivided interest and Ms. Doe owning 70% undivided interest, Ms. Smith would complete a questionnaire for the Merging ETF indicating her 30 units (and her corresponding ACB for those 30 units) and Ms. Doe would complete a separate questionnaire for the Merging ETF indicating ownership of her 70 units (and her corresponding ACB for those 70 units).
So based on the example given in this note, it sounds to me that if you have a joint taxable account holding the Merging ETF units, and you have an undivided interest with another person on that account, you would have to divide the number of shares and ACB accordingly. So if you and a spouse each co-own 50% undivided interest of the Merging ETF units in the joint taxable account, then you would enter 50% of the total number of shares of each Merging ETF, and 50% of the total ACB of each ETF, for each owner. Note that the questionnaire allows you to enter fractional shares.
2.) The questionnaire also states the following in Note 2 of their “Important information” tab:
The deadline for providing the Joint Tax Election Information to Horizons MFC is March 31, 2020 (the “Joint Tax Election Information Submission Deadline”). However, Horizons MFC is asking that the Joint Tax Election Information be provided within 30 days after the day on which the disposition of the Merging ETFs Units is completed by the Merging ETFs Unitholder pursuant to the Mergers (the “Effective Date”). That is, December 27 for the BetaPro and Commodity ETFs and December 30 for the Total Return Index ETFs.
So it sounds like that the hard deadline is March 31, 2020 to submit the joint tax election information to Horizons, but they prefer that you submit by December 30, 2019 for the TRI ETFs, probably so they have enough time to process all the joint tax election submissions.
Horizons have changed the wording and added note 2 for the undivided interest ownership percentage after I have submitted the questionnaire. Now, when I read the information and the FAQ, which they have also changed it is clear that you have to divide the number of shares and ACB.
Now I have to contact the Technical line ans see how can both I and my wife resubmit the questionnaires. This is frustrating!
If I sold my shares on Nov 28th and it settled Nov 29th, should I still fill out election form?
Has anyone heard back from Horizons after submitting? I submitted mine more than a month ago and haven’t heard back from them.
Ian, I sent mine in a month ago too and haven’t heard anything yet. Dan mentioned the packages would be shipped during the week of the 6th. If we don’t get them by the end of next week we should probably contact Horizons.
Hey Bart I actually just got an email from them today.
I have left a voice-mail on their support line and e-mailed them to find out how to re-submit the questionnaires. I have not heard back from Horizons.
As advised here and from my initial understanding after reading their FAQs, we have included 100% of the units and ACBs on both mine and my wife’s questionnaire. Since then Horizons updated their instructions and now it’s clear that we have to split 50/50 for our joint investment account, based on the percentage ownership. We have undivided interest and either of us can make decisions for the investments in the account, but the ownership percentage is 50/50. It’s the same way we report our capital gains or loss to CRA.
Anybody knows how to change the information? Do we just re-submit the questionnaires with the corrected information and hope to receive the package on time for this year’s tax return?
Hi Ian, I just got mine last night! I haven’t gone through it all but I got four attachments (one for CRA, one for Horizons, one for my records and an Appendix).
I have received a response from the Horizons hotline, so fingers crossed they will adjust the units and ACBs accordingly 50/50 between my wife and myself:
“Thank you for contacting us. Confirming receipt. No need to resubmit. We will adjust the values accordingly.
Kind regards,
Horizons Tax Election Hotline”
So the forms are all filled out except the 2 tables which are added as separate pages. Other than signing and dating as the “Transferor” am I populating these tables myself and only sending in pages 1-3? Asking for a friend (myself)
Where can I learn more about the basis for your comment “Most of the swap-based ETFs in Horizons’ lineup are inappropriate for Couch Potato investors”?
@Cathy: What I mean is that the Couch Potato strategy is based on using traditional index funds that simply track a broad market. In the Horizons lineup, the only funds that really meet that description are HXT (Canadian stocks), HXS (US stocks), HXDM (international stocks) and HBB (Canadian bonds). These funds track indexes very similar to those you’ll see in traditional index portfolios. Most other Horizons swap ETFs track narrow sectors, commodity futures, or exotic asset classes.
Hi Dan and fellow readers. I invested a small amount in a Horizons ETF (HXT specifically). I must have missed the part about filing a Section 85 request. I don’t recall receiving a notice from Horizons on this. So, I received a (nasty) surprise yesterday with a T5008 that a sale was triggered on my ETF holdings and I’ll need to include it in my 2019 tax return. Horizons Tax Election website states that the deadline is March 31, 2020 to file an election. Does this mean I can still file the election request and a subsequent T5008 would be issued to negate the sale? Or is it an approval process of sorts that will allow me to then claim the Section 85 on my tax return to negate the capital gains tax? I will call Horizons during business hours but wondering if anyone has experience or guidance on this issue. I am glad I didn’t have a large amount in there otherwise it would be a bigger issue. Thank you!
Following up to my comment from Saturday, I am further ahead in my understanding. I submitted the questionnaire and await the completed Joint Tax Election form from Horizons. I understand that I need to then sign and send that back to Horizons as well as to the CRA. From this point on, I’m unclear. When I file my 2019 tax return, sounds like I still need to include the sale. Do I also need to include something about the election in my tax return or does the CRA reconcile this with the election they receive? Thanks again!
Bobby, I’m in the same boat – I filed the documents with CRA and with Horizons and I got the same T5008 document.
Can anyone weigh in on what we are supposed to do now?
Hi everyone,
I also sent the T2057 (pursuant to section 85) to sudbury as well as horizons,and received the T5008, also not completely sure what to do. However as per the government website titled “T5008 Guide ‑ Return of Securities Transactions”, there is the following line,
with the ‘you’ referring to securities dealers:
“You have to report transactions to all persons, including individuals, corporations, partnerships, trusts, or any other person who resides either in or outside Canada. You have to report all security transactions falling under any section of the Income Tax Act not specifically excluded under subsection 230(3) of the Income Tax Regulations, even if no tax arises as a result of the transaction.
For example, transactions undertaken under section 85 and section 85.1 of the Income Tax Act are not exempt from the requirement to report.”
In short, it is not surprising that we got the T5008.
I too got an unexpected T5008 from TD recording sale of HBB units at a higher price than the agreed cost basis. I had mailed T2057 to CRA as well as Horizon. When I called TD Investing today, they told me to file a “Cost Adjustment Form” (with them), which will essentially change the cost basis to what it was before restructuring. However, TD rep couldn’t confirm if they would then revise t5008. I’m yet to speak with an accountant; but wondering if anybody has more insights.
@Bobby V, @BartBandy, @test, @melwin: From the Horizons FAQ’s page:
“You must report the disposition of Merging ETFs units even though you elected to obtain a full deferral of any capital gain that might otherwise arise on the disposition of your Merging ETFs units pursuant to the Mergers. Your proceeds of disposition for Canadian income tax purposes will be equal to the Elected Amount set out in box B on page 3 of the federal Joint Tax Election”
It says we use the amount from box B (agreed amount) as the proceeds from the disposition on our 2019 capital gains tax form. This should be equal to your adjusted cost base so the capital gain will be zero. I assume we can ignore the values on the T5008 form as long as we’ve filed the T2057 form with the CRA. They could certainly make this clearer.
I have emailed Horizons about this, but I will really appreciate if someone can answer the questions below:
1) The Horizons election questionnaire allows us to enter fractional shares, but in the T2057 forms Horizons have rounded up the “number of shares transferor received”.
My wife and I are 50/50 co-owners of undivided interest and due to some of the shares being odd numbers (in red) we have provided fractional number of shares. Why did Horizons round them up?
We have noticed that the T2057 “redemption value per share value” is calculated using the provided fractional number of shares as, not the “number of shares transferor received”. Wouldn’t this raise questions with CRA?
2) We have received the 2019 trading summary and T5008 form from our brokerage.
The 2019 trading summary proceeds of disposition and T5008 does not match with the Horizons fair market value.
We did not enter the proceeds of disposition in the questionnaire, so the “fair market value” and “redemption value per share” was calculated by Horizons.
Why there are differences between the proceeds of disposition reported by the brokerage and the fair market value calculated by Horizons?
I assume we have to report the values from the T5008 in Schedule 3 on our tax returns and pay tax on the capital gains as the fair market values calculated by Horizons are a bit lower.
To add to the above Q11 of FAQ states we must report the disposition of Merging ETFs units and our proceeds of disposition for Canadian income tax purposes will be equal to the Elected Amount set out in Box B on page 3 of the federal joint tax election, which is basically the ACB of the units.So, we just ignore the T5008 proceeds of disposition and Horizon’s fair market value differences and report this amount instead in Schedule3?
Wonder if anyone can sense check this for me…
Seems to me I can loan funds to my minor dependents, they can purchase these swap ETFs with them, and even if I don’t charge them the prescribed interest rate there will be no attribution to me because it’s all capital gains. Meanwhile I retain control of the majority of the funds, aside from the capital gains. Am I missing something? Aside from the CESG seems like a good alternative/supplement to the RESP.
Thank you everyone for the recent comments. Right, I think the key question with regards to our tax returns is: when we report the T5008 information, can we replace the amount on line 21 (Proceeds of disposition or settlement amount) with the amount on line 20 (Cost or book value)? Not sure if we would get some sort of confirmation/direction on this after the T2057 is processed by the CRA. Perhaps a call to the CRA is in order but what are the odds of getting the right information? :)
Here is the response from Horizons, which clarifies things and answers my questions above:
We accept fractional units on the questionnaire to allow for ACB of joint-accounts to be divided equally to each of the co-owners. However, the prescribed T2057 form does not allow for fractional units which is why it was rounded. Please note the rounding does not affect the total ACB of the units disposed or the ACB allocated per unitholder. The rounding does not impact the gain or loss you would otherwise record when you choose to dispose of the units.
The Fair Market Value used in your tax election is the information pulled from Horizon’s records on the closing date of the transaction. This amount may differ from your broker reports by a minor amount due to timing differences of when the information is pulled (e.g. 5PM vs 9AM next day). Per the transmittal letter that was part of your tax election package “The “Agreed Amount” provided by you and included on page 3 of the Form T2057 is the elected amount of proceeds received on the disposition of the Merging ETFs Units. If the Agreed Amount and the adjusted cost base are the same, no capital gain will arise on the disposition of the Merging ETFs Units.” Please note as you are filing a tax election, this document overrides the standard T5008 for tax filing purposes on your individual tax returns.
Hi Vlad,
Is it possible that your Horizon’s FMV is based on the transaction date and your broker’s T5008 is based on settlement date (a few business days later)? That’s my case.
”Please note as you are filing a tax election, this document overrides the standard T5008 for tax filing purposes on your individual tax returns.”
Does this mean we don’t need to file the T5008?
Hi all,
Best I can figure from what Horizons has said, and the discussions here, is that those of us who filed a T2057 simply use the “Agreed Amount” from the T2057 as the value we put in the T5008 for “Proceeds of disposition or settlement amount” (Box 21). Hence we “override” the information in box 21, but still file the T5008. Effectively, as was mentioned before, this simply makes our “Cost or book value” and “proceeds of distribution or settlement amount” align so we do not trigger capital gains. This is what I am planning on doing unless anyone else has any additional insights.
Thank you for this useful platform and conversation.
@Chad – I agree. I’ve spent a few days now, going back and forth with my broker (Scotia Bank iTrade), Horizons, and the CRA. Per the agent at iTrade, the T5008 is not an official tax document, so if any of the information is not correct, you can override it with the correct info on your tax return. Per the CRA guide for creating a T5008, had the broker known about the T2057, it should have been created as follows:
Report sections 85 and 85.1 transactions in these boxes as follows:
Box 21 – Leave this box blank for these transactions.
Box 22 – Enter “SHS”.
Box 23 – Enter the number of shares, units, or quantity of any other property or securities received as part of the proceeds of disposition.
Box 24 – Enter “Section 85” or “Section 85.1,” as applicable
So that is how I am going to enter my T5008 information. The only problem I still have is that my broker now has the wrong ACB value going forward. The ACB should be the same as what it was, pre-conversion. There was a previous comment in this thread from someone with TD, that they could file a “Cost Adjustment Form” to adjust their ACB. Maybe I’ll see if there is a similar form for iTrade. Otherwise, I’ll just be aware, when I do sell any shares, to ignore the ACB on the resulting T5008 form.
Hmmm, I now disagree with what I said above. I entered as outlined above on my tax return (using TurboTax) and it ended up saying I had a Capital Loss. So now I’ve put the same value in Box 21 as what I have in Box 20 (ie, ACB = Proceeds). Now my Capital Gains/Loss = 0.
Hi Rozalyn! I overrode my T5008 as you noted and got 0$ Capital Gains in TurboTax as well. I was also able to reset/correct my ACB with my brokers, NBDB by filling out their form. Hoping this is correct!
anyone know how to enter this in studiotax? there’s no box 22, 23, 24
There’s 14, 16, 17, 19, 20 and 21 on T5008 form
I use Studio Tax too and you can’t over-ride. I spoke with CRA who said if we can’t over-write box 21 to say “Section 85” then we should submit and mail an letter explaining the situation to update our taxes. Not ideal but since the deadline is June 30 we have some time.
Sorry, tax deadline is June 1st, not 30th – please file on time!