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Take strategic advantage of ETF tax traits – Investment Executive



This column won’t cover all aspects of ETFs and taxes. It can’t. That’s the domain of textbooks and experts (like the one we spoke to). But it does offer an overview of ETF tax benefits and considerations. It largely focuses on the taxation of ETFs held in non-registered investments but does discuss registered accounts for some circumstances. It also addresses a manageable administrative aspect of ETF taxation; namely, tracking the impact of reinvested capital gains distributions, known formally as “notional distributions,” or colloquially as “phantom distributions” on the adjusted cost base (ACB) of investments. If you’ve lacked “phantom fluency” (and maybe refrained from using ETFs because of it), this column shows that it shouldn’t be a stumbling block.

Mutual funds, ETFs and taxes

With mutual funds, investors buy/sell units directly from the fund. If enough unitholders choose to redeem units, the fund’s portfolio manager may be compelled to divest some holdings to raise the necessary cash with which to pay the redemptions, thus potentially triggering capital gains for all unitholders of record. Similarly, if a portfolio manager decides to sell specific holdings to crystallize a gain, the same outcome occurs: a taxable event for everyone. In both cases, the taxable activity occurs within the fund itself.

However, purchases and sales of an ETF’s units by individual investors does not affect other owners because the units are traded between investors on an exchange, and their value typically does not fluctuate dramatically from normal trading activity. Also, most ETFs are managed passively based on an index with only quarterly rebalancing. So, the turnover rate on portfolio investments of ETFs is generally lower compared to actively managed mutual funds, which diminishes the likelihood of triggering capital gains. Actively managed ETFs may incur capital gains rates comparable to some mutual funds, but it depends on turnover, and they’re still often available at a lower MER relative to mutual funds.

Trusts versus corporations: the tax implications

How Canadian ETFs are structured (whether as trusts or as corporations) impacts their taxation.

Most ETFs are structured as trusts and therefore enjoy various tax-related and other benefits. Like their mutual fund peers, ETFs pass on capital gains, interest, dividends, foreign income and return of capital (ROC) to their investors, which may create tax obligations or adjustments to ACB. An ROC is deemed “a non-taxable event” but does reduce an investment’s ACB and, therefore, impacts the calculation of capital gains and losses when units are eventually sold. This has an impact on the taxes an ETF investor may pay.

Though they are still in the minority, ETFs structured as corporations provide specific tax management benefits and have growing appeal for investors. Why? Within a corporate structure, for example, realized capital losses of one class can be used to offset realized capital gains of another class The corporate structure therefore potentially reduces the level of capital gains distributable to investors.

In defining an ETF investment strategy for your clients, the tax implications of each structure should be a factor in your decision-making.

“Phantom distributions” — not really so scary

Because of their nickname, phantom distributions may conjure up negative sentiments that inhibit advisors from exploring ETFs, but they are really quite benign. “Phantom” simply refers to distributions that affect an investment’s ACB but are not actually paid in cash. Here is how they work.

Most ETFs make capital gains distributions that are reinvested and immediately reconsolidated, creating “notional” or “phantom” distributions. These phantom distributions increase an investor’s ACB of their investment in an ETF, thus reducing the capital gain (or increasing the capital loss) when these holdings are eventually sold; therefore, distributions that affect an investment’s ACB need to be tracked to avoid paying taxes twice: once on the distribution itself and again on the embedded gain when the investment is sold.

ACB tracking should not be a barrier to ETF investing. ETF providers publish their distributions by issuing news releases and by reporting through CDS Clearing and Depository Services. Many financial firms’ back offices (probably yours) have in-house solutions to calculate and track ACBs. If you operate on a fee-for-advice model or your clients engage in DIY investing, you may want to remind them to calculate their ACBs and mention that online tracking resources are available.

What about withholding taxes?

How an ETF gains exposure to international equities affects foreign withholding taxes and therefore the ETF an advisor would prudently recommend.

Generally, any type of foreign investment — whether held in a mutual fund or ETF — is subject to withholding taxes, and tax treaties between Canada and other jurisdictions determine the applicable rates. Whether an investment is open or is held in a registered account, withholding taxes may apply with varying financial effects and remedies. The two most likely scenarios an advisor will encounter are: a Canadian-listed ETF holding foreign stocks directly and a Canadian-listed ETF holding foreign stocks indirectly through a U.S.-based ETF. Regarding the former, withholding tax is recoverable if the ETF is held in an open account — but not in a registered account. And regarding the latter, only U.S. withholding tax is recoverable, but not if it’s in a registered account.

Choosing the right fund structure and account type in which to hold international ETFs is essential because it can impact the level of withholding taxes your client is exposed to.

Don’t go it alone: seek out tax expertise

The tax obligations of ETF investing should not deter you from recommending ETFs any more than the taxes payable on mutual funds would. Expertise available within or beyond your firm can complement what you uniquely bring to your clients. CETFA applied this thinking to writing this column.

Theo Heldman is a CPA, CA and CFA charterholder with deep investment sector experience at the executive level. Now serving as an independent board director and an advisor to boards and associations, his insights materially informed this piece.

We asked Theo to summarize his thoughts about ETFs and taxes. Here’s what he told us: “You owe it to your clients to check out ETFs because they can be used as a foundational tool for optimizing client portfolios. There are many Canadian-listed ETFs that offer a variety of investment mandates and exposure to foreign markets, and although there are always tax considerations when investing, ETFs can be more tax-efficient than traditional mutual funds. And while phantom distributions may appear complicated at first, they’re really not. They are manageable, and they shouldn’t prevent you from using ETFs for the benefit of your clients.”

At the CETFA, we could not agree more.

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Joe Biden tax plan affect US investment in Ireland?




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Wander around Dublin’s Grand Canal Quay and you get a sense of how successful the Republic of Ireland has been in attracting US technology companies.

Google has its international headquarters across a campus of offices and will soon have more space nearby at the Boland’s Mill development.

Just across the canal, Facebook has its international HQ with Tripadvisor and AirBnB close by.

Stripe, the United States-based payments firm, could soon be in the area.

Last month its Irish founders said they’re planning about 1,000 new jobs in Ireland.

The head of the country’s inward investment agency, Martin Shanahan, described the Stripe investment as a “phenomenal signal from Ireland and about Ireland”.

But there’s now a risk that the pipeline of investment from the US could dry up if President Joe Biden can lead a major change to global tax rules.

Irish tax advantage under threat

In among those tech company HQs in Dublin’s docklands, you will also find the offices of the lawyers and accountants who help US firms use Ireland’s tax system to reduce their global tax bills.

For the last 20 years Ireland has had a simple message: invest here and you will pay just 12.5% tax on your Irish profits.

That compares favourably to headline corporation tax rates of 19% in the UK, 30% in Germany and 26.5% in Canada.

It is an article of faith in Irish politics that the 12.5% rate has been vital to attracting US investment.

But that tax advantage could be seriously undermined if President Biden gets his way.


Google head office Dublin


The most striking of his proposals – and the one of most consequence for Ireland – is for a global minimum corporate tax rate.

The US Treasury Secretary Janet Yellen has suggested a 21% minimum rate.

“We are working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom,” she said in a speech last week.

“Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations.”

What would it mean for Ireland’s economy?

Essentially that would mean if a company paid tax at the lower Irish rate, then the US (or other countries) could top up that company’s tax in their jurisdiction to get it to the global minimum.

So if a US company had a presence in Ireland primarily for the tax advantage, that advantage would disappear.

This is a matter of urgency for the Biden administration because it is planning to raise corporate taxes at home and would prefer not to see more tax revenues leaking to other countries.

Peter Vale, tax partner with accounting firm Grant Thornton in Dublin, thinks a global minimum rate is now an inevitability.

“If you’d asked me six months ago I’d have been quite sceptical, there was a lot of opposition,” he said.

“But it’s now moving by the day and, with the US behind it with its plans, I think we’re going to arrive at some sort of global consensus.”

He said the key issue for Ireland becomes the level at which the rate is set.

“I don’t think 21% is where it will land, I suspect it will be somewhere in the teens.”



Niall Carson/PA

Other details will be important too: “Exactly how will you work out what the rate is a company is paying in Ireland and what does that mean in terms of any top up? The detail becomes pretty critical.”

The Biden proposals have reinvigorated work which is being led by the OECD (Organisation for Economic Co-operation and Development), an intergovernmental economic organisation.

It began a project known as Base Erosion and Profit Shifting (BEPS) in 2013, which aims to mitigate tax loopholes which currently allow companies to shift profits from higher tax countries to lower tax countries like Ireland.

‘Intention to target Ireland’

Perhaps ironically Ireland appears to have been a major beneficiary of some of the early outcomes of the BEPS project.

The country’s corporation tax receipts have soared from about €4bn (£3.5bn) in 2013 to around €12bn (£10.5bn) in 2020.

That is the principle that companies should declare their profits in the location where they have real operations or activities.

“Countries like Ireland have been a huge winner from BEPS mark one,” he said.

“The objective was to align profit with substance and we actually are one of the countries where these companies have substance, whether it be pharmaceuticals, computer chips, medical devices and the ICT companies.

“I think when countries in the G7 looked at this they thought ‘that’s not quite what we wanted’ – maybe the intention was to target countries like Ireland, not benefit them.”

When could we see an impact?

In the next round of BEPS, with the US on board, those other rich countries are more likely to get what they want at Ireland’s expense.

But even if President Biden can agree the reforms at home and abroad, how quickly would that have an impact in Ireland?

Mr Coffey thinks any negative effects would not be instant because tax is not everything.

“Are the ICT companies likely to head off around the world, scattering their headquarters to various different cities?” he said.

“There are benefits to being co-located. At least in the medium term we are not likely to see a huge shock.”

That is echoed by the IDA (Industrial Development Authority), the inward investment agency, which points to Ireland’s workforce and significant clusters of specialisation in areas like medical technology and pharmaceuticals.

The IDA also sees the Brexit angle, pointing out that Ireland, unlike its UK neighbour, is part of the EU’s single market.

In a statement, it said: “Ireland is at the heart of Europe. Ireland’s continued commitment to the EU is a core part of Ireland’s value proposition to foreign investors, offering a base to access the European Single Market and to grow their business.

“Ireland also benefits from free movement of people within the EU, giving businesses located in Ireland access to a European labour market.”

The Irish government has been engaged in the BEPS process, though in a speech last year the Finance Minister, Pascal Donohoe, said he remained to be convinced of the need for minimum taxation, beyond the specific challenges relating to the digital economy.

This week a government spokesman said: “Ireland is aware of the US proposals.

“We are constructively engaging in these discussions, and will consider any proposals carefully noting that political level discussions on these issues have not yet taken place with the 139 countries involved in this process.”

Source: – BBC News

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World's Biggest Wealth Fund Makes $1.6 Billion Wind Investment – BNN



(Bloomberg) — Norway’s $1.3 trillion wealth fund has made its first investment in unlisted renewable-energy infrastructure since being given the go-ahead to move into the asset class.

The world’s biggest sovereign investment vehicle said on Wednesday it will buy 50% of the 752 megawatt Borssele 1 & 2 Offshore Wind Farm from Orsted A/S of Denmark. The deal is worth 1.375 billion euros, or about $1.6 billion, it said.

Norway’s wealth fund has been looking for such assets to purchase since getting a mandate to start buying in 2019. But as recently as January, Chief Executive Officer Nicolai Tangen said it was proving hard to find reasonably priced targets.

“We are excited to have made our first unlisted investment in renewable energy infrastructure, and we look forward to working alongside Orsted on delivering green energy to Dutch households,” Mie Holstad, chief real assets officer at the wealth fund, said in a statement.

Strategy Update

The announcement coincided with a strategy update by the fund, in which it signaled it will apply a more active approach to its investment strategy. That includes a goal of becoming a global leader in sustainable investing.

Tangen, a former hedge-fund boss who’s been running the giant sovereign investment vehicle since September, has stepped up the Oslo-based fund’s reliance on external asset managers and made environmental, social and governance goals a cornerstone of his focus. He wants to rely more on technology, including artificial intelligence, and plans to expose his portfolio managers to the same kind of training regimens that help shape top athletes.

In Wednesday’s strategy update, the fund said it will “emphasize specific, delegated active strategies and have less emphasis on allocation or top-down positioning.”

As the world’s biggest stock investor, the Norwegian wealth fund’s “knowledge of our largest company investments helps us achieve the highest possible return after costs,” it said. “It improves risk management and enables us to fulfill our ownership role. We believe our active management improves our ability to be a responsible investor.”

The fund, which generated $123 billion in returns last year, used a previous strategy update to shift its equity exposure toward U.S. stocks and away from Europe. Much of last year’s performance was driven by the fund’s holdings of U.S. technology stocks.

The fund follows a benchmark that allocates about 70% to stocks and the rest to fixed income. It also invests in real estate and was recently given a mandate to start buying renewable infrastructure.

The sovereign wealth fund, managed by a unit of the central bank, was created in the 1990s to invest Norway’s oil and gas revenues abroad, initially to prevent the domestic economy from overheating. It owns about 1.5% of global stocks.

The fund said the goal is to become a global leader in responsible investment, partly by further integrating ESG data into its investment process.

©2021 Bloomberg L.P.

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Digital investments correlate to financial success – The 21st Century Supply Chain – Perspectives on Innovative



Executives live daily with a daunting dual challenge. One part is the need to manage the business through steady-state operations and times of disruption. The other is to create value for shareholders through financial excellence and growth.

At the intersection of these two parts lies the digitalization of supply chain. Through digital transformation, supply chain leaders can begin to develop the capabilities that are already needed to manage disruption, as well as those that will help overcome known obstacles, such as data availability and quality. Layering on top of data is information and insight, which are critical to ensuring that those in supply chain are making the decisions that matter most to the business.

The operational opportunities are evident, so the rationale behind the investment is clear. However, that only solves one part of the executive’s dual challenge. Quantifying the value created through financial excellence has been more difficult, but recent research from Professor Morgan Swink of Texas Christian University now shows the correlation between investing in digital transformation and delivering financial success.

Kinaxis customers outperformed during the pandemic

Using quarterly financial statements for 48 publicly held, North American companies that use Kinaxis for their supply chain planning, Professor Swink conducted what is known as a difference in differences analysis for all of 2019 and the first three quarters of 2020. In that analysis, the 48 companies represented those who have already begun their digital transformation against industry averages for each respective vertical over the corresponding period. Furthermore, the analysis was performed as a pre/post event comparison based upon the declaration of COVID-19 as a global pandemic in Q1 2020.

While industry averages showed declines after the pandemic declaration in return on assets (ROA), return on sales (ROS) and return on invested capital (ROIC), the Kinaxis users all delivered improvements when compared to the pre-pandemic performance.

“These data are very strong. I was quite surprised at the level of positivity in these findings,” Professor Swink said upon sharing his findings. The results were so impressive that among the initial six financial metrics compared, the group of 48 Kinaxis customers, representing the digitally transformed, outperformed their industry averages across the board.

The academically rigorous, statistically significant data shows that while industry averages showed declines after the pandemic declaration in return on assets (ROA), return on sales (ROS) and return on invested capital (ROIC), the Kinaxis users all delivered improvements when compared to the pre-pandemic performance. The largest gap occurred for return on sales, which acts as a measure of operational efficiency, where the Kinaxis group improved by more than 1.5%, while the industry declined by more than 0.5%, leading to an overall performance gap of more than 2%. Costs, as a percentage of revenue, also were an advantage for the group of 48 Kinaxis users as both costs of goods sold and sales, general and administrative costs decreased while industry averages either declined slightly or grew.

Translate supply chain success into the CFO’s main metrics

With an impressive array of data, like the research findings, it becomes critical that supply chain leaders be able to convey the right information to the right people. In the case of what matters most to CFO’s, Professor Swink says, “The two things that every CFO cares about are profit and growth. And from the CFOs perspective, they’re looking at ways to invest money to drive profit and growth.”  

Therein lies a significant opportunity for supply chains because they have historically struggled with translating operational capabilities into financial success. This carries over to digital transformation, as well. In both cases, the benefits are typically stated in the terms of those desiring the investment, as opposed to the metrics of whomever is making the decision. As Professor Swink stated, “You need to learn what those metrics are and be able to position your proposal in that language just like the other people who are competing for those funds.”

Flow chart connecting digital capabilities to financial outcomes
Translate digital transformation outcomes into meaningful impacts for decision makers, for example, aligning supply chain capabilities to financial outcomes.

Once the metrics are identified, begin to understand how operational capabilities work as input drivers for them. For example, increased visibility is highly desirable so that supply chains can sense disruptions as it is happening and respond immediately. That alone is a tremendous benefit and it can be tied to financial outcomes such as reduced inventory and cash buffers, improved capacity utilization and lower cost resolution of demand-supply mismatches.

Taking it a step further, the improvements in return on invested capital, and even return on assets, can then be tracked as digitally enabled capabilities are now linked to these financial performance measures. By doing so, the “why an investment is needed” aligns with what it means to the decision maker.

This creates a pivot point for supply chains as Professor Swink suggests that practitioners must be able “to relate structural choices, policies, technology investments, and training and labor investments to the kinds of KPIs that show up on income statements and balance sheets.” This is crucial because “if we really want to speak the language of the CFO we must think beyond those kind of specific operational metrics to think about how our choices affect these larger outcomes.”

To hear more about Professor Swink’s research, watch his on-demand webinar, Speak your CFO’s language – Managing risk and opportunity in supply chains.

Watch the on-demand webinar, "Speak your CFO's language - Managing risk and opportunity in supply chains"

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