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Take strategic advantage of ETF tax traits – Investment Executive

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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.

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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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Lenders Rally After India’s Central Bank Eases Investment Curbs – BNN Bloomberg

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(Bloomberg) — Indian banks and shadow lenders rose Thursday after the country’s central bank eased capital requirements for a unique type of investment, a move that may free up more funds for loans.

The gains came after the Reserve Bank of India issued Wednesday modified rules on lenders’ required provisions for exposure to alternative investment funds, or AIFs, that invest in the lenders’ borrowers. Under the new policy, a lender needs to set aside capital only for the amount the AIF invested in the debtor company, and not the entire investment of the lender in the AIF.

Shares of Piramal Enterprises Ltd., which reported among the biggest provisions for such investments, closed 1% higher after rising as much as 6% during the day. A gauge of financial services firms climbed 1%, the most since March 1.

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Lenders led the rally in the broader market, with the NSE Nifty 50 Index registering its best day since beginning of the month.

The RBI’s softening stance came after industry players raised concerns over clarity and uniformity after it announced in December restrictions on lenders’ exposure to AIFs that hold stakes in their borrowers. The latest move will likely help firms including Piramal, HDFC Bank Ltd. and IIFL Finance Ltd. reverse some of their relevant provisions made previously, according to analysts at Citigroup Inc. and Jefferies Financial Group Inc.

Read more: India’s Crackdown on Financial Risks Puts Industry on Watch

“Select private banks and NBFCs like Piramal had provided for their entire AIF exposure during 3Q and could see some write-backs in 4Q if they decide to reverse the excess provision,” Jefferies analyst Bhaskar Basu wrote in a note.

Regulators introduced a flurry of new rules last year to prevent a buildup of financial stress at a time when India’s economy remained resilient in the face of rising interest rates, slowing global growth and unabated geopolitical tensions.

©2024 Bloomberg L.P.

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What is Islamic halal investment and why is it on the rise?

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The global Islamic halal economy is set to reach a market value of $7.7 trillion by 2025, more than double the $3.2 trillion it reached in 2015 and significantly higher than the $5.7 trillion it was valued at less than three years ago in 2021, according to industry experts.

A report by the General Council for Islamic Banks and Financial Institutions revealed last year that the global Islamic funds market has grown by more than 300 percent over the past decade, with nearly $200bn now under management globally.

The statistics depict a rise in both demand for halal – or “sharia compliant” – investments and opportunities.

Investing is permitted under Islam, but certain aspects of investment practice – such as charging or paying interest – are not. This has traditionally meant a lack of opportunities for Muslim savers and investors in the past.

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What is halal investment?

Halal is an Arabic term meaning “permitted” and stipulating that:

  • Transactions cannot involve “riba” (interest).
  • Investments must not be made in “haram” (unlawful) assets or commodities such as pork products, alcohol or military equipment, among others.
  • Investments cannot be made based on “gharar”, which has been described as “highly uncertain transactions or transactions that run contrary to the idea of certainty and transparency in business”.

“Halal investment is basically managing your money and finances in line with your faith,” Omar Shaikh, director of Islamic Finance Council UK (UKIFC), told Al Jazeera. “Muslims believe that earning money in a way which is halal is better than earning money (even if that is more) in a way that is harmful to society and against the morals of the religion.”

Umar Munshi, co-founder and managing director of Islamic finance group Ethis, said sharia compliance is key, but institutions and investors looking for ethical investments need to go even further to ensure a business is completely ethical.

“The actions of a business must not have a negative impact on society or the environment,” Munshi told Al Jazeera. “So it’s not only compliant, but refraining from having a negative impact. Investing in a tobacco company, for example, may be sharia compliant, but it’s not good for society.”

How does halal investment work?

One example of halal investment is Islamic business financing, which works using new models of profit-sharing, sharia-compliant insurance and sukuk, an Islamic financial certificate that represents a share of ownership.

Unlike with conventional bonds – a form of IOU that investors can buy in order to receive interest payments – sukuk investors receive partial ownership of a business and then receive profit payments, which are generated over time. These payments are made instead of interest in order to ensure sharia compliancy.

“Islamic finance as a sector is barely 30 years old, with the past 15 years seeing the most development,” Shaikh from UKIFC said. “It takes time to educate and create awareness and as this has happened, more banks have focused on servicing the demand for halal investing. This in turn helps to create more products, which then creates more demand.”

Stock markets used to be the traditional modes of investment for many [Marcin Nowak/Anadolu via Getty Images]

A Goldman Sachs report published in December 2022 estimated that by 2075, five of the world’s 10 largest economies – India, Indonesia, Nigeria, Pakistan and Egypt – will have Muslim populations amounting to more than 850 million people.

As the population rises, so does its demand for financial products. According to the State of the Global Islamic Economy Report 2023, published by research group DinarStandard, some $25.9bn was invested into sharia-compliant investments in the financial year 2022-23, marking a 128 percent year-on-year growth.

“In general, it [halal investment] is on the rise. People are a lot more educated and more aware of how their dollar impacts the socioeconomic landscape globally,” said Siddiq Farid, co-founder of SmartCrowd, a real estate investment platform based in Dubai.

“They are a lot more cautious, too, hence leading to more ethical investing, which halal investing is a big component of. It’s on the rise, particularly around the younger generation. The millennials, they are a lot more aware socially. People realise exactly where their money is going and how it’s being used.”

An increase in opportunities for halal investing and their ease of access are also cited as reasons driving the rise in demand.

Israel’s war on Gaza and its impact

More recently, the rise in demand for halal investments has received an additional boost as consumers boycott brands seen as supporting Israel and its war on Gaza.

The war, which has seen more than 32,000 Palestinians killed by Israeli attacks in Gaza, has “adjusted” the mindset of these investors, Farid said.

“Halal investment has been increasing steadily and it has accelerated further in the past six months, mostly among millennials and people under 40,” he said.

“But in the past, it’s more of these people just looking for something halal. As long as it’s not haram, it’s fine. Now, there’s more awareness of not only halal, but halal aligned with values and faith. All these boycott movements have got people much more aware that something may be halal, but you might not necessarily want to use it, be associated with it or invest in it.”

bds
The Boycott, Divestment and Sanctions (BDS) movement has made many people consider where their money goes before they spend or invest it, say experts [Martin Pope/SOPA Images/LightRocket via Getty Images]

How has technology contributed to the rise of halal investing?

FinTech Magazine reported in December last year that while Muslims make up nearly a quarter of the world’s population, barely one percent of financial assets qualify as sharia compliant. This is set to change, say experts, with the arrival of “fintech” – financial technology that can make investing much more accessible for ordinary consumers and individual investors.

“Muslims are generally not as well educated when it comes to investing, and this is partly due to a lack of available options for them as Muslims. Even basic information pertaining to sharia-compliant investments is often not available to most of the Muslim population,” said Ibrahim Khan, co-founder of the online financial platform Islamic Finance Guru, in an interview with FinTech Magazine.

However, the rise of social media has contributed to an increased awareness and significant growth in sharia-compliant finance. In addition, fintech has made halal investment options, which are often much more convenient and easy to use with a smartphone or laptop, more accessible.

Consultancy group McKinsey & Company published research in January this year showing that “revenues in the fintech industry are expected to grow almost three times faster than those in the traditional banking sector between 2023 and 2028”.

“Your phone is often physically the closest thing to you. Fintechs are able to start from this paradigm and build solutions that are efficient and enhance transparency and choice for retail customers. This is where a lot of the action is at. Many banks are now creating fintech-based solutions or acquiring fintech players,” said UKIFC’s Shaikh.

Munshi added the selling point for fintechs is the age of the target audience.

“The younger generation is more open to investing online,” said Munshi, whose company operates an online platform and community for alternative finance and investment opportunities.

The same research by McKinsey & Company showed that the fintech industry raised record capital in the second half of the 2010s. Venture capital funding grew from $19.4bn in 2015 to $33.3bn in 2020, a 17 percent year-over-year increase.

As of July 2023, publicly traded fintech companies had a combined market capitalisation of $550bn, double that of 2019, the research said.

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Amazon completes $4B Anthropic investment to advance generative AI – About Amazon

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Amazon concludes $4 billion investment in Anthropic.

Customers of all sizes and industries are using Claude on Amazon Bedrock to reimagine user experiences, reinvent their businesses, and accelerate their generative AI journeys.

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The work Amazon and Anthropic are doing together to bring the most advanced generative artificial intelligence (generative AI) technologies to customers worldwide is only beginning. As part of a strategic collaborative agreement, we and Anthropic announced that Anthropic is using Amazon Web Services (AWS) as its primary cloud provider for mission critical workloads, including safety research and future foundation model development. Anthropic will use AWS Trainium and Inferentia chips to build, train, and deploy its future models and has made a long-term commitment to provide AWS customers around the world with access to future generations of its foundation models on Amazon Bedrock, AWS’s fully managed service that provides secure, easy access to the industry’s widest choice of high-performing, fully managed foundation models (FMs), along with the most compelling set of features (including best-in-class retrieval augmented generation, guardrails, model evaluation, and AI-powered agents) that help customers build highly-capable, cost-effective, low latency generative AI applications.

Earlier this month, we announced access to the most powerful Anthropic AI models on Amazon Bedrock. The Claude 3 family of models demonstrate advanced intelligence, near-human levels of responsiveness, improved steerability and accuracy, and new vision capabilities. Industry benchmarks show that Claude 3 Opus, the most intelligent of the model family, has set a new standard, outperforming other models available today—including OpenAI’s GPT-4—in the areas of reasoning, math, and coding.

“We have a notable history with Anthropic, together helping organizations of all sizes around the world to deploy advanced generative artificial intelligence applications across their organizations,” said Dr. Swami Sivasubramanian, vice president of Data and AI at AWS. “Anthropic’s visionary work with generative AI, most recently the introduction of its state-of-the art Claude 3 family of models, combined with Amazon’s best-in-class infrastructure like AWS Tranium and managed services like Amazon Bedrock further unlocks exciting opportunities for customers to quickly, securely, and responsibly innovate with generative AI. Generative AI is poised to be the most transformational technology of our time, and we believe our strategic collaboration with Anthropic will further improve our customers’ experiences, and look forward to what’s next.”

Global organizations of all sizes, across virtually every industry, are already using Amazon Bedrock to build their generative AI applications with Anthropic’s Claude AI. They include ADP, Amdocs, Bridgewater Associates, Broadridge, CelcomDigi, Clariant, Cloudera, Dana-Farber Cancer Institute, Degas Ltd., Delta Air Lines, Druva, Enverus, Genesys, Genomics England, GoDaddy, Happy Fox, Intuit, KT, LivTech, Lonely Planet, LexisNexis Legal & Professional, M1 Finance, Netsmart, Nexxiot, Parsyl, Perplexity AI, Pfizer, the PGA TOUR, Proto Hologram, Ricoh USA, Rocket Companies, and Siemens.

To further help speed the adoption of advanced generative AI technologies, AWS, Anthropic, and Accenture recently announced that they are coming together to help organizations—especially those in highly-regulated industries including healthcare, public sector, banking, and insurance—responsibly adopt and scale generative AI solutions. Through this collaboration, organizations will gain access to best-in-class models from Anthropic, a broad set of capabilities only available on Amazon Bedrock, and industry expertise from Accenture, Anthropic, and AWS to help them build and scale generative AI applications that are customized for their specific use cases.

Deepening our commitment to advancing generative AI, today we have an update on the announcement we made to invest up to $4 billion in Anthropic for a minority ownership position in the company. Last September, we made an initial investment of $1.25 billion. Today, we made our additional $2.75 billion investment, bringing our total investment in Anthropic to $4 billion. To learn more about the broader strategic collaboration between Amazon and Anthropic, of which this investment is one part, check out the stories below:

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