44 Horizons ETFs are now corporate-class funds

Toronto-based Horizons ETFs Management (Canada) Inc. has fully reorganized 44 ETFs that use derivative arrangements into Horizons ETF Corp. — a newly created fund corporation.

The firm completed the reorganization in two stages: after close of business on Nov. 27, 2019, 29 ETFs from Horizons ETFs’ BetaPro and Commodity suites were reorganized; after close of business on Nov. 29, 15 ETFs from the firm’s Total Return Index suite were reorganized.

None of the investment objectives, names or ticker symbols of the ETFs have changed. The group of 29 ETFs began trading as corporate-class funds on Nov. 28 and the group of 15 ETFs began trading as corporate-class funds on Monday.

The 44 synthetic ETFs primarily use derivative arrangements to achieve their investment objectives — a methodology the Department of Finance targeted in its 2019 federal budget.

The 2019 budget proposed to disallow allocations of ordinary income to redeeming unitholders if the unitholders’ redemption proceeds are reduced by the allocation. This would apply to all mutual fund trusts for tax years beginning after March 18, 2019. The Department of Finance confirmed these intentions by releasing draft legislation on July 30. The comment period for the legislation ended Oct. 7.

If the synthetic ETFs continued to operate as they had prior to the reorganization after the 2019 tax year, doing so could have resulted in taxable distributions to the unitholders.

ETFs within a mutual fund corporation are not considered mutual fund trusts, meaning the so-called “allocation to redeemers” rule changes do not apply. Merging the ETFs into a new mutual fund corporation allows the ETFs to maintain their existing characteristics.

In an interview in August, Steve Hawkins, president and CEO of Horizons, said the merger would  create operational efficiencies and that none of the costs associated with the reorganization would be passed to unitholders.

The reorganization should not be a taxable event, so long as unitholders make the appropriate election under Section 85 of the Income Tax Act to exchange their units for shares of the new mutual fund corporation. Horizons said it will help unitholders file that election free of charge.

The 44 ETFs can be found here.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.