By Dale Roberts, CuttheCrapInvesting

Special to the Financial Independence Hub

The week just completed was budget week in Canada. And government finances certainly get most of the attention and most of the ink. But there were some investment issues that made it into Budget 2019. Not the larger societal issue of Canadians paying the highest mutual fund fees in the developed world combined with the standard and unscrupulous and unethical practices of the typical financial ‘advisor’ in Canada.

Nope, this made it into the budget. From a post on holypotato.net and John Robertson the author of The Value of Simple:

The derivative transaction mention means they will target total return ETFs such as Horizons’ TSX 60 Total Return (TRI) index ETF. Here’s the link to HXT, which replicates the TSX 60 by way of swaps. These funds are derivative based and they can be incredibly tax efficient. They remove the funds’ income. From Dan Bortolotti in this MoneySense article…

There are several advantages to building an ETF with a swap rather than holding the stocks or bonds directly. The first is tax-efficiency. The most important advantage of swap-based ETFs is their potential to defer or reduce taxes. As we’ve noted, these ETFs do not pay dividends or interest, which means you won’t be taxed on any income as long as you hold your units. All of the gains in the fund are considered capital gains, which are not taxable until you eventually sell the holding. And even then, capital gains are taxed at only half the rate of regular interest income and foreign dividends. (Canadian dividends enjoy favourable tax treatment too, but for high-income earners, capital gains are still taxed at a lower rate.)

And this ETF allows Canadians to invest at an incredibly low MER of just .03% with rebate. Horizons offers a suite of total return funds that includes US and International stock indices plus Canadian and US bonds. One could build a tax-efficient portfolio. [Editor’s Note: The chart shown at the top of the Hub version of this blog shows a Horizon bond ETF that operates along similar principles.]

Eat the rich investors

There is almost $1.9 billion in the HXT. There is well over $1.6 trillion in Canadian mutual funds. Now certainly not all of those funds are crap, but most of ’em are quite poor due to average fees in the area of 2.2% annual. Of course couch potato investors will know that passive low fee index investing drastically outperforms high fee actively managed funds over longer periods.

So instead of going after the 2.2% fee junk, they go after the .03% offering.

I’d estimate that the amount that Canadians pay and lose needlessly to high fees is in the range of $20,000,000,000 or more annually. Yes that’s $20 billion. That’s massive. It’s so massive it’s the size of our annual deficit projections. Ha. I’m not sure that picking up some tax scraps to the tune of tens of millions of dollars from swap based funds is going to close the deficit gap. Continue Reading…