Registered Accounts, Distribution & Tax

The tax character of the distributions in the Harvest Diversified Monthly Income ETF (HDIF) can be a blend of income, including foreign income and/or dividends from taxable Canadian corporations and capital gains (less the expenses of the Harvest ETF) and may include return of capital (ROC).

HDIF will generally replicate the tax character of the underlying ETFs held in the portfolio. As the tax character of the monthly distributions is not known until after the year-end, we are unable to provide tax characteristics until the year in question is completed.

We note that the distributions are generally tax efficient for investors who hold outside of registered accounts. For more information about tax efficient distributions, please click here.

At Harvest ETFs, we generally use the term “tax efficient” to describe the income generated through our active & flexible covered call options strategy. Because premiums earned in the sale of call options is considered a capital gain and not income, the portion of our Equity Income ETFs’ cash distributions earned from call options is taxed at a more favourable rate than fixed income and non-Canadian dividends when those ETFs are held in non-registered accounts. Learn more here.

The income earned in an ETF and the tax implications of owning units of an ETF are subject to different tax impacts and will depend on whether the units are held in a registered account (such as an RRSP, RRIF, or TFSA) or a non-registered account.

Income earned through distributions from an ETF in a non-registered account:

An ETF that qualifies as a mutual fund trust generally earns dividend income, interest income and capital gains.

Dividend income can be in the form of eligible dividends, non-eligible dividends and foreign dividends (which are subject to withholding tax). The tax rules in Canada require a mutual fund trust to distribute out to unitholders the income generated in the ETF to ensure the ETF will not be liable for income taxes on any realized capital gains, dividends and interest and these rules apply to any mutual fund trust whether it is an ETF, Mutual Fund or Closed End Fund. As a result of this distribution mechanism, those who own units of an ETF will receive a distribution that will follow the tax character as determined in the ETF. For example, if the ETF earned capital gains, you as a unitholder will receive a distribution that will be taxed as a capital gain.

When an ETF distributes its income to unitholders the tax effect for unitholders will be as follows:

• 50% of a capital gain will be taxed at an individual’s marginal tax rate
• 100% of any interest income and foreign income will be taxed at the individual’s marginal tax rate
• Eligible dividends are usually eligible for a dividend tax credit.

Tax implications of buying and selling units in a non-registered account:

In addition to income distributed from an ETF, a unitholder may sell their units after the ETF has appreciated in value. In the event that units are sold at a value above cost, the capital gain will be reported in the year of the sale and 50% of the capital gain will be taxed at the individual’s marginal tax rate. There are times over the course of owning the units where the ETF paid a distribution that was characterized as return of capital (ROC). When this occurs the cost base of the units held by the unitholder will be reduced by the amount of ROC paid out by the fund.

For more information regarding tax considerations in the Harvest covered call ETFs see Tax considerations and covered call ETFs.

For the most recent summary of the Harvest ETFs distributions see Harvest ETFs distribution summary.

This article explains some of the differences between tax treatment of the cashflow, versus the cash flow that is generated.

The section entitled “Can you explain how your tax factors for distributions have been treated as ROC (Return of Capital) and are you just giving me my money back or “grinding” the net asset value?, explains the difference between cashflow and how that is treated as ROC for tax purposes even if the cashflow is generated by option premium.

Our distributions are not predicated on hot markets. We calculate the distribution in both up and down market scenarios to ensure the sustainability of our distributions. Covered call options can actually generate higher premiums during volatile periods, therefore our strategy is well suited to certain down market scenarios.

Our ETF distributions are currently sustainable – we make ongoing assessments. If the underlying stocks were to cut their dividends or if there was a sustained downtrend in the markets – we would have to reassess, but currently that is not the expectation or case.

We would encourage you to look at the distribution history of our equity income ETFs, which have stayed largely consistent over their histories.

We’ve endeavoured to put a number of pieces on our learning page located here.

A notional non-cash distribution is a special annual distribution that may be paid by Harvest ETFs at the end of the tax year which raises the Adjusted Cost Base (ACB) of the units of an ETF held in a non-registered account. There is no impact on the Net Asset Value of the ETF. You can learn more about a notional non-cash distribution here.

All Harvest ETFs are registered account eligible. They can be held in RRSPs, RRIFs, TFSAs, RESPs and others. Learn more about how these ETFs fit in registered and non-registered accounts.

Harvest Equity Income ETFs pay their distributions on a monthly basis. Each month Harvest announces the monthly distributions of these ETFs via a press release and on the TSX website. That press release includes the ex-dividend date for each month’s distributions as well as the payment date set for “on or about” a certain date, typically the 9th day after month end. The funds are available for brokerages to process as of that date and may arrive in a unitholder’s account on a different date.

Tax-loss harvesting is a strategy where investors sell securities at a loss to offset capital gains, thereby reducing taxable income. In volatile markets, this approach can be particularly advantageous due to increased opportunities to realize losses.

Key Considerations for Tax-Loss Harvesting in Volatile Markets:

• Identify Losses: Regularly review your portfolio to pinpoint investments that have declined in value.
• Offset Gains: Use realized losses to counterbalance capital gains from other investments, potentially lowering your tax liability.
• Avoid the Wash-Sale Rule: Be cautious of repurchasing the same or substantially identical security within 30 days before or after the sale, as this can disqualify the tax benefit.
• Reinvest Strategically: After selling a security at a loss, consider reinvesting in a similar, but not identical, asset to maintain your desired market exposure without violating wash-sale regulations.

At Harvest ETFs, we offer a range of ETFs that can serve as effective tools for tax-loss harvesting. Our funds are designed to provide diversified exposure across various sectors and strategies, including covered call options, which can enhance income potential. By incorporating Harvest ETFs into your tax-loss harvesting strategy, you can maintain market exposure while potentially improving your portfolio's tax efficiency.

For personalized advice tailored to your financial situation, we recommend consulting with a tax professional or financial advisor.

1. Systematic Withdrawal Plan (SWP)

• Tax-Deferred Accounts (RRSP/RRIF): In tax-deferred accounts, setting up a SWP can create steady income, especially in retirement. RRIFs have required minimum withdrawals that increase with age, which are fully taxable as ordinary income each year.
• Standard Accounts: In a taxable account, SWPs can also generate consistent cash flow. Withdrawals will be subject to capital gains tax on any appreciated assets sold, but only 50% of the gains are included in taxable income, which is generally more tax-efficient than the fully taxable RRIF withdrawals.

2. Dividend/Distribution-Only Withdrawal

• Tax-Deferred Accounts (RRSP/RRIF): In RRSPs and RRIFs, dividends and distributions grow tax-free until withdrawal. When withdrawn, the full amount (including reinvested distributions) is taxed as regular income.
• Standard Accounts: In a non-registered account, you can take dividends and distributions without selling your principal. Dividends from Canadian stocks receive a dividend tax credit, making them more tax-efficient than interest income, though foreign dividends are fully taxable.

3. Proportional Withdrawals

• Tax-Deferred Accounts (RRSP/RRIF): Proportional withdrawals allow you to take money from each asset in the account, keeping your portfolio balanced while meeting income needs. In RRIFs, this method ensures that required minimum withdrawals are met without selling disproportionately from one asset. Withdrawals are fully taxed as ordinary income.
• Standard Accounts: In a taxable account, proportional withdrawals are also possible but may trigger capital gains tax on any appreciated securities sold. This strategy is generally beneficial for maintaining portfolio allocation, though you’ll need to consider the tax implications for each asset.

4. Bucket Strategy

• Tax-Deferred Accounts (RRSP/RRIF): A bucket strategy divides your portfolio into short-term and long-term holdings, with short-term assets used to fund immediate withdrawals. Long-term assets remain invested, benefiting from tax-deferred growth. This strategy can help you avoid selling growth assets in down markets and allow you to meet RRIF minimums while maintaining exposure to growth.
• Standard Accounts: In a taxable account, the bucket approach is similar, allowing you to withdraw from safer, short-term investments and keep growth-focused assets compounding. Selling assets for short-term income may incur capital gains tax, but this can be minimized by strategically timing sales.

5. Total Return Withdrawal

• Tax-Deferred Accounts (RRSP/RRIF): Total return withdrawal involves withdrawing based on overall portfolio returns, drawing from both capital gains and income. In RRSPs and RRIFs, all withdrawals are taxed as regular income, so this approach allows you flexibility to adjust withdrawals based on needs while managing tax impact across years.
• Standard Accounts: In a taxable account, this method lets you draw from capital gains, dividends, and interest. Gains on appreciated assets are subject to capital gains tax, but strategically timing sales can help minimize the impact. This approach offers flexibility and can support tax efficiency by taking advantage of the lower inclusion rate on capital gains.

Key Takeaway:

• Tax-Deferred Accounts (RRSP/RRIF): Withdrawals are fully taxable as regular income, making it essential to plan around RRIF minimums, income needs, and tax brackets to minimize tax impact.
• Standard Accounts: Withdrawals trigger taxes on dividends, interest, and capital gains, but the structure of these taxes (especially the lower rate on capital gains and Canadian dividend tax credits) allows for more flexible, tax-efficient planning.

Disclaimer: The strategies outlined here are general in nature and may not be suitable for every investor’s unique tax situation. It’s important to consult a tax accountant or financial advisor for professional advice tailored to your individual circumstances, especially when planning withdrawals from tax-deferred and standard accounts.

Question: Today is listed as the record date, so if I own the ETF at the end of the day today, when can I expect the payment?

Answer: If you own the ETF as of the record date (today), you are entitled to the distribution. For Harvest ETFs, monthly distributions (cash dividends) are typically paid on the 9th of the month. Dealers will deposit the dividend into your account on or about this date, not on the record date.

You can find detailed dividend dates, including the ex-dividend date, record date, and payment date, in the latest distribution press release or on the monthly factsheet for each ETF. These details are also listed on the product pages on the Harvest ETFs website.

If you have selected DRIP for your monthly dividend, please click here for details about Distribution Reinvestment Plan (DRIP).

Where to Find the Information:

• Harvest ETFs Website: Navigate to the "Distributions" section on the official website (HarvestETFs.com) to view dividend payment schedules for each fund.
• Press Releases: Harvest ETFs publishes a monthly press release with dividend details, available at Harvest Portfolios Press Releases.
• Fund Factsheets: These documents, available on the website, provide up-to-date information about distributions.
• Mailing List: If you subscribe to the mailing list, you will receive announcements directly in your inbox on the same day they are published. You can subscribe here: Harvest Portfolios Subscribe.

Dealer Platforms: Brokers and investment platforms such as TD Direct Investing, BMO InvestorLine, and others often list dividend details for ETFs on each fund’s profile.

Dealers typically do not post dividends on the same day as the record date. The dividend is usually paid on the payment date (e.g., the 9th of the following month for Harvest ETFs). Dealers will deposit the dividend into your account on or about this date, not on the record date. Check with your dealer for their specific processing times.

The First Home Savings Account (FHSA) is a Canadian registered savings plan designed to help individuals save for their first home. It combines features of both a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP), offering tax benefits that make saving for a home more accessible.

Key Features for 2025:

1. Contribution Limits:
   • The annual contribution limit remains at $8,000.
   • The lifetime contribution limit is capped at $40,000.
   • Unused contribution room from a prior year can carry forward (only if you open an FHSA).
2. Eligibility:
   • Available to Canadian residents aged 18 to 71.
   • Must be a first-time homebuyer (you haven’t lived in a home you or your spouse/common-law partner owned in the current year or the previous four years).
3. Tax Advantages:
   • Contributions are tax-deductible, similar to an RRSP.
   • Investment growth (interest, dividends, capital gains) within the FHSA is tax-free.
   • Withdrawals for a qualifying home purchase are tax-free(like a TFSA).
4. Qualifying Home Purchase:
   • The funds must be used toward purchasing a primary residencein Canada.
   • You have 15 yearsfrom opening the account to use it for a home purchase or transfer it to your RRSP/RRIF tax-free.
5. Investment Options:
   • You can hold a variety of investments, including stocks, bonds, ETFs, mutual funds, and GICs, depending on your provider.
6. Unused Funds:
   • If you don’t purchase a home, you can transfer the funds to your RRSP/RRIFwithout affecting your RRSP contribution room.

Planning for 2025:

• Maximize Contributions Early: Contribute the full $8,000 at the start of the year to take advantage of tax-free growth.
• Leverage Carry-Forward Room: If you didn’t contribute the full $8,000 in 2024, you can carry forward the unused room to 2025.
• Combine Strategies: Use the FHSA alongside the Home Buyers’ Plan (HBP)for additional savings potential.
• Choose Low-Cost Investments: Consider ETFs or index funds to minimize fees and maximize growth potential.

Who Should Use an FHSA?

• Individuals saving for their first home who want to benefit from tax-deductible contributions and tax-free withdrawals.
• Canadians who prefer a flexible savings account that also allows transferring unused funds to their RRSP.

What is Return of Capital (ROC)?
Return of Capital (ROC) occurs when income distributed by an exchange traded fund (ETF) is less than its realized income. ROC occurs for many reasons; is generally prevalent in funds that pursue a stable income strategy; and can form an effective tax tool.

Return of Capital (ROC) is a tax characteristic of ETF income-based strategies.
Investors should know that ROC can serve as a valuable feature for certain ETFs, enabling them to maintain consistent cashflows to the unitholders. This is particularly beneficial for those seeking reliable income, as it allows distributions to remain stable even when the fund's earned income (dividends, interest, or realized capital gains) falls short of the distribution amount due to a timing mismatch of income received by the ETF and the income paid out to investors.

From a tax perspective, ROC is treated as a return of the investor's original capital, which means it is not immediately taxed as income. Instead, it reduces the Adjusted Cost Base (ACB) of the investor's holdings, deferring tax liability until the units are sold. While this deferral provides an initial tax advantage, the reduced ACB leads to a higher capital gain (or smaller capital loss) when the units are eventually disposed of.

Why Do ETFs Distribute ROC?
ROC forms part of an ETF’s distribution for several reasons, including a commitment to make consistent monthly distributions, strategic portfolio decisions, rebalancing activities and market conditions. These serve to make ROC distribution seemingly inescapable.

Distribution Policies:
Many ETFs aim to provide stable monthly distributions. When cash flows generated within the ETF do not perfectly align with the income needed for distributions, ROC may be included to maintain stability.
Portfolio Decisions: Strategic decisions by portfolio managers, such as buying back options in a covered call strategy, can lead to ROC in distributions. These decisions are often made to optimize returns for investors.

Portfolio Rebalancing:
The simple act of rebalancing a portfolio can result in ROC distribution, when a portfolio manager trims a position and distributes the capital gains to investors. Without getting into the technicalities, investors should know that by not liquidating the entire position, part of the gains from trimming will be treated as ROC.

Market Conditions:
Market volatility impacts the income generated through covered call strategies. For example, lower-than-expected volatility can result in reduced option premiums and when paired with the time mismatch of other income, may give rise to the use of ROC to meet distribution targets. Conversely, higher volatility may allow the manager to generate sufficient or even more than sufficient income needed to meet distribution targets.

The share of ROC in an ETF’s distribution can change over time and typically varies between 0% and 100%, depending on many factors including those we just explored. While the percentage of ROC in a distribution can fluctuate annually based on these factors, it is rare for distributions to consist of 100% ROC. Most ETFs aim to strike a balance between earned income (dividends, interest, capital gains) and ROC to provide tax-efficient and sustainable cash flows to investors.

Implications for Investors Receiving ROC
The tax implications of ROC differ based on account type:
Non-Registered Accounts:

• Tax Deferral: ROC is not taxed when received, offering an immediate tax deferral benefit.
• ACB Impact: ROC reduces the ACB of ETF units, potentially increasing capital gains (or reducing capital losses) when the units are sold.

Registered Accounts:

• No tax implications for investors holding ETFs in registered accounts such as RRSPs or TFSAs.

Considerations for ROC Distributions:
An assessment of a distribution and payment of it is based on a fund’s ability to generate the cashflow to pay such distributions. The cashflow generated varies depending on the ETF. Funds such as the Harvest Equity Income ETFs will generate dividends, (net of withholding taxes), option premiums from the covered call writing strategy and at times realized capital gains from rebalancing activities in a portfolio. Tax efficiency and value assessments are taken into consideration in portfolio management decisions. This can result in some portion of the distribution to be ROC, however the overall net asset value of the fund may not be impacted.
Portfolio Manager Oversight: At Harvest, portfolio managers regularly monitor distributions and may adjust payout amounts to align with market conditions and the funds’ distribution policies.
Tax Efficiency: Distributions that include ROC are managed carefully to balance tax efficiency and investor value without compromising the ETF’s net asset value (NAV).

FAQs About ROC
Why am I receiving part of my capital back?
ROC represents a deferral of tax until the units are sold. It can occur due to timing differences between cash generated within the fund and its taxable income under tax laws.

Does ROC mean the ETF is paying too much to investors?

Not necessarily. Consistent monthly distribution policies often lead to temporary mismatches between cash flow and taxable income. For example, an ETF may carry forward losses to offset taxable income in future years, resulting in ROC distributions.

Are Harvest ETFs generating sufficient cash flow to maintain distributions?

Harvest Equity Income ETFs aim to generate sufficient cash flow through dividends and their covered call strategy to cover distributions, fees, and expenses.

Conclusion

Understanding ROC in ETF distributions is essential for effective tax planning and investment management. While ROC offers tax deferral benefits, it impacts your ACB and future capital gains. Investors should regularly review their holdings and consider consulting a tax professional for personalized advice.