A Tax Efficient Investing Strategy | ETFs

June 27, 2022

By Harvest ETFs

Retirement IncomeTax efficient investing strategies are a key consideration for an investor, especially if you are an income-seeking investor with holdings in non-registered accounts. Calculating your monthly income from your high-yielding investment portfolio can feel nice until the tax man slaps you with a hefty bill. That tax can dramatically impact your income plans and the personal goals that income helps you achieve.

Dividend income and bond interest payments are taxed as income. Dividends from foreign holdings are taxed at the highest marginal rates and dividends from Canadians companies—in most cases—are eligible for the federal dividend tax credit. However, there is another form of investing that can generate more tax efficient income for investors.

A tax efficient ETF strategy for investors

Equity income ETFs can provide tax efficient income for investors, provided they generate some or most of their income from covered call strategies. These ETFs sell call options on a portion of their equity holdings to generate premiums which are then paid as an income distribution. You can find out more about the mechanics of covered calls here.

The tax efficiency of a covered call strategy is that the premiums generated by a covered call strategy are taxed as capital gains and therefore only 50% of that income is taxable.

It’s important to note that covered call strategies are not the only way equity income ETFs generate income. Many of their holdings may pay dividends, and that dividend income will be combined with the call option premium to create the full distribution. The dividend portion of the income distribution will still be taxed as income—though subject to the federal dividend tax credit if paid from eligible Canadian securities—while the covered call premium is taxed as capital gains.

Equity income ETF strategies vary significantly, with some portfolios generating their income solely from dividends, and others mainly from covered call premiums. Harvest equity income ETFs all use a covered call strategy to generate at least a portion of their income distribution.

Individual investors’ unique goals are key to assessing whether an ETF is worth investing in. Factors like the underlying portfolio of securities, annualized yield, and risk rating are among a host of crucial factors investors may want to consider. If an investor is looking for a more tax efficient source of investment income, however, they may want to consider the unique tax implications of an equity income ETF that uses covered call strategies.

For more on Harvest Equity Income ETFs click here.

You may also like…

Disclaimer

For Information Purposes Only. Commissions, management fees and expenses all may be associated with investing in HARVEST Exchange Traded Funds (managed by Harvest Portfolios Group Inc.) Please read the relevant prospectus before investing. The funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies. Tax, investment and all other decisions should be made with guidance from a qualified professional.

Certain statements in the Harvest Blog are forward looking Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or  “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.

Sign up to receive our monthly updates

SUBSCRIBE