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By default, the Horizons ETFs are generally regarded under U.S. tax law as a corporation. As a result of a Canadian investment fund being regarded as a default corporation by the IRS, investors who own Canadian investment funds and who file U.S. tax returns will generally be considered to be holders of a “Passive Foreign Investment Company” (PFIC). Note that all U.S. citizens and green card holders are required to file a U.S. tax return even if they are residents of Canada or another country. Other Canadian residents with significant ties to the U.S. may also be required to file U.S. tax returns.
A PFIC is defined under U.S. tax rules. PFIC rules are intended to prevent U.S. taxpayers from securing preferential tax treatment, such as tax deferral, from investing in foreign securities in comparison with U.S. domestic securities. “Passive” is not meant to reflect on the investment strategy of the ETF: both active and passive ETFs managed by Horizons ETFs can be “Passive” for this purpose.
To help investors who file U.S. tax returns avoid the negative consequences of owning a PFIC (see below), Horizons ETFs has commenced providing PFIC Annual Information Statements for many of its funds.
This allows U.S. taxpayers to elect to treat these ETFs as “Qualified Electing Funds” (QEFs) on their U.S. tax returns. This election gives U.S. investors access to capital gains tax rates on their holdings of these funds.
Each year, U.S. taxpayers must report each PFIC that was held for any portion of the tax year on a separate IRS Form 8621. On this form, taxpayers may make the mark-to-market election or the “Qualified Electing Fund” (QEF) election. There are also various supplementary elections that are beyond the scope of these materials. Annual IRS Form 8621 reporting is required for each PFIC that is directly or indirectly held by the investor, regardless of which election is made. However, it should be noted that an investor with indirect exposure through a PFIC to its underlying PFIC(s) may not be required to include in income the distribution from the lower-tier fund pursuent to IRC 1293(c).
Under the mark-to-market election, investors report all income and gains (both realized and unrealized) each year.
Under the QEF election, investors report their pro-rata share of the fund’s earned income for U.S. tax purposes. Investors also receive an increase to their tax cost basis in units of the funds, to correspond with amounts included in income under the QEF election.
The PFIC reporting from Horizons ETFs provides investors with information required to file a QEF election. In certain situations, such as cases where units of a fund decline in value during a tax year, other elections may be more advantageous. Investors should consult with a qualified U.S. tax professional for guidance on which election is most advantageous for each fund, taking into account statutory restrictions on revoking elections in subsequent tax years.
Horizons ETFs has elected an initial reporting period for U.S. tax information for QEF election purposes of May 1, 2015, through April 30, 2016. That information would be used by a U.S. Person when filing their 2016 income tax return in April 2017.
For each PFIC, a tax preparer will require the following: 1) the PFIC Annual Information Statement (AIS) for the fund provided by Horizons ETFs; and 2) account statements for the tax year provided by the tax payer’s investment dealer.
The AIS will provide the pro-rata share of the fund’s ordinary earnings and net capital gain per unit per day.
To calculate one’s individual amounts for a QEF election, you will multiply the number of unit days you held the fund (including weekends) by the pro-rata amounts on the AIS.
To calculate the number of unit days, you will multiply the number of units held by the number of days those units were held during the tax year. For example, for an account that held 100 units of a fund for the full year (i.e. 365 days), the number of unit days would be 100 x 365 = 36,500. If those units were held for 180 days, the number of unit days would be 100 x 180 = 18,000. This value would then be multiplied by the pro-rata values on the AIS and reported on IRS Form 8621.
If the number of units changes over the course of the year, the unit days calculation should be adjusted accordingly. For example, consider an account that starts the year with 100 units, then 65 days into the year, another 100 units are purchased (increasing the total number of units to 200). If no other changes are made for the remaining 300 days of the year, the unit days calculation would be: (100 units x 65 days) + (200 units x 300 days) = 66,500 unit days. In counting days, the day that units of a fund are purchased does not count, but the day that the units are sold does count.
Some ETFs have their own daily pro-rata amount and may have indirect exposure to additional ETFs that are PFICs (these are noted with “Please refer to the specific statement for indirect investment allocations.”) and the pro-rata amounts for those are referenced.
While the lower-tier fund PFIC factor information is provided, it is picked up proportionately by the top fund by series. Your tax advisor should be able to compare the factors provided and determine the overall PFIC income inclusion rate applicable to you.
When an investor makes a QEF election for his investment in a PFIC, he should over the lifetime of his investment (from date of purchase to date of disposal) not include in his taxable income any more income (or loss) that he recognizes ‘economically’. For example if an investor purchases 10 units of PFIC A for $20 per unit, and sells them 5 years later at $22 per unit his economic gain is: 10 x (22 - 20) = $20. The amount he should pay tax on is also $20. This should not change if PFIC A is also invested in PFIC B, and the investor makes a QEF election for PFIC B.
Investor purchases 10 units of PFIC A for $20 per unit. PFIC A has 10,000 units outstanding. In PFIC A’s portfolio of investments is PFIC B. PFIC A owns 1,000 units of PFIC B until June 30, when it sold 500 units (at a gain).
In year 1 of Investor’s investment: PFIC A reports Ordinary Earnings of $2 per unit and Net Capital Gains of $3 per unit. It makes no distributions. PFIC B reports Ordinary Earnings of $8 per unit and Net Capital Gain of $4 per unit. It makes a distribution of $3 per unit on July 30.
Investor would include in his US personal tax filings $2 x 10 + $3 x 10 + $8 x (750**/10,000) x 10 + $4 x ((750**/10,000) x 10) = $20 + $30 + $6 + $3 = $61. However since PFIC B made a distribution to PFIC A (which was included in PFIC A income) pursuant to IRC 1293(c) Investor may be able to reduce income inclusion by $3 x (500/10,000) x 10 = $1.5. Taxable Includable income is then $59 (rounded).
(**750 represents 1,000 units for ½ year and 500 units for ½ year)
Investor adjusts his tax basis in his investment from $200 to $259.
In year 2 (January 1) investor sells his investment for $22 per unit or $220. Economically he made $20. His tax inclusion for the year is $220 - $259 = a loss of $39. Add that $39 loss to prior year taxable income of $59 represents an overall taxable income of $20 over two year.
Investor may make an election to defer payment of tax until he receives distributions or makes a disposal.
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Horizons ETFs is a Member of Mirae Asset Global Investments. Commissions, trailing commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by AlphaPro Management Inc. and Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.
The Horizons Exchange Traded Products consist of the Horizons Index ETFs ("Index ETFs"), 2x Daily Bull and -2x Daily Bear ETFs ("2x Daily ETFs"), Inverse ETFs ("Inverse ETFs"), VIX ETFs (defined below) and active ETFs. The 2x Daily ETFs and certain other Horizons Exchange Traded Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These Horizons Exchange Traded Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, which, where applicable, are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or -200% of the performance of a specified underlying index, commodity or benchmark (the "Target") for a single day. Each Index ETF or Inverse ETF seeks a return that is 100% or -100%, respectively, of the performance of a Target. Due to the compounding of daily returns, a 2x Daily ETF's or Inverse ETF's returns over periods other than one day will likely differ in amount and possibly direction from the performance of their respective Target(s) for the same period. The Horizons Exchange Traded Products whose Target is the S&P 500 VIX Short-Term Futures Index™ (the "VIX ETFs"), one of which is a 2x Daily ETF and one of which is an Index ETF, as described in their prospectus, are speculative investment tools that are not conventional investments. The VIX ETFs' Target is highly volatile. As a result, the VIX ETFs are not generally viewed as stand-alone long-term investments. Historically, the VIX ETFs' Target has tended to revert to a historical mean. As a result, the performance of the VIX ETFs' Target is expected to be negative over the longer term and neither the VIX ETFs nor their Target are expected to have positive long term performance. Investors should monitor their holdings, as frequently as daily, to ensure that they remain consistent with their investment strategies.
*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.
The EURO STOXX 50® Futures Roll Index (Total Return) is the intellectual property (including registered trademarks) of STOXX Limited, Zurich, Switzerland (“STOXX”), Deutsche Börse Group or their licensors, which is used under license. Horizons EURO STOXX 50® Index ETF is neither sponsored nor promoted, distributed or in any other manner supported by STOXX, Deutsche Börse Group or their licensors, research partners or data providers and STOXX, Deutsche Börse Group and their licensors, research partners or data providers do not give any warranty, and exclude any liability (whether in negligence or otherwise) with respect thereto generally or specifically in relation to any errors, omissions or interruptions in the relevant index or its data.
"Standard & Poor's®" and "S&P®" are registered trademarks of Standard and Poor's® Financial Services LLC ("S&P"), "TSX®" is a registered trademark of TSX Inc.("TSX"), and Morningstar® is a registered trademark of Morningstar Research Inc. ("Morningstar"). These marks have been licensed for use by AlphaPro Management Inc. and Horizons ETFs Management (Canada) Inc. where applicable. The Horizons Exchange Traded Products are not sponsored, endorsed, sold, or promoted by S&P, TSX, or Morningstar and their affiliated companies and none of these parties make any representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in the Horizons Exchange Traded Products. All trademarks/service marks are registered by their respective owners. None of the owners thereof or any of their affiliates sponsor, endorse, sell, promote or make any representation regarding the advisability of investing in the Horizons Exchange Traded Products.
The mark and name “Hang Seng High Dividend Yield Index” (the “Index”) is proprietary to Hang Seng Data Services Limited (“HSDS”) which has licensed its compilation and publication to Hang Seng Indexes Company Limited (“HSIL”). HSIL and HSDS have agreed to the use of, and reference to, the Index by Horizons ETFs Management (Canada) Inc. (“the Issuer”) in connection with the Horizons China High Dividend Yield Index ETF (the “Product”). However, neither HSIL nor HSDS warrants, represents or guarantees to any person the accuracy or completeness of the Index, its computation or any information related thereto and no warranty, representation or guarantee of any kind whatsoever relating to the Index is given or may be implied. Neither HSIL nor HSDS accepts any responsibility or liability for any economic or other loss which may be directly or indirectly sustained by any person as a result of or in connection with the use of and/or reference to the Index by the Issuer in connection with the Product, or any inaccuracies, omissions or errors of HSIL in computing the Index. Any person dealing with the Product shall place no reliance whatsoever on HSIL and/or HSDS nor bring any claims or legal proceedings against HSIL and/or HSDS in any manner whatsoever. For the avoidance of doubt, this disclaimer does not create any contractual or quasi-contractual relationship between any broker or other person dealing with the Product and HSIL and/or HSDS and must not be construed to have created such relationship. Click here to read more
Horizons ETFs is committed to providing a respectful, welcoming and accessible environment for all persons with disabilities; treating all individuals in a way that allows them to maintain their dignity and independence. We are devoted to offering our services in a manner that is accessible to all clients.
We believe in integration and equal opportunity, which is why we are committed to a workplace that is accessible and enables our employees to participate fully. Our policies are designed to keep the recruitment, retention and development of talent impartial and barrier-free. Every employee is expected to contribute to creating and sustaining such a workplace. Horizons ETFs ensures that all individuals are aware of their rights and responsibilities to promote an accessible working environment for persons with disabilities.
Upon request, Horizons ETFs will provide a copy of the policy for those individuals requesting it, in accessible format that takes into account the person’s disability, if any. We welcome and appreciate feedback regarding this policy. To obtain a copy of the policy or to comment on its content, please contact our Human Resources department and the email provided below.
Mail: Horizons ETFs Management (Canada) Inc.
Attn: Human Resources Department
26 Wellington Street East, Suite 700
Toronto, Ontario, M5E 1S2