Information contained herein does not constitute or form part of any recommendation, offer or solicitation to buy, hold or sell any security, adopt any investment or portfolio strategy or purchase any other investment product or service. This material has been provided for informational purposes only and shall not be construed as investment and/or tax advice. This material is not tailored to the needs or circumstances of any specific investor and shall not be reproduced, redistributed, copied, published or transferred to any person without the express written consent of BlackRock, Inc. and/or its subsidiaries.
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As with most mutual funds, iShares ETFs distribute income and/or capital gains to unitholders. iShares ETFs may also pay distribution in the form of return of capital (“ROC”). Please check the individual fund product page on BlackRock.com/CA for specific distribution dates and tax information. For a brief and general discussion of different types of distribution and its tax implications, please also see below. -
A. Types of distribution that an iShares ETF may distribute are: interest and other income, foreign non-business income, Canadian dividends (eligible or ineligible), capital gains and/or ROC. Depending on the nature of investments of a particular iShares ETF, one or more types of the distribution may be received.
Interest income
Interest income is earned through depositing or lending money to others. Interest can be earned on investments such as guaranteed investment certificates (GICs), income payments from government or corporate bonds or T-bills, certain mutual funds, etc. Investors in an iShares ETF can earn interest income through their investment if the iShares ETF earns interest income through its underlying holdings and distributes this interest income to its investors.
Interest income is normally taxable at the individual’s marginal tax rates. These rates can be in excess of 50% for the highest income earners in some provinces. In order to avoid a tax deferral when earning interest, it is usually taxed on an accrual basis. That is to say, interest income is generally taxed as it is earned day by day, not upon ultimate receipt.
Canadian dividends
Individuals that invest in shares of Canadian corporations, either directly or through a mutual fund or ETF which holds shares of such Canadian corporations, can earn Canadian dividends. These dividends represent the distribution of corporate profits to the shareholders.
Recognizing that corporations already pay income tax on the profits they earn, dividends paid to shareholders can receive favourable tax treatment. This is achieved through a dividend gross up and dividend tax credit for individuals. Generally, dividends paid by Canadian public corporations will be considered eligible dividends while dividends paid by Canadian controlled private corporations are ineligible dividends. The effective tax rate of eligible dividends for individual investors is normally lower than that of ineligible dividends.
Foreign non-business income
Foreign non-business income is earned when an iShares ETF receives dividends from, or interest on, non-Canadian investments. Investors in an iShares ETF may earn foreign non-business income if the iShares ETF earns such income and distributes this foreign non-business income to its investors. They are fully taxable at an investor’s marginal tax rate. However, to the extent that the iShares ETF has paid foreign withholding tax on the foreign non-business income earned, the fund may designate gross foreign income earned and its associated foreign withholding tax paid to investors so that investors may be able to claim a foreign withholding tax credit when filing their own personal income tax returns.
Capital Gains
Capital gains represent the growth or increase in value realized on the sale of a capital asset such as a stock or a bond etc.
Capital gains distributed by an iShares ETF represent the net capital gains realized by the fund. Only 50% of capital gains realized are subject to tax.
ROC
Return of Capital (“ROC”) represents the amount of a distribution that is in excess of an iShares ETF’s earnings (income, dividends and capital gains). For tax purposes, ROC is essentially an investor’s own invested capital.
ROC is not taxable immediately in the year received, but reduces an investor’s Adjusted Cost Base (“ACB”) of a particular iShares ETF, which generally results in a larger capital gain or a smaller capital loss when the iShares ETF is sold. In the event ROC causes the ACB to be negative, the negative ROC will be required to be recognized as capital gains and ACB will be reset to zero. -
A. iShares ETFs may pay distributions received to unitholders in cash or may reinvest such distribution amount in the fund. Generally, net income (such as interest income, dividends, foreign income) received by the iShares ETFs are distributed to unitholders in cash and net realized capital gains are reinvested in the ETF.
Similar to mutual funds, reinvested distributions are reinvested on the unitholder's behalf in additional units of the fund. With iShares ETFs, immediately following a reinvested distribution, the number of units outstanding is consolidated so that the number of units held by investors is the same as before the capital gains distribution. As a result, unitholders of iShares ETFs will not see an increase in the number of units held, and will NOT see a change in the net asset value per unit. This is similar to the result from reinvested distribution received by a mutual fund.
For tax purposes, both cash distributions and reinvested distributions are taxable on the distribution received. However, reinvested distributions to an investor of an iShares ETF will increase the investor’s ACB of the iShares ETF by the amount of the reinvested distribution. This adjustment means that any gain realized on a subsequent sale of units will, in effect, be reduced by the amount of the reinvested distribution. In this way, you do not pay tax twice on the distribution.iShares ETF Mutual Fund Jan 1, 2015 - buy 1000 units at $50 Dec 31, 2015 - fund pays reinvested distribution of $1 per unit; price=$55 Jan 1, 2015 - buy 1000 units at $50 Dec 31, 2015 - fund pays reinvested distribution of $1 per unit; price=$54 ($55 - $1) Units 1,000 1,000 1,000 1018.5185 Book Value 50,000 51,000 50,000 51,000 Market Value 50,000 55,000 (1000x$55) 50,000 55,000 (1018.5185 x $54) Unrealized Gain (not taxed) $0 4,000 ($55,000 - $51,000) $0 4,000 ($55,000 - $51,000) Additional units from distribution n/a 0 n/a 18.5185 (1000 x $1/$54) Gross capital gains distribution subject to tax n/a $1,000 n/a $1,000
Note: From the above illustration, you can see the net effect is the same for both the iShares ETF and mutual fund for the book value, market value, unrealized gain and taxable amount of distribution although the end result is reached through a different process. -
A. All iShares ETFs that are offered under a prospectus in Canada (“Canadian iShares ETFs”) are RRSP, RRIF, RESP, and TFSA eligible. In addition, all Canadian iShares ETFs are qualified investments for Deferred Profit Sharing Plans (“DPSPs”) and Registered Disability Savings Plan (“RDSPs”).
Many of the iShares ETFs that trade on foreign exchanges may also be RRSP, RRIF, RESP, TFSA, DPSP and RDSP eligible. Please consult with your own broker or tax advisor regarding your personal circumstances. -
A. The iShares ETFs were established for the benefit of Canadian resident investors. However, if you are a non-Canadian resident investor in a Canadian iShares ETF, you will generally be subject to a 25% Canadian withholding tax on income distribution paid (excluding Return of Capital and capital gains) unless the tax treaty between your country of residency and Canada provides an exemption or a lower rate.
However, it is your broker that is responsible for applying Canadian withholding tax. Normally your broker will request certain tax documentation to determine the applicable withholding tax rate. Without proper tax documentation provided, a 25% withholding tax will generally be applied. However, you can file a tax return (Form NR7-R) to reclaim the over-withheld withholding tax from Canada Revenue Agency within 2 years after the end of the calendar year the withholding tax is remitted if you have sufficient documentation to prove that you are entitled to a lower rate. -
A. Your broker is also responsible for providing all required tax slips including T3 slips to you.
BlackRock Canada provides brokerage firms with the information that they need to prepare your T3 slips (such as the proportionate share of distributions attributable to dividends, income, capital gains, return of capital or foreign tax withheld per unit per fund) through Clearing and Depository Services Inc. (“CDS”). This is different from a typical mutual fund, where the mutual fund company maintains investor accounts and provides tax reporting directly to unitholders.
In terms of timing, BlackRock Canada normally targets sending tax factor information to CDS by the end of 3rd week of February following the end of a calendar year. An iShares ETF investor’s brokerage firm is required to provide investors with T3 slips normally by mid-March. -
A. BlackRock Canada or iShares ETFs do not maintain your ACB information. ACB information may be provided by investors’ brokerage firms. Investors should contact their brokerage firms for such information. -
A. Canadian individuals, corporations, trusts and partnerships who held specified foreign property with a total cost of more than $100,000 CDN any time during a taxation year must file Form T1135 unless certain exceptions are met.
Canadian iShares ETFs are not considered “specified foreign property”, hence, investors of Canadian iShares ETFs will not be required to report such investment on Form T1135, even if a Canadian iShares ETF itself invests in international securities. -
A. BlackRock Canada cannot provide tax advice. Investors requiring additional information should consult their own tax accountant or advisor, and/or contact Canada Revenue Agency (“CRA”) or visit the CRA website at http://www.cra-arc.gc.ca/.
