BlackRock Asset Management Canada Limited has announced changes to seven forward-using Canadian iShares ETFs in response to proposed federal taxation rules first introduced in conjunction with the 2013 Federal Budget.
If enacted as proposed, the amendments would eliminate the ability of investment funds to use forward agreements to convert fully-taxable ordinary income to capital gains (character conversion transactions). The proposed amendments generally apply to forward agreements entered into on or after the Budget date, so that in certain circumstances (generally depending on the term and notional amount of the forward agreement), forward agreements that existed prior to the Budget date, or replacements of such agreements that have a final settlement date that is before 2015, will be “grandfathered,” meaning that the proposed amendments will not apply to them.
The forward agreements (legacy forwards) of the forward-using iShares ETFs that were in effect as of the Budget date or, in the case of CYH, that replaced a forward agreement then in effect, are currently grandfathered. Accordingly, the new rules under the proposed amendments would not apply to the forward-using iShares ETFs during the term of the legacy forwards, provided that the legacy forwards do not exceed certain prescribed growth limits.
Read: Government extends transition time for character conversions
As previously announced, as a result of the initial announcement, each of the forward-using iShares ETFs has temporarily stopped accepting subscriptions, except in certain limited circumstances. The present changes will enable the forward-using iShares ETFs to resume operating as open-ended ETFs by accepting new subscriptions following their implementation while respecting the growth limits for forward agreements set out in the Proposed Amendments.
Changes will be made to six of the seven forward-using iShares ETFs: CHB, CSD, CAB, CBR, CVD and CYH, while CMF, the seventh affected fund, will be terminated.
- CHB: iShares Advantaged U.S. High Yield Bond Index Fund (CAD-Hedged)
- CSD: iShares Advantaged Short Duration High Income Fund
- CAB: iShares Advantaged Canadian Bond Index Fund
- CBR: iShares Broad Commodity Index Fund (CAD-Hedged)
- CVD: iShares Advantaged Convertible Bond Index Fund
- CYH: iShares Global Monthly Advantaged Dividend Index Fund
- CMF: iShares Managed Futures Index Fund
With respect to CHB and CSD, BlackRock Canada will change each fund’s investment strategy to pursue a new interim hybrid investment strategy. For CBR, CAB and CVD, their respective legacy forwards will be terminated and each fund will change its investment strategy to transition to investing in a portfolio of directly-held securities. CYH’s legacy forward expires in November 2013, in connection with which BlackRock Canada expects to change its investment strategy to invest in a portfolio of directly-held securities and to change the fund’s index.