E Point Perfect

We’re living longer—here are two ways to boost retirement savings and income


The heart of the issue is the fact that 90% of private-sector employees in Canada no longer have access to employer-sponsored pensions, according to a recent report from the National Institute on Ageing at Toronto Metropolitan University. And increasing life expectancy complicates matters. The average 65-year-old in 2018, for example, was expected to live to the age of 86—two and a half years longer than the average 65-year-old in 1998 and four years longer than in 1980, according to data from Statistics Canada.

Some strategies for making retirement savings last include buying annuities, which pay a fixed income for life, or building a portfolio with income-generating assets, like dividend stocks. Annuities, however, require handing over your money to an insurance company, and until recently, low interest rates had made them fall out of favour. Portfolios of dividend stocks, meanwhile, can have unwelcome tax consequences. Dividends from foreign-owned companies, for example, are taxed at high tax rates in a non-registered account and are subject to withholding tax on the dividends in an RRSP. (Dividends from Canadian stocks, however, are eligible for a lower rate of tax in a non-registered account and have no withholding tax in an RRSP.) What else can investors consider?

Tax-efficient investing with call option ETFs

Investment firms have developed fresh strategies for generating income from investments. Harvest ETFs, for example, offers a range of tax-efficient equity-income ETFs that combine investments in dividend-producing equities with a form of options trading known as a “covered call.”

Here’s how these call option ETFs work

Harvest’s equity-income funds are made up of investments in carefully selected large-cap companies that are leaders in their industry. Harvest fund managers then sell—or “write”— a “call” on portions of the share blocks they hold.

A call is basically a contract between a seller and the buyer that gives the buyer an option to buy a block of shares on a specific future date for a pre-agreed price. The buyer of the call pays a fee to acquire the option, anticipating that the price of the shares will rise higher than the pre-agreed “strike price.” If they’re right, they make a profit by buying the shares at the lower predetermined price and then reselling the shares.

The seller, meanwhile, benefits in two ways. First, if the share price doesn’t increase, the buyer has no incentive to exercise their option. So, the seller keeps the shares and pockets the fee charged for the call option. If they sell the shares, they profit on the pre-agreed strike price—plus the initial fee paid for the option.

There are critics who argue that covered-call options sacrifice capital growth in favour of generating income, which may be true if the stock price keeps rising. But that can be a net positive, depending on an investor’s goals.

In the case of Harvest ETFs’ equity income ETFs, it can be a worthwhile trade-off. The earnings generated by a covered-call strategy generate a premium on top of the income from dividend payments. Better yet, the portion of distributions to ETF holders from the covered-call strategy is treated as capital gains, which are taxed at half the rate of income in a non-registered account—just the kind of incentives an investor looking for cash flow wants to consider when building their plan. In an RRSP account, covered calls written on Canadian and foreign stocks are tax-deferred and have no withholding tax.


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