Covered Call ETF Distribution Type and Tax

I wish someone would buy this book for the folks at Questrade who take care of ETF distributions and tax slips.  This is especially true for covered call ETFs like those from Horizons (HEX, HEE, HEJ, ....) that offer distributions that are generally not eligible Canadian dividends.  If my 2011 taxes are any indication,  Questrade has been acting dumber and dumberer when it comes to classifying  those ETF distributions - rarely getting them in the right box the first time. This is important at tax time when distributions are put on your T5 or T3 slip, or both.  Even if the distributions are return of capital, those have to show up on your T3 slip on box 42.

Horizons has posted their annual distribution summary for their 2012 and these are summarized in the chart below.  Some ETF distributions are 100% return of capital (ROC) - no tax payable this year, but the adjusted cost base of the shares go down and you pay that in capital gains when you sell.  This is shown as the violet bars.  Click the chart to enlarge.

Many buyers would have expected higher capital gains as opposed to ROC, because the premiums earned on covered calls is taxed a capital gains - for example, last year HEX had no capital gains.

Investment decisions should not be made on the basis of tax treatment, but it can be a consideration.  After all, ROC is a great way to defer taxes to a later date and many ETFs, especially new growing ones, offer that.

But wait!  Here comes the Questrade Tax-mobile to the rescue!  Maybe they have a De Lorian with a flux capacitor too and can travel back to 2012 and fix my 2011 tax slips.