***

Tax Risk
In determining its income for tax purposes, each ETF will treat gains or losses on the disposition of securities in its
Common Share Portfolio under its Initial Forward Documents as capital gains and losses. The CRA’s practice is not
to grant advance income tax rulings on the characterization of items as capital gains or income and no advance
income tax ruling has been requested or obtained.
If, contrary to the advice of counsel to the ETFs or as a result of a change of law, upon physical settlement of the
Initial Forward Documents the character and timing of the gain under the Initial Forward Documents were other
than a capital gain on the sale of the securities thereunder, after-tax returns to Unitholders could be reduced.
It is anticipated that each ETF will qualify at all times as a “mutual fund trust” within the meaning of the Tax Act.
For an ETF to qualify as a “mutual fund trust,” it must comply on a continuous basis with certain requirements
relating to the qualification of its Units for distribution to the public, the number of Unitholders of the ETF and the
dispersal of ownership of its Units. Each ETF has or intends to make an election in its first tax return so that it will
qualify under the Tax Act as a mutual fund trust from the commencement of its first taxation year. In the event an
ETF were not to qualify as a mutual fund trust under the Tax Act at all times, there may be adverse tax
consequences to Unitholders.
Currently, a trust will be deemed not to be a mutual fund trust if it is established or maintained primarily for the
benefit of non-residents unless, at that time, all or substantially all of its property is property other than “taxable
Canadian property” as defined in the Tax Act. The “at that time” requirement was added to the Tax Act in 2007.
Tax Amendments released on September 16, 2004 propose that a trust would cease to qualify as a mutual fund trust
for purposes of the Tax Act if, at any time after 2004, the fair market value of all units held by non-residents or
partnerships which are not Canadian partnerships for the purpose of the Tax Act is more than 50% of the fair market
value of all issued and outstanding units unless no more than 10% (based on fair market value) of the trust’s
property is at any time taxable Canadian property within the meaning of the Tax Act and certain other types of
specified property. It is not clear whether the 2007 amendment noted above supersedes the Tax Amendments
released on September 16, 2004.
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If an ETF were to cease to qualify as a mutual fund trust, the income tax considerations as described under “Income
Tax Considerations” would in some respects be materially different. Neither current law nor the Tax Amendments
provide any means of rectifying a loss of mutual fund trust status.
Provided an ETF complies with its investment restrictions set forth under the heading “Investment Restrictions and
Practices”, no more than 10% of the fair market value of that ETF’s assets will at any time consist of taxable
Canadian property and such other specified property. As each ETF intends to continue to meet all other
requirements necessary to maintain its status as a mutual fund trust, the Manager does not anticipate that under
current law or these Tax Amendments (if enacted as proposed) any ETF would lose its mutual fund trust status.
There can be no assurance that Canadian federal and provincial income tax laws respecting the treatment of mutual
fund trusts will not be changed in a manner that adversely affects the Unitholders of an ETF.
The Tax Act contains rules concerning the taxation of publicly traded Canadian trusts and partnerships that own
certain types of property defined as “non-portfolio property.” A trust that is subject to these rules is subject to trust
level taxation, at rates comparable to those that apply to corporations, on the trust’s income earned from “nonportfolio
property” to the extent that such income is distributed to its unitholders. These rules should not impose any
tax on the ETFs since the ETFs are not expected to have any income from “non-portfolio property.” If these rules
apply to the ETFs, the after-tax return to Unitholders could be reduced, particularly in the case of a Unitholder who
is exempt from tax under the Tax Act or is a non-resident of Canada.
On October 31, 2003, the Department of Finance announced a Tax Amendment relating to the deductibility of losses
under the Tax Act. Under this Tax Amendment, a taxpayer will be considered to have a loss from a business or
property for a taxation year only if, in that year, it is reasonable to assume that the taxpayer will realize a cumulative
profit from the business or property during the time that the taxpayer has carried on, or can reasonably be expected
to carry on, the business or has held, or can reasonably be expected to hold, the property. Profit, for this purpose,
does not include capital gains or capital losses. On February 23, 2005, the Minister of Finance (Canada) announced
that a more modest legislative initiative to replace the Tax Amendment of October 31, 2003 would be released. No
such legislative proposal has publicly been released to date. If such legislative proposal were to apply to deny
deductions that would otherwise reduce an ETF’s taxable income, after-tax returns to Unitholders would be reduced
as a result.

Let’s say you think the market will be up over the next 2 years. Instead of buying a 2x bull version of whatever indices, you short the 2x bear version. The leakage works more in your favour.

I looked at some charts for the bull/bear component and it definitely shows a difference over time and that difference widens as time marches on.