The MacMillan family, high-net-worth clients in British Columbia, have a concentrated position in a publicly traded tech company they founded. This holding represents 60% of their $15 million liquid portfolio and has a very low adjusted cost base (ACB). Their financial advisor has proposed a strategy to diversify the portfolio while managing capital gains tax. Which of the following strategies is most suitable for their situation?

Question: The MacMillan family, high-net-worth clients in British Columbia, have a concentrated position in a publicly traded tech company they founded. This holding represents 60% of their $15 million liquid portfolio and has a very low adjusted cost base (ACB). Their financial advisor has proposed a strategy to diversify the portfolio while managing capital gains tax. Which of the following strategies is most suitable for their situation?

Answer options:

• Sell a significant portion of the tech stock immediately, despite the tax implications, to achieve diversification quickly and reduce idiosyncratic risk. ✅ Implement an 'exchange fund' or 'forward contract' strategy, if available and appropriate, to defer or manage the capital gains while diversifying.
• Retain the entire tech stock holding, arguing that its historical performance and liquidity outweigh the concentration risk, and invest new capital into diversified assets.
• Borrow against the tech stock holding to invest in diversified assets, thereby maintaining their ownership while achieving some diversification through leverage.

Correct answer: Implement an 'exchange fund' or 'forward contract' strategy, if available and appropriate, to defer or manage the capital gains while diversifying.

Explanation: For HNW clients with concentrated, low-ACB positions, strategies like exchange funds or forward contracts can defer or mitigate capital gains taxes while achieving diversification, which is a key concern in managing such portfolios. Selling immediately would trigger significant taxable gains, and borrowing against it introduces leverage risk.