Title: Taking the guesswork out of portfolio management
1Segregated Funds Mutual Funds A Taxation
Comparison
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2Agenda
- Segregated Funds Mutual Funds a taxation
comparison - Distributions in a down market
- Taxation of guarantee top ups
3Similarities
- Fund manager buys and sells securities
- Unit value fluctuates with the underlying
securities
4MORE Similarities
- Fund distributes all taxable income and capital
gains realized to unitholders - Interest, dividends, capital gains flow through
5Differences
- Treatment of capital losses realized by the fund
- All taxable amounts reported on T3 for segregated
funds
6MORE Differences
- Distributions versus allocations
- Change in unit value after distributions and/or
allocations
7Treatment of Capital Losses
8In a mutual fund
- Gains 2,000
- Losses 3,000
- Distribution to investor 0
- 1,000 losses carried forward by the fund
9In a segregated fund
- Gains 2,000
- Losses 3,000
- Allocation to investor 2,000 gain 3,000
loss - 1,000 losses carried forward (or back) by the
investor
10Redemptions
11Disposing of units before the distribution date
- Mutual Funds
- Does not receive distributions
- Capital gain/loss realized on disposition is not
shown on the T3
12Disposing of units before the distribution date
- Mutual Funds
- Investor must calculate gain/loss and report on
tax return
13Disposing of units before the distribution date
- Mutual Funds
- Fund reports details of disposition to CRA on
T5008
14Disposing of units before the allocation date
- Segregated Funds
- Allocation realized as of the date of disposition
- Capital gain/loss realized on disposition is
shown on T3
15Disposing of units before the allocation date
- Segregated Funds
- Acquisition fees are deemed to be capital losses
and are also reported on a T3
16Distribution and/or Allocation
17Mutual Fund distributions
- Must actually distribute income capital gains
- Investor can choose to receive distribution in
cash or reinvest in funds
18Mutual Fund distributions
- If reinvested, the investor is deemed to have
received the cash and then purchased additional
units
19Segregated Fund allocations
- Deemed to have distributed no need to actually
pay it out thus allocation - No additional units are purchased
20Segregated Fund allocations
- Allocations cannot be paid in cash like
distributions (must request withdrawal)
21The tax impact
- Both methods are ways to pass tax liability from
fund to investor - Does not affect fund returns or tax payable
- Both first reduce the distribution and/or
allocation by the expenses of the fund in the
order of the highest type of taxable income
22Changes in unit values
23In a mutual fund
- Unit value decreases after a distribution
24In a mutual fund
- The purchase of additional units returns each
investor back to the original total value held
before the distribution
25In a segregated fund
- Unit value remains the same after the allocation
26Distribution vs. Allocation
(100 x 5)/45 45X11
27Mutual Fund investors perception
- They received extra units equal to the taxable
amount - REALITY they traded in a dime for two nickels
28Segregated Fund investors perception
- They only get the tax slip
- REALITY and they get to keep the dime
29Distribution timing is everything
Investor A Investor B
Date Dec. 28 Jan. 2
Investment 5,000 5,000
Unit value 50 45
units 100 111
Dec. 31 distr. 5/unit -
Unit value on Dec. 31 45/unit -
New units 11 -
Market value 5,000 5,000
Taxable income 500 -
(100 x 5)/45
30Common questions
- Why is there tax to pay when my value has gone
down? - Manager often forced to sell some stocks
- Unrealized gains become taxable when underlying
investments are sold
31Common misunderstanding
- Dont confuse fund value with taxable income
- Taxable income applies to the investor or fund
manager activity
32Investor activity an example
- Investor buys 100
- Investor sells 180
- Investors capital gain equal to 80
33Fund manager activity an example
- Fund manager buys at 60
- Investor buys at 100
- Value of the investor purchased units decreases
to 70 - Fund manager sells at 70
- Capital gains distributed of 10
34Taxation of Guarantee Payments
35Top ups Registered contracts
- Taxable as RRSP/RRIF income when it is paid out
of the contract
36Top ups Non-registered contracts
- Taxable as capital gain when paid
37Top ups Non-registered contracts
- Capital losses, if applicable, will be applied
against capital gains
38Lets look at an example
- Non-registered
- 1. Initial investment 100,000
- 2. Guarantee 100,000
- 3. Market value 80,000
- Top-up gain (3-2) 20,000
- Capital loss (3-1) (20,000)
- Total taxable amount 0
39Lets look at another example
- Non-registered
- 1. Initial investment 100,000
- 2. Guarantee 140,000
- 3. Market value 130,000
- Top-up gain (3-2) 10,000
- Capital gain (3-1) 30,000
- Total capital gain 40,000
40Mutual Fund Corporations (Manulife Corporate
Classes)
41Tax efficiency
- Interest Foreign Income
- Ordinary Dividends
- Capital Gains Dividends
42Tax efficiency
- Corporations investing in Corporations
- Tax free fund switches
43Interest Foreign Income
- A number of expenses, deductions are first
applied against this type of income - Balance, if any, taxed within the corporation
- Taxes may be reduced by foreign tax credits, if
any - After-tax earnings may be distributed as ordinary
dividends
44Ordinary Dividends
- Flow through to shareholders
- Grossed up with dividend tax credit
45Capital Gains Dividends
- Reduced by capital losses of all share classes
- Reduced by CGRM for those leaving Corp
Capital Gains Refund Mechanism
46Capital Gains Dividends
- Balance flows through to shareholders
- Treated as capital gains
47Tax-Free Fund Switching
- Each fund is a class of shares of a multi-class
Mutual Fund Corporation - Moving between share classes (funds) doesnt
trigger tax to investor - However, liquidation of underlying assets to do
the transfer may cause flow through of capital
gains dividends - Cant offset taxable gains with CGRM for those
who havent left corporation
48Taxation of Manulife Corporate Classes
- Proactive Tax management
- Tax expert assigned
- Tax-free, DSC-free switching between multiple
managers
49Educate your clients
50Important notes
Manulife Funds and Manulife Corporate Classes are
managed by Manulife Mutual Funds, a division of
Elliott Page Limited. Manulife Investments is
the brand name identifying the personal wealth
management lines of business offered by Manulife
Financial (The Manufacturers Life Insurance
Company) and its subsidiaries in
Canada. Manulife and the block design are
registered service marks and trademarks of The
Manufacturers Life Insurance Company and are used
by it and its affiliates including Manulife
Financial Corporation.
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