Transcript Taking the guesswork out of portfolio management

Segregated Funds
& Mutual Funds –
A Taxation Comparison
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Agenda
 Segregated Funds & Mutual Funds – a
taxation comparison
 Distributions in a down market
 Taxation of guarantee top ups
Similarities
 Fund manager
buys and sells
securities
 Unit value
fluctuates with
the underlying
securities
MORE Similarities
 Fund distributes
all taxable
income and
capital gains
realized to
unitholders
 Interest,
dividends, capital
gains flow
through
Differences
 Treatment of
capital losses
realized by the
fund
 All taxable
amounts reported
on T3 for
segregated funds
MORE Differences
 Distributions
versus allocations
 Change in unit
value after
distributions
and/or allocations
Treatment of Capital
Losses
In a mutual fund
 Gains = $2,000
 Losses = $3,000
 Distribution to
investor = $0
 $1,000 losses
carried forward
by the fund
In 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
Redemptions
Disposing of units before the
distribution date
Mutual Funds
 Does not receive
distributions
 Capital gain/loss
realized on
disposition is not
shown on the T3
Disposing of units before the
distribution date
Mutual Funds
 Investor must
calculate
gain/loss and
report on tax
return
Disposing of units before the
distribution date
Mutual Funds
 Fund reports
details of
disposition to
CRA on T5008
Disposing 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
Disposing of units before the
allocation date
Segregated Funds
 Acquisition fees
are deemed to be
capital losses and
are also reported
on a T3
Distribution and/or
Allocation
Mutual Fund distributions
 Must actually
distribute income
& capital gains
 Investor can
choose to receive
distribution in
cash or reinvest
in funds
Mutual Fund distributions
 If reinvested, the
investor is
deemed to have
received the cash
and then
purchased
additional units
Segregated Fund allocations
 Deemed to have
distributed – no
need to actually
pay it out – thus
allocation
 No additional
units are
purchased
Segregated Fund allocations
 Allocations
cannot be paid in
cash like
distributions
(must request
withdrawal)
The 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
Changes in unit
values
In a mutual fund
 Unit value
decreases after
a distribution
In a mutual fund
 The purchase of
additional units
returns each
investor back to
the original total
value held before
the distribution
In a segregated fund
 Unit value
remains the
same after the
allocation
Distribution vs. Allocation
Mutual Fund Seg Fund
Date
Dec. 31
Dec. 31
Investment
$5,000
$5,000
Unit value
$50
$50
# units
100
100
$5/unit
$5/unit
Unit value on Dec. 31
$45/unit
New units
Market value
11*
$5,000**
$50
$5,000
T3 amount
$500
$500
Dec. 31 distr./alloc
*(100 x 5)/45
** $45X$11
Mutual Fund investor’s perception
 They received
extra units equal
to the taxable
amount
 REALITY – they
traded in a dime
for two nickels
Segregated Fund investor’s perception
 They only get the
tax slip
 REALITY – and
they get to keep
the dime
Distribution – timing is everything
Date
Investment
Unit value
# units
Dec. 31 distr.
Unit value on Dec. 31
New units
Market value
Taxable income
*(100 x 5)/45
Investor A
Dec. 28
$5,000
$50
100
$5/unit
$45/unit
11*
$5,000
$500
Investor B
Jan. 2
$5,000
$45
111
$5,000
-
Common 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
Common misunderstanding
 Don’t confuse
fund value with
taxable income
 Taxable income
applies to the
investor or fund
manager activity
Investor activity – an example
 Investor buys
$100
 Investor sells
$180
 Investor’s capital
gain equal to
$80
Fund 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
Taxation of
Guarantee Payments
Top ups – Registered contracts
 Taxable as
RRSP/RRIF
income when it
is paid out of the
contract
Top ups – Non-registered contracts
 Taxable as
“capital gain”
when paid
Top ups – Non-registered contracts
 Capital losses, if
applicable, will
be applied
against capital
gains
Let’s 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
Let’s 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
Mutual Fund
Corporations
(Manulife Corporate
Classes)
Tax efficiency
 Interest &
Foreign Income
 Ordinary
Dividends
 Capital Gains
Dividends
Tax efficiency
 Corporations
investing in
Corporations
 Tax free fund
switches
Interest & 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
Ordinary Dividends
 Flow through to
shareholders
 Grossed up with
dividend tax
credit
Capital Gains Dividends
 Reduced by
capital losses of
all share classes
 Reduced by
CGRM* for those
leaving Corp
*Capital Gains Refund Mechanism
Capital Gains Dividends
 Balance flows
through to
shareholders
 Treated as capital
gains
Tax-Free Fund Switching
 Each fund is a class of shares of a multiclass Mutual Fund Corporation
 Moving between share classes (funds)
doesn’t trigger tax to investor
 However, liquidation of underlying assets to
do the transfer may cause flow through of
capital gains dividends
 Can’t offset taxable gains with CGRM for those
who haven’t left corporation
Taxation of Manulife Corporate Classes
 Proactive Tax
management
 Tax expert
assigned
 Tax-free, DSC-
free switching
between multiple
managers
Educate your clients
Important 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.