Taking the guesswork out of portfolio management

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Segregated Funds Mutual Funds A Taxation
Comparison
Enter Name Enter Title Enter Date
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Agenda

• Segregated Funds Mutual Funds a taxation
  comparison
• Distributions in a down market
• Taxation of guarantee top ups

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Similarities

• Fund manager buys and sells securities
• Unit value fluctuates with the underlying
  securities

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MORE Similarities

• Fund distributes all taxable income and capital
  gains realized to unitholders
• Interest, dividends, capital gains flow through

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Differences

• Treatment of capital losses realized by the fund
• All taxable amounts reported on T3 for segregated
  funds

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MORE Differences

• Distributions versus allocations
• Change in unit value after distributions and/or
  allocations

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Treatment of Capital Losses
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In a mutual fund

• Gains 2,000
• Losses 3,000
• Distribution to investor 0
• 1,000 losses carried forward by the fund

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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

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Redemptions
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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

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Disposing of units before the distribution date

• Mutual Funds
• Investor must calculate gain/loss and report on
  tax return

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Disposing of units before the distribution date

• Mutual Funds
• Fund reports details of disposition to CRA on
  T5008

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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

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Disposing of units before the allocation date

• Segregated Funds
• Acquisition fees are deemed to be capital losses
  and are also reported on a T3

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Distribution and/or Allocation
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Mutual Fund distributions

• Must actually distribute income capital gains
• Investor can choose to receive distribution in
  cash or reinvest in funds

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Mutual Fund distributions

• If reinvested, the investor is deemed to have
  received the cash and then purchased additional
  units

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Segregated Fund allocations

• Deemed to have distributed no need to actually
  pay it out thus allocation
• No additional units are purchased

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Segregated Fund allocations

• Allocations cannot be paid in cash like
  distributions (must request withdrawal)

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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

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Changes in unit values
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In a mutual fund

• Unit value decreases after a distribution

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In a mutual fund

• The purchase of additional units returns each
  investor back to the original total value held
  before the distribution

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In a segregated fund

• Unit value remains the same after the allocation

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Distribution vs. Allocation
(100 x 5)/45 45X11
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Mutual Fund investors perception

• They received extra units equal to the taxable
  amount
• REALITY they traded in a dime for two nickels

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Segregated Fund investors perception

• They only get the tax slip
• REALITY and they get to keep the dime

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Distribution 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
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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

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Common misunderstanding

• Dont confuse fund value with taxable income
• Taxable income applies to the investor or fund
  manager activity

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Investor activity an example

• Investor buys 100
• Investor sells 180
• Investors capital gain equal to 80

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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

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Taxation of Guarantee Payments
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Top ups Registered contracts

• Taxable as RRSP/RRIF income when it is paid out
  of the contract

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Top ups Non-registered contracts

• Taxable as capital gain when paid

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Top ups Non-registered contracts

• Capital losses, if applicable, will be applied
  against capital gains

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Lets 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

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Lets 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

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Mutual Fund Corporations (Manulife Corporate
Classes)
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Tax efficiency

• Interest Foreign Income
• Ordinary Dividends
• Capital Gains Dividends

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Tax efficiency

• Corporations investing in Corporations
• Tax free fund switches

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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

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Ordinary Dividends

• Flow through to shareholders
• Grossed up with dividend tax credit

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Capital Gains Dividends

• Reduced by capital losses of all share classes
• Reduced by CGRM for those leaving Corp

Capital Gains Refund Mechanism
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Capital Gains Dividends

• Balance flows through to shareholders
• Treated as capital gains

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Tax-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

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Taxation of Manulife Corporate Classes

• Proactive Tax management
• Tax expert assigned
• Tax-free, DSC-free switching between multiple
  managers

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Educate your clients
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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.
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