19 Flashcards
ratio withdrawal plan
investor receives annual income from the fund by redeeming a set % of holdings on each withdrawal date
X sells 5,000 units of ABC No-Load Mutual fund on September 29 from his non-registered account. His adjusted cost base for the units is $85,000, and he receives $100,000. On October 2, the fund distributes $2 per unit. Capital gain?
When a fund holder redeems the shares or units of the fund itself, the transaction is considered a disposition for tax purposes, possibly giving rise to either a capital gain or a capital loss. Only 50% of net capital gains (total capital gains less total capital losses) is added to the investor’s income and taxed at their marginal rate. In this example, Andre’s gain of ($100,000 - $85,000) = $15,000 would result in a taxable capital gain of $15,000 x 50% = $7,500. As he did not hold the units at the time of distribution, he is not liable for the taxes on the distribution.
Modified Dietz method
The Modified Dietz method weights each cash flow by the amount of time it is held in the portfolio. It assumes a constant rate of return through the period, eliminating the need to value the portfolio on the date of each cash flow.
fixed-period withdrawal plan
A specified amount is withdrawn over a pre-determined period of time with the intent that all capital will be exhausted when the plan ends.
An investor purchases $5,000 in mutual fund units. Over the next two years, the investor chooses to reinvest the income in additional fund units. At the end of two years, the total value of the investor’s portfolio rises to $7,225. Over that same time period, the investor received $125 in reinvested dividends and $1,000 in reinvested dividends. What would the investor’s adjusted cost base be at the end of two years?
The cost base for the units includes the purchases, and also the value of the reinvested dividend. Therefore, the cost based for the investment would be $6,125 ($5,000 + $125 + $1,000)
On March 1st last year, Natalie, an investor who is in a 48% tax bracket, buys 1,000 units of a mutual fund for $14.75 a unit in a non-registered account. Two months later she receives $1.10 per unit in capital gains distributions. Later that year, Natalie sells the units for $19.25 a unit. Ignoring any other costs, considerations, or potential capital losses on other investments, what amount would she owe in income tax as a result of this transaction?
Capital gains receive a special exemption under the Income Tax Act (Canada). Only 50% of any capital gains are subject to tax, including capital gains distributions. Natalie’s capital gain is ($19.25 - $14.75 × 1,000 units) + ($1.10 × 1,000 units) = $5,600. On this, only 50% of the gain is taxable, and she will pay tax at her marginal rate of 48% on the remaining $2,800, or an amount of $1,344.00. Of course, if Natalie had held the funds in a Registered Retirement Savings Plan (RRSP), she would have paid no current income taxes on the capital gains.
mutual funds from lowest return and lowest risk to highest return and highest risk:
money market funds; mortgage funds; bond funds; balanced funds; dividend funds; equity funds; real estate funds; specialty funds.
T3
when mutual funds are held in non-registered accounts, T3 (Statement of Trust Income Allocations and Designations) details income distributed that year for unitholder in unincorporated fund.
T5
when mutual funds are held in non-registered accounts, T5 (Statement of Investment Income) details income distributed that year for shareholder in fund.
ratio withdrawal plan
investor redeems a specified % of fund holdings each year
fixed dollar withdrawal
investor redeems a specified dollar amount (usually monthly or quarterly, and in ‘round amounts’)
fixed-period withdrawal
specified dollar amount over set period of time so all capital gone when plan ends (eg. 20% year 1; 25% year2; 33% year 3; 50% year 4; 100% final year)
life-expectancy adjusted withdrawal plan
(fund holding)/(life expectancy - current age)
note: purpose to deplete entire fund holding by plan end while maximizing income
