Segregated Funds & Mutual Funds – A Taxation Comparison Enter Name Enter Title Enter Date

 Segregated Funds & Mutual Funds – a taxation comparison  Distributions in a down market  Taxation of guarantee top ups Agenda

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

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

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

 Distributions versus allocations  Change in unit value after distributions and/or allocations MORE Differences

Treatment of Capital Losses

 Gains = $2,000  Losses = $3,000  Distribution to investor = $0  $1,000 losses carried forward by the fund In a mutual 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 In a segregated fund

Redemptions

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 distribution 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 Disposing of units before the allocation date

Distribution and/or Allocation

 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 Mutual Fund distributions

 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) Segregated Fund allocations

 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 The tax impact

Changes in unit values

 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 mutual fund

 Unit value remains the same after the allocation In a segregated fund

$500 T3 amount $5,000 $5,000 ** Market value - 11*New units $50$45/unitUnit value on Dec. 31 $5/unit Dec. 31 distr./alloc 100 # units $50 Unit value $5,000 Investment Dec. 31 Date Seg FundMutual Fund *(100 x 5)/45 ** $45X$11 Distribution vs. Allocation

 They received extra units equal to the taxable amount  REALITY – they traded in a dime for two nickels Mutual Fund investor’s perception

 They only get the tax slip  REALITY – and they get to keep the dime Segregated Fund investor’s perception

Investor AInvestor B DateDec. 28Jan. 2 Investment$5,000 Unit value$50$45 # units Dec. 31 distr.$5/unit- Unit value on Dec. 31$45/unit- New units11*- Market value$5,000 Taxable income$500- *(100 x 5)/45 Distribution – timing is everything

 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 questions

 Don’t confuse fund value with taxable income  Taxable income applies to the investor or fund manager activity Common misunderstanding

 Investor buys $100  Investor sells $180  Investor’s capital gain equal to $80 Investor 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 Fund manager activity – an example

Taxation of Guarantee Payments

 Taxable as RRSP/RRIF income when it is paid out of the contract Top ups – Registered contracts

 Taxable as “capital gain” when paid Top ups – Non-registered contracts

 Capital losses, if applicable, will be applied against capital gains Top ups – Non-registered contracts

Non-registered 1. Initial investment$100, Guarantee $100, 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 an example

Non-registered 1. Initial investment$100, Guarantee $140, Market value$130,000 Top-up gain (3-2)$10,000 Capital gain (3-1)$30,000 Total capital gain$40,000 Let’s look at another example

Mutual Fund Corporations (Manulife Corporate Classes)

 Interest & Foreign Income  Ordinary Dividends  Capital Gains Dividends Tax efficiency

 Corporations investing in Corporations  Tax free fund switches Tax efficiency

 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 Interest & Foreign Income

 Flow through to shareholders  Grossed up with dividend tax credit Ordinary 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 Capital Gains Dividends

 Each fund is a class of shares of a multi- class 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 Tax-Free Fund Switching

 Proactive Tax management  Tax expert assigned  Tax-free, DSC- free switching between multiple managers Taxation of Manulife Corporate Classes

Educate your clients

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. Important notes