Are
Your Clients Paying Someone Else's Tax Bill?
Author:
Standard Life
If
your clients purchase non-registered mutual funds towards the end of a calendar
year, they could pay tax for a year’s worth of capital gains even though
they didn’t own units for the whole year. With segregated funds, income
is allocated daily, so your clients don’t have to pay tax on gains that
arose before they owned units. Segregated funds take into account when your
client came into the fund and only allocate that portion of capital gains
and income directly attributed to them.
Taxing memories
Let’s take a quick trip down memory lane — the memories related
to doing past tax returns. Think back to last March or April, for example,
when some of us were struggling to find tax slips for our clients, looking
for last-minute ways to reduce their taxes, wishing that we had done things
differently and committing to doing a better job next year.
Clients want to take advantage of every last legal deduction and credit.
And, they want the administration
made simple.
Yes, year-round tax planning is the way to go. But getting sidetracked happens
to the best of us.
Fortunately, there are year-end strategies you can put into place in the
next few weeks that could save your clients valuable tax dollars and help
next April to be a more pleasant memory.
TIP
It only makes sense to consider the year-end distributions when you’re
looking at nonregistered funds.
Segregated funds could help avoid an unexpected tax bill
Both mutual and segregated funds flow through earnings to investors. That’s
because only investors can take advantage of the graduated taxation system
and personal tax credits. If the earnings remained in the fund, they would
be taxed at the highest possible tax rate.
So it makes sense that a fund would flow through these earnings before year-end.
And this can result in a
disproportionately large distribution in December. It’s known as the
ex-dividend date. And buying shares in
a mutual fund just before this date can trigger a large and unexpected tax.
Let’s say your client buys 1,000 shares of ABC Mutual Fund at $10 a
share. A few days later, the fund goes ex-dividend, entitling investors to
a $1 per share capital gains distribution. Your client has to pay tax on
the distribution.
You’ll be left explaining why your client has a capital gains tax, when
they haven’t seen a corresponding
gain in their portfolio. While it may be little consolation, if they sold
their shares they would then realize a corresponding loss.
TIP
To find out a fund’s ex-dividend date, call the fund company directly.
If the distributiondate is not faroff, they may be able to give you an estimate.
Considering
a seg fund can make a lot of sense
Because seg funds allocate income on a time weighted basis, only the portion
of capital gains directly
attributed to the investor flows through. So it doesn’t matter at what
point during the year a purchase is made from a taxation standpoint.
Purchases of a mutual fund late in the year can result in clients advancing
the government tax dollars.
Investing in a fund that distributes a large capital gain at the end of the
year means a taxable gain without having had the benefit of the gain during
the year. Not a good strategy.
Obviously taxation should not be the only consideration in an investment
purchase. It’s generally not advisable to let the tax tail wag the investment
dog. But avoiding an unexpected tax bill is still one factor you should consider.
Standard Life’s Ideal Segregated Funds – security without sacrificing
return
In today’s investment arena, performance is critically important, but
it’s not the only consideration.
Standard Life’s Ideal Segregated Funds – available on a registered
and non-registered basis – offer you a choice of investment portfolios
that balance the performance potential of professionally-managed investment
funds with the security of built-in deposit guarantees.
Our MERs are extremely competitive, even when compared to many mutual fund
families. So your clients aren’t sacrificing return. We offer performance
and security every step of the way.
Standard Life’s team of investment professionals focus on delivering
consistent, long-term returns while
maintaining risk at a manageable level. How? Through rigorous research, a
commitment to investment fundamentals, diversification and team decision-making.
Our investment professionals are seasoned veterans. They have a solid track
record of superior performance due to disciplined investing with a focus
on fundamental value. We know that success in investment management requires
long-term goals and a consistent approach that can be applied year after
year.
TIP
As a general rule, it’s better to buy a taxable mutual fund after the
distribution date.
