Segregated Funds & Mutual Funds – A Taxation Comparison

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

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

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

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

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

6. MORE Differences • Distributions versus allocations • Change in unit value after distributions and/or allocations

7. Treatment of Capital Losses

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

9. 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

10. Redemptions

11. 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

12. Disposing of units before the distribution date Mutual Funds • Investor must calculate gain/loss and report on tax return

13. Disposing of units before the distribution date Mutual Funds • Fund reports details of disposition to CRA on T5008

14. 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

15. Disposing of units before the allocation date Segregated Funds • Acquisition fees are deemed to be capital losses and are also reported on a T3

16. Distribution and/or Allocation

17. Mutual Fund distributions • Must actually distribute income & capital gains • Investor can choose to receive distribution in cash or reinvest in funds

18. Mutual Fund distributions • If reinvested, the investor is deemed to have received the cash and then purchased additional units

19. Segregated Fund allocations • Deemed to have distributed – no need to actually pay it out – thus allocation • No additional units are purchased

20. Segregated Fund allocations • Allocations cannot be paid in cash like distributions (must request withdrawal)

21. 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

22. Changes in unit values

23. In a mutual fund • Unit value decreases after a distribution

24. In a mutual fund • The purchase of additional units returns each investor back to the original total value held before the distribution

25. In a segregated fund • Unit value remains the same after the allocation

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

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

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

29. Distribution – timing is everything *(100 x 5)/45

30. 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

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

32. Investor activity – an example • Investor buys $100 • Investor sells $180 • Investor’s capital gain equal to $80

33. 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

34. Taxation of Guarantee Payments

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

36. Top ups – Non-registered contracts • Taxable as “capital gain” when paid

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

38. 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

39. 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

40. Mutual Fund Corporations (Manulife Corporate Classes)

41. Tax efficiency • Interest & Foreign Income • Ordinary Dividends • Capital Gains Dividends

42. Tax efficiency • Corporations investing in Corporations • Tax free fund switches

43. 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

44. Ordinary Dividends • Flow through to shareholders • Grossed up with dividend tax credit

45. Capital Gains Dividends • Reduced by capital losses of all share classes • Reduced by CGRM* for those leaving Corp *Capital Gains Refund Mechanism

46. Capital Gains Dividends • Balance flows through to shareholders • Treated as capital gains

47. Tax-Free Fund Switching • 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

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

49. Educate your clients

50. 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.