# Capital Gain on Mawer 105?



## Wiser14 (Nov 30, 2013)

Just received my T3 from Mawer on my Tax Effective Balanced Fund (MAW105) for 2015 and there is an entry for capital gain. I did not sell any of the fund in 2015, so presume I am paying the capital gain yearly up front. Is this correct? If so, does that mean it is capital gain exempt when I sell any of the fund? Just need to be sure...is that why it is called tax effective? Thanks.


...further, I just got a reply from Mawer and they advise that this fund would still be capable of capital gains upon sale.


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## Eclectic12 (Oct 20, 2010)

No ... mostly likely it means the fund sold investments where the CG from selling *within the fund* is being passed on to the unit holders.
I am less familiar with MFs but I believe a second source of CG would be if something like a REIT or ETF that is paying some of the cash as a capital gain, then it would also be passed on to the unit holder.

See the section on this link "Why do I have a capital gain on my T3 information slip, when my mutual fund lost money?" in this link.
I believe it could also be titled "Why do I have a capital gain on my T3 information slip, when I did not sell my MF?", which is what your question is.

http://www.taxtips.ca/personaltax/investing/taxtreatment/mutualfunds.htm
http://www.thinkadvisor.com/2015/03/02/under-the-hood-tax-treatment-of-etfs-vs-mutual-fun


Cheers


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## jdc (Feb 1, 2016)

The capital gain reported on your T5 is trading gains from the fund being passed on to unit holders. You cannot use it to offset actual capital gains or losses when you sell the mutual fund.

However, every time that you get a distribution from the fund that is reinvested, it increases the ACB of your holdings that YOU need to keep track of. At the end of the year, MAW105 had a pretty big distribution, and if you were to forget to add it to your ACB, you will be throwing away your money paying additional capital gains taxes when you sell.


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## Eder (Feb 16, 2011)

You can choose to have the gains paid out to you rather than reinvested...


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## Sasquatch (Jan 28, 2012)

I have a question for the learned crowd of this forum. Hope you can help!

I have a non registered investment account which consists of 2 separate mutual funds from MAWER. Fund A and fund B. I am DRIPping all distributions.

In Apr. 2015 I sold all units of fund B and re-invested all proceeds into fund A. Now my account just consists of one MAWER mutual fund.

My T3 slip for 2015 shows a capital gain amount in box 21(Capital Gains).

Does this amount in box 21 include the capital gain realized from my sale of fund B ?

Or do I have to calculate a separate capital gain for fund B upon disposal and report this amount separately from box 21 on my T3 ?

I've been reading the Mutual Fund Tax Guide from the CRA but I'm still confused !

Any comments would be appreciated.


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## jdc (Feb 1, 2016)

Sasquatch said:


> Does this amount in box 21 include the capital gain realized from my sale of fund B ?


No



Sasquatch said:


> Or do I have to calculate a separate capital gain for fund B upon disposal and report this amount separately from box 21 on my T3 ?


Yes



Sasquatch said:


> Any comments would be appreciated.


When calculating the capital gain realized from the sale of Fund B, remember to add the dollar value of ALL reinvested distributions from that fund (from the time of purchase until the time of sale) to the adjusted cost basis (ACB) of Fund B. This has the effect of reducing the amount of capital gains tax payable on the sale.


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## Sasquatch (Jan 28, 2012)

jdc said:


> No
> 
> 
> 
> ...


Thanks jdc..... I am entering all my transactions into a database on "Adjusted Cost Base.ca" which keeps a running total of the ACB and even calculates the capital gain of a fund upon disposal. 
I just wasn't sure if box 21 of the T3 had that particular amount already included. 
One other question if I may ......how does adding the DRIPs to the ACB reduce the Capital gain taxes payable upon the sale of a mutual fund? I don't get it :-O


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## AltaRed (Jun 8, 2009)

Sasquatch said:


> One other question if I may ......how does adding the DRIPs to the ACB reduce the Capital gain taxes payable upon the sale of a mutual fund? I don't get it :-O


I believe the point of the comment was that people who forget to add re-invested distributions to their cost base will end up paying more capital gains taxes than they should have.

Example: Fund X has an ACB of $1000 at end of 2014. During 2015, there were 4 re-invested distributions of $10 each. ACB of fund X is now $1040 at the end of 2015. If the fund is then sold at $2000 sometime this year, capital gains will be $960. Had you forgotten to add the re-invested distributions to the ACB, you would mistakenly record $1000 of capital gains when selling and pay too much in CG taxes.


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## jdc (Feb 1, 2016)

Sasquatch said:


> Thanks jdc..... I am entering all my transactions into a database on "Adjusted Cost Base.ca" which keeps a running total of the ACB and even calculates the capital gain of a fund upon disposal.


If you put all the info, including the DRIP purchases into that web site, you will have the correct ACB for when you sell. I have heard of some people forgetting about the reinvested dividends when they sold, and paying extra capital gains tax as a result. 

(proceeds of sale) minus (adjusted cost base) equals capital gain

Higher adjusted cost base means less capital gains.

I just wanted to point out that it is your responsibility to keep track of your reinvested distributions resulting in increased ACB. You shouldn't count on your broker or the fund company to calculate it properly for you, and CRA won't either, and will gladly let you pay more taxes than you should.


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## Eclectic12 (Oct 20, 2010)

Eder said:


> You can choose to have the gains paid out to you rather than reinvested...




??? ... reinvesting will modify the ACB for the investment - it won't generate a taxable CG until sold.


The issue is that the investment generated a CG without selling, which XIC did basically every tax year that I held it in a taxable account.


Cheers


*PS*

If the ETF company decided to re-invest with a CG distribution ... that choice is out of the investor's hands where there are no additional units to remind one that the ACB needs adjustment (a DRIP will result in a higher number of shares/units). This is why it is called a "phantom distribution" as it is easy to miss where there seems to be only the ETF company's web site to find it.
http://www.theglobeandmail.com/glob...by-phantom-etf-distributions/article18225076/

From what I recall of an article, I think it was 2011 where for some companies, 60% of their ETFs paid phantom distributions. XIU is reported to about around $6 a unit, if one bought back in 1999 or so.


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## Eclectic12 (Oct 20, 2010)

Sasquatch said:


> ......how does adding the DRIPs to the ACB reduce the Capital gain taxes payable upon the sale of a mutual fund? I don't get it :-O


Basic math ... CG (or CL if it is negative) = proceeds from selling - ACB - outlays or expenses

The DRIP is really buying more units, which is increasing the ACB. A bigger ACB with a set proceeds as well as expense forces the CG or CL to be lower.


Cheers


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## Eclectic12 (Oct 20, 2010)

Wiser14 said:


> Just received my T3 ...


Taking a step back ... the key is that there are two sources of CG for investments such as MFs or ETFs that are independent of each other. 

The first is yearly where one reports it on one's tax return where is recorded on a T3. Some years, there many be other income with none from CG where other years, there is CG income.

The second is the CG from selling the units/shares. This is only recorded on the tax return for the tax year the sale was made and is recorded on Schedule 3, part 3 of the tax return for publicly traded investments.


Cheers


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## humble_pie (Jun 7, 2009)

Eclectic12 said:


> Basic math ... CG (or CL if it is negative) = proceeds from selling - ACB - outlays or expenses
> 
> The DRIP is really buying more units, which is increasing the ACB. A bigger ACB with a set proceeds as well as expense forces the CG or CL to be lower.



... i believe that capital gains/losses can be either positive (gain) or negative (loss) as a result of DRIPPing, though?

when a share price declines relentlessly in public markets, DRIP shares will be acquired at ever-lower prices. The ACB total for the holding will increase, but the ACB for each individual share - very important data to work up & store for swing trading - will decline. This could result in increased capital gains when eventually some or all of the shares are sold, no? there can also be cases where a trading pattern of steady declines in market share price could result in capital losses upon disposition?


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## Eder (Feb 16, 2011)

Eclectic12 said:


> ??? ... reinvesting will modify the ACB for the investment - it won't generate a taxable CG until sold.
> 
> 
> The issue is that the investment generated a CG without selling, which XIC did basically every tax year that I held it in a taxable account.
> ...


I was just pointing out there was the alternative to just have capital gains paid out along with dividend distributions rather than reinvesting automatically....gives a choice as to whether add more Mawer or spend the money on something else and keeps things simple allowing more time for kite boarding/beer etc.


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## humble_pie (Jun 7, 2009)

Eder said:


> You can choose to have the gains paid out to you rather than reinvested...



this will not make any difference. CG reported on a T3 for a fund is still CG that the investor should report for the year received ...


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## humble_pie (Jun 7, 2009)

Wiser14 said:


> Just received my T3 from Mawer on my Tax Effective Balanced Fund (MAW105) for 2015 and there is an entry for capital gain. I did not sell any of the fund in 2015, so presume I am paying the capital gain yearly up front. Is this correct? If so, does that mean it is capital gain exempt when I sell any of the fund? Just need to be sure...*is that why it is called tax effective?*
> 
> ...further, I just got a reply from Mawer and they advise that this fund would still be capable of capital gains upon sale.



the question of how Mawer's Tax Effective Balanced is actually "tax effective" is interesting. It's difficult to find a presentation on their website. I found their explanation in their accompanying video, but not mentioned elsewhere.

bref, the tax effective balanced fund holds actual stocks, unlike its sister the plain balanced fund.

every year, the tax effective fund does sell some securities for profit & it does have capital gains, of course. But management also looks at all its losing positions on the year. 

management selects a losing position that it basically still likes, ie the stock has to be fundamentally sound, although undergoing a difficult period. In addition, this stock has to have one or more closely correlated stocks as peers in its sector.

the correlated stock is then bought as a temporary replacement or proxy that will outlast the 30-day wash rule on losses. It acts like a hedge or insurance against the original losing stock suddenly soaring to the moon as of january of the new fiscal year.

next, management sells both the winning stock for a gain & the original losing stock for an offsetting loss. The theoretical result is net zero capital gains.

once 30-day wash rule period over, management is then free to sell the substitute/replacement/proxy stock, which has more or less fluctuated in tandem with what the losing stock would have done if Mawer had continued to hold it. With the proceeds from this sale, Mawer can then repurchase the original stock & hop back into the original position.

it's an art, it's certainly not an exact science. It's a dance, a tango. Buy substitute, sell winner, sell loser, wait 30 days, sell substitute, re-buy original loser.

the exact dollars will never work out perfectly; but the general strategy works fine. There are several cmffers who practice this strategy every tax sale season. Argentina, anyone?


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## jdc (Feb 1, 2016)

humble_pie said:


> the question of how Mawer's Tax Effective Balanced is actually "tax effective" is interesting. It's difficult to find a presentation on their website. I found their explanation in their accompanying video, but not mentioned elsewhere.


I think that in addition to the tax loss harvesting that you describe, other tax efficiencies are achieved by holding bonds and foreign equities directly, as opposed to just holding other Mawer funds like MAW104 does.


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## humble_pie (Jun 7, 2009)

jdc said:


> I think that in addition to the tax loss harvesting that you describe, other tax efficiencies are achieved by holding bonds and foreign equities directly, as opposed to just holding other Mawer funds like MAW104 does.



so sorry, i don't quite see how holding foreign equities directly produces a tax effective, ie tax avoidance, strategy?

i believe that a foreign NR withholding tax is a foreign NR tax, it will apply whether a stock is held directly or whether the NR tax flows through an intervening mutual fund structure, no?

the regular Mawer balanced was designed to work mostly in registered accounts, i believe. The need then arose for the tax effective version, to be held in non-registered accounts.

original Mawer balanced is a fund of funds. It's a structure that i dislike, rather intensely. Mawer itself is a company that would be far too ethical to charge double MERs - i'm so sure of this that i didn't even look - but there are other sticky investcos out there that do charge double MERs.

btw, the econo version of the five-step tax tango above is to purchase the replacement proxy stock, not as the stock itself but as far less expensive call options. Very DITM options usually have no TV or premium left, they are 100 delta options that trade in near-perfect tandem with the underlying stock ... very nice to dance with ...


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## Sasquatch (Jan 28, 2012)

Ahhhh, my head hurts after reading the posts :stupid:

Anyway, thanks to all of you I finally understand the importance of ACBs and how they affect the tax payable :biggrin: I always thought that a higher ACB/unit was equal to higher payable taxes, don't ask me why!

Also I was not aware that there are two ways I have to report CG, from T3 slips AND once units are sold which I have to figure out myself. 

Now I know why I'm using that website to track ACBs automatically. Saves a lot of math which is not one of my strong points.

Thanks again :biggrin:


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## humble_pie (Jun 7, 2009)

Sasquatch said:


> Also I was not aware that there are two ways I have to report CG, from T3 slips AND once units are sold which I have to figure out myself.



this is the meat-&-potatoes. Now you're cooking! each:


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## OhGreatGuru (May 24, 2009)

It is very difficult to make out the difference between the Tax-Effective Balanced Fund and the plain Balanced Fund, based on what is written in the prospectus. This seems to be a common problem. I know some "Tax-Managed" funds are designed to make regular Returns-on-Capital as part of their distributions. Which is really just postponing a Capital Gains bill until you sell or die. I can't find a mention of such a strategy in Mawer's prospectus. Maybe there's a difference in the composition of their holdings, although nominal asset allocations are identical.

PS to OP: Capital Gains from T3's are reported on line 176 of Schedule 3.


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## humble_pie (Jun 7, 2009)

OhGreatGuru said:


> It is very difficult to make out the difference between the Tax-Effective Balanced Fund and the plain Balanced Fund, based on what is written in the prospectus. This seems to be a common problem. I know some "Tax-Managed" funds are designed to make regular Returns-on-Capital as part of their distributions. Which is really just postponing a Capital Gains bill until you sell or die. I can't find a mention of such a strategy in Mawer's prospectus. Maybe there's a difference in the composition of their holdings, although nominal asset allocations are identical.



Guru! hello! (waving)

like i said, the explanation of how-it-works in Mawer tax effective is *not* on the website in so many text words. Nor is it in the prospectus.

where i found it is in the video that accompanied the fund. The video last year, i don't know about the new video. 

in the video, there was only the briefest of references. What i explained upthread, post No. 16. I know i'm only a poor stupid coconut crumble, but perhaps you might consider reading this? i'd be greatly honoured ...

you of all people, guru, ought to be able to recognize what the fund manager was talking about - what i'm talking about with more detail upthread - because some of us cmffers do the exact same thing. And we've all posted the how-to here in the forum. Many times.

it's a kind of expert dance step. Buy, sell, sell, slide slide slide, then sell & re-buy again. Now you've turned full circle & you're back to the original dance position, except that now the capital gains consequences have all been neutralized.


(signed)
ginger rogers


ps here's the how-it-works explanation:

http://canadianmoneyforum.com/showt...on-Mawer-105?p=1052849&viewfull=1#post1052849


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## dubmac (Jan 9, 2011)

humble_pie said:


> it's a kind of expert dance step. Buy, sell, sell, slide slide slide, then sell & re-buy again. Now you've turned full circle & you're back to the original dance position, except that now the capital gains consequences have all been neutralized.
> 
> (signed)
> ginger rogers


^ love this...rich analogy.


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## GreatLaker (Mar 23, 2014)

jdc said:


> I think that in addition to the tax loss harvesting that you describe, other tax efficiencies are achieved by holding bonds and foreign equities directly, as opposed to just holding other Mawer funds like MAW104 does.





humble_pie said:


> so sorry, i don't quite see how holding foreign equities directly produces a tax effective, ie tax avoidance, strategy?
> 
> i believe that a foreign NR withholding tax is a foreign NR tax, it will apply whether a stock is held directly or whether the NR tax flows through an intervening mutual fund structure, no?
> 
> ...


I believe (although I don't know for sure) that holding securities directly instead of the fund-of-fund approach is what gives MAW105 the ability to what Mawer refers to as the tax overlay strategy. In a fund-of-funds approach how could they do tax loss harvesting?


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## jdc (Feb 1, 2016)

GreatLaker said:


> I believe (although I don't know for sure) that holding securities directly instead of the fund-of-fund approach is what gives MAW105 the ability to what Mawer refers to as the tax overlay strategy. In a fund-of-funds approach how could they do tax loss harvesting?


Yeah. I see that MAW105 holds bonds directly too, which gives them some opportunity to let them mature for a capital loss that can be offset against gains. Most bonds sell at a premium.

However, this doesn't seem to be the case looking at the difficult to find annual distributions listed on the Mawer site....

http://www.mawer.com/our-funds/distributions/

Is MAW105 really tax effective? I think not.


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