# Mutual fund distributions in group savings plan



## Beaver101 (Nov 14, 2011)

Not sure if this goes to the investing section but it is tax related so here goes. 

Has anyone attempted to figure out how the various gains/income (eg. dividends, capital gains, interest income, foreign income, etc.) are allocated from mutual fund units in a "*group savings plan (non-registered)*" that show up on your T5 from your employer? 

I have asked the HR dep't how those gains have been calculated but they told me to ask the investment (advisor?) company who then basically told me "it's complicated because you're investing in mutual fund units, not individual stocks" or "your results are different from everybody's else". :confused2: 

And so … I have proceeded to look up the published annual distributions from the fund company's website of that particular fund. Only to find it doesn't even remotely resembles or calculate even close (on a proportionate unit basis as I understand it) because there are thousands of unitholders /employers also utilizing the same fund for their employees non-registered group savings plan. Or is this exercise to verify those figures an impossible task? Thanks in advance for any feedback.


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## OptsyEagle (Nov 29, 2009)

I've never audited it but the concept is quite simple. The unit holders on record at the time of the distribution will pay the tax.

So if a fund received $1,000,000 of eligible dividends and $500,000 of interest income, and they had 1,000,000 units outstanding at the time, each unit would be allocated a distribution of $1.50 and that would be made up of $1 of eligible dividends and $0.50 of interest income. If you had 1000 units it would be $1,000 of eligible dividends and $500 of interest income on your t-slip, that you would personally have to pay tax on.

It would make no difference whether the money invested was from an individual investor or part of a group savings plan.

There is a little more to it but that is the basic idea.


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## Guban (Jul 5, 2011)

I actually haven't heard of a nonregistered group savings plan. All the ones I have heard about are registered. 

What you are describing and the answer that OptsyEagle gave sounds like a flow through structure of a trust. As such, I would expect the distributions to be shown on a T3, not a T5.


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## Beaver101 (Nov 14, 2011)

Guban said:


> I actually haven't heard of a nonregistered group savings plan. All the ones I have heard about are registered.
> 
> What you are describing and the answer that OptsyEagle gave sounds like a flow through structure of a trust. As such, I would expect the distributions to be shown on a T3, not a T5.


 ... yes, there is a registered version of a group RRSP plan also but in my case, it is called a group employees' savings plan whereby the employer provides a 10% matching to encourage employees to save. (There is a similar 10% matching on the group RRSP plan but employees' get only one selection, the savings plan or the RRSP, not both). I elected the savings plan as a group since I already have my own individual RRSP in place, hence, the issue of the T5 - actually it's a T4SP addition since the employers' matching is considered income also.


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## Beaver101 (Nov 14, 2011)

OptsyEagle said:


> I've never audited it but the concept is quite simple. The unit holders on record at the time of the distribution will pay the tax.
> 
> So if a fund received $1,000,000 of eligible dividends and $500,000 of interest income, and they had 1,000,000 units outstanding at the time, each unit would be allocated a distribution of $1.50 and that would be made up of $1 of eligible dividends and $0.50 of interest income. If you had 1000 units it would be $1,000 of eligible dividends and $500 of interest income on your t-slip, that you would personally have to pay tax on.
> 
> ...


 ... so essentially, there is no way to "verify" your allocation of the dividends, interest income, etc. - ie. how accurate are those numbers on the issued T5? Just take them as calculated by the investment company?


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## OptsyEagle (Nov 29, 2009)

The mutual funds will issue financial statements for the end of the year which will also include the number of outstanding units. The problem with the audit that you are talking about is that these financial statements will show the earned income of the fund, but they may not distinguish between interest and dividends received. Also, some of those distributions may have been declared quarterly to units that may not exist at year end, but will be responsible for some of the tax owed. 

Also, a mutual fund will deduct the cost of their management fees and other expenses before the declaration of the net taxable income to the unit holders. It would be virtually impossible to know exactly how all that calculates out. You would also have realized capital gains, which are most likely shown in the financial statements but what might not be easily obtained is all the capital losses from prior years that they might use to offset those gains for tax purposes.

You could possibly get somewhere close to what you see on your T-slip, but I doubt you would be able to determine if they are doing it right or wrong.

Since what you are asking, has been asked by regulators before, all mutual funds are required to have an independent auditor, who works in the interest of the unit holders, to go into the books and verify all that is claimed by the mutual fund. That is the theory, anyway. In practise, as we know, the auditors loyalties are usually more aligned with the mutual fund company, since they are the ones who bring their names forward to be hired by the unit holders.

Anyway, there is not much you can do but trust them. My other point is valid, in that there is nothing different in a group savings plan then any other mutual fund and that your employer has nothing to do with any of this.


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## Eclectic12 (Oct 20, 2010)

^^^^

If I understand ... you are saying the MF does not publish the tax breakdown, similar to an index fund, ETF or REIT, right?


Cheers


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## OptsyEagle (Nov 29, 2009)

Eclectic12 said:


> ^^^^
> 
> If I understand ... you are saying the MF does not publish the tax breakdown, similar to an index fund, ETF or REIT, right?
> 
> ...


I don't think they do. I am just going by memory. I have looked at the odd financial statement of a mutual fund before. If I recall they use to send them in the mail to unit holders. It has been a long time since I have owned a mutual fund, so I cannot say for sure. I don't recall them itemizing the income as what was eligible dividends, foreign income, interest income, etc. Without that, an audit of a T-slip would be quite difficult. Also, they deduct their expenses, as would you, before they declare their taxable income that is distributed to unit holders. That would be important information and I don't think they showed the calculation of taxable income clearly, but again, all is from memory. 

It is not much different then your own taxes, in my opinion. If you told me how much income you earned and even if I knew your expenses, I doubt I could hit your taxes payable number within more then 10%. I could get a close estimate but as you know, there are so many factors that go into how one is taxed, that would be required to hit the number on the head. A mutual fund is just as complex.

Past losses, make a huge difference in the taxes payable in a mutual fund. One of the pet peaves, I have always had is when a bad performing mutual fund is merged into a good performing mutual fund (happens everyday), the unit holders of the good mutual fund get to benefit from the tax losses of the bad mutual fund. But the benefits of those losses, should actually go the unit holders who actually lost the money. Unfortunealy, they don't. In my opinion, this alone, makes these mergers NOT in the interest of the unit holders. 

Unfortuneately, our securities regulators are government working zombies without much investment and taxation experience and they take most of their information from the biased mutual fund companies who simply want to reduce their expenses of having two funds, and more importantly, bury the record of the bad performance of the exiting fund. Anyway, this paragraph is a digression and rant that only mildly address the OP question. I will stop here with that.


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## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> I don't think they do... I don't recall them itemizing the income as what was eligible dividends, foreign income, interest income, etc. Without that, an audit of a T-slip would be quite difficult.


Interesting ... one of the other threads on ETFs had a comment that compared with the bookkeeping, calculations of an ETF, the MF would provide everything for one. At the time, I thought they'd also provide the tax breakdown but now that you mention it, I've never found such a breakdown.

Like others up thread, I have only ever been offered the RRSP version so it hasn't been relevant to me.




OptsyEagle said:


> ... One of the pet peaves, I have always had is when a bad performing mutual fund is merged into a good performing mutual fund (happens everyday), the unit holders of the good mutual fund get to benefit from the tax losses of the bad mutual fund...


 ... and my brother-in-law learned the hard way that as attractive as any end of year price drops may be, if it means shouldering the tax burden for the year - it might be as rosy a picture as it looks.


Cheers


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## Beaver101 (Nov 14, 2011)

OptsyEagle said:


> I don't think they do. ...
> 
> *Past losses, make a huge difference in the taxes payable in a mutual fund. * *One of the pet peaves, I have always had is when a bad performing mutual fund is merged into a good performing mutual fund (happens everyday), the unit holders of the good mutual fund get to benefit from the tax losses of the bad mutual fund. But the benefits of those losses, should actually go the unit holders who actually lost the money. Unfortunealy, they don't. In my opinion, this alone, makes these mergers NOT in the interest of the unit holders. *


 ... totally agree and I have the same pet peeve about how a bad performing mutual fund (equity) with a "negative" performance at year end can actually generate capital "gains" and passed onto unitholders as depicted on their year-end T5. :confused2: I call it amazing mutual fund accounting.



> Unfortuneately, our securities regulators are government working zombies without much investment and taxation experience and *they take most of their information from the biased mutual fund companies who simply want to reduce their expenses of having two funds, and more importantly, bury the record of the bad performance of the exiting fund. * Anyway, this paragraph is a digression and rant that only mildly address the OP question. I will stop here with that.


 .... a valid rant which I wholeheartedly share also because there is a lack of transparency on how the taxation of these mutual fund distributions are actually treated/allocated.


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## OptsyEagle (Nov 29, 2009)

Beaver101 said:


> ... totally agree and I have the same pet peeve about how a bad performing mutual fund (equity) with a "negative" performance at year end can actually generate capital "gains" and passed onto unitholders as depicted on their year-end T5. :confused2: I call it amazing mutual fund accounting.


This tends to happen more during the worst years, as well. To give them some credit, you probably may find the same situation happening in your own portfolio, if you think about it. If you have owned 10 stocks for a few years and made good gains on them and then the stock market cracks, you will probably believe that the stocks that you own, that went down a lot have been oversold. It's a human condition many investors fall prey to. Since you may be fully invested, you will look to the stocks that have not gone down as much or even better, gone up, to come up with the money to buy the stocks that went down too much. When you do this, you are effectively selling the ones with capital gains to buy the stocks that went down. This may work out well in the longer term, but for that taxation year, you probably have to pay some tax on some capital gains, all the while owning a portfolio that has lost money, overall that year. There are exceptions to this, but that is how it can work individually and this is how it works for a mutual fund.

Now, you think it is difficult to audit the taxation of a mutual fund. Try a segregated fund. With segregated funds (issued by insurance companies and regulated by the insurance regulators) they attempt to allocate taxation on a "time weighted" system. So with mutual funds, it is like musical chairs. He who holds the units on distribution day, pays the tax. With segregated funds, they allocate the taxation proportionate to not only how many units you hold, but also for how many days you held it.

So for example. Let's say a mutual fund had a bad year and ended up selling some winners to buy some losers. They actually get paid for that. Anyways, if the fund issued a capital gain dividend of $10 per unit and you bought 10,000 units on December 15th of that year, you would end up owing tax on $100,000 of capital gains, and you probably did not have the time to even make any profit. With a segregated fund they would say that since you only owned it for 2 weeks out of 52, you should only receive about 4% of that dividend or a T-slip for $4,000 of capital gains. It will end up being a little bit more or less then that since the other $96,000 does need to be allocated around to all unit holders, but I have always said that this was a much fairer way to do the tax distributions for funds. There are some arguments against it but on those really bad stock market years, that end up putting out the really big distributions, one will see my point quite quickly.


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## Beaver101 (Nov 14, 2011)

OptsyEagle said:


> This tends to happen more during the worst years, as well. * To give them some credit,* you probably may find the same situation happening in your own portfolio, if you think about it. If you have owned 10 stocks for a few years and made good gains on them and then the stock market cracks, you will probably believe that the stocks that you own, that went down a lot have been oversold. It's a human condition many investors fall prey to. Since you may be fully invested, you will look to the stocks that have not gone down as much or even better, gone up, to come up with the money to buy the stocks that went down too much. When you do this, you are effectively selling the ones with capital gains to buy the stocks that went down. This may work out well in the longer term, but for that taxation year, you probably have to pay some tax on some capital gains, all the while owning a portfolio that has lost money, overall that year. There are exceptions to this, but that is how it can work individually and this is how it works for a mutual fund.


... well, the scenario that you have provided does make the tax bite a little bit believeable. However, I still don't swallow it because with stocks, you have control on when you take the gains and the losses. With mutual funds, you don't. 



> Now, you think it is difficult to audit the taxation of a mutual fund. Try a segregated fund. With segregated funds (issued by insurance companies and regulated by the insurance regulators) they attempt to allocate taxation on a "time weighted" system. So with mutual funds, it is like musical chairs. He who holds the units on distribution day, pays the tax. With segregated funds, they allocate the taxation proportionate to not only how many units you hold, but also for how many days you held it.


 ... knowing what I know now and all the investment choices out there, I wouldn't touch segregated funds with a 10' pole. 



> So for example. Let's say a mutual fund had a bad year and ended up selling some winners to buy some losers. They actually get paid for that. Anyways, if the fund issued a capital gain dividend of $10 per unit and you bought 10,000 units on December 15th of that year, you would end up owing tax on $100,000 of capital gains, and you probably did not have the time to even make any profit. With a segregated fund they would say that since you only owned it for 2 weeks out of 52, you should only receive about 4% of that dividend or a T-slip for $4,000 of capital gains. It will end up being a little bit more or less then that since the other $96,000 does need to be allocated around to all unit holders, but I have always said that this was a much fairer way to do the tax distributions for funds. There are some arguments against it but on those really bad stock market years, that end up putting out the really big distributions, one will see my point quite quickly.


... nevertheless, I appreciate your taking the effort and time to explain the finer taxation of the distributions of these segregated/mutual funds. Thank you!


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... well, the scenario that you have provided does make the tax bite a little bit believeable. However, I still don't swallow it because with stocks, you have control on when you take the gains and the losses. With mutual funds, you don't...


 ... which as I understand it, is one of the pros of the MF/ETF for those who are not confident in their picking of what/when to buy/sell.


BTW ... holding stocks directly generally gives the investor choice but YMMV. 

I've had several stocks that I planned on keeping for years be bought out, reducing my time frame taxable event to the next six months or less (which would affect the MF in the same way). 

Then too, because I didn't realise how short the time frame can be to provide the broker with instructions - I missed the opportunity to rollover to the new shares/units on a tax deferred basis as for some reason, the default action was to take the taxable action. You never know what that vacation is going to cost you ... :biggrin: 


Cheers


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