# mutual fund taxes



## showmethemoney45 (Feb 27, 2015)

So I keep reading that mutual funds are traded more often in the fund and therefore have to incur more capital gains tax so they are less efficient than an indexed ETF. But does that really matter? I'm assuming thats all taken care of with the high MER rates. Or do you pay more taxes when you cash out? (which of course is a biggie)


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## stardancer (Apr 26, 2009)

Capital gains that the fund incurs are divided among the unit holders; your share shows up on the T3/T5 that the fund issues for tax time. The gains/losses you personally incur come when you sell your units; you keep track of the ACB on an on-going basis and calculate the gain/loss only when you sell. The MER has nothing to do with any gain/loss you or the fund incur.

As for a comparison with ETFs- I can't speak to that.


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## Eclectic12 (Oct 20, 2010)

^^^^

To help make it clear - the T3/T5 tax form is issued each year there is a CG *in any given tax year*. So one could buy a MF, hold it for ten years then sell. If nine of the ten years, there's a CG that is distributed to MF unit holders - then one will have nine years of CG to report/pay taxes on. At the point where one sells the MF, there will be another CG from selling the units on schedule 3, part 3 of one's tax return.



> Why do I have a capital gain on my T3 information slip, when my mutual fund lost money?
> 
> Mutual funds allocate their realized capital gains to unit holders. Thus, if they have sold some investments at a gain during the year, they are allocating capital gains to you, even if the value of the mutual fund units went down.


http://www.taxtips.ca/personaltax/investing/taxtreatment/mutualfunds.htm

This is also why the common advice is to avoid buying a MF in a taxable account towards the end of the year. One may only own the MF for a month but will have to pay CG as if the fund was owned all year.


As for ETFs, they will follow what makes up the index so while likely there will less buying/selling. I say likely because the ETF manager will have to sell when the index designer decides to drop companies from the index and substitute other companies.


As a couple of examples, April 30th Talisman Energy Inc announced the buyout was approved so it was removed from the S&P TSX 60 (plus variants such as the Capped TSX 60) with Franco-Nevada Corp replacing it. 

April 23rd removed BonTerra Energy Corp as well as Major Drilling Group International from the S&P/TSX Dividend Aristocrats index.

http://us.spindices.com/indices/equity/sp-tsx-60-index



Cheers


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## showmethemoney45 (Feb 27, 2015)

so here's another blonde question: Do you pay taxes (dividend or capital gains) on mutual funds that are held in an RRSP every year that you incur them? I thought you don't pay a single cent until you cash out in your old age?


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## Azim Dahya & Co CGA (Jun 3, 2015)

as long as the mutual fund is RRSP eligible and is in an RRSP account you will not have to pay taxes on it until you take it out

www.advancedtax.ca


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## OnlyMyOpinion (Sep 1, 2013)

...and at that time it will be reported as ordinary taxable income - not as eligible dividends or capital gains.


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## showmethemoney45 (Feb 27, 2015)

Azim Dahya & Co said:


> as long as the mutual fund is RRSP eligible and is in an RRSP account you will not have to pay taxes on it until you take it out
> 
> www.advancedtax.ca


soooo.... if you have an mutual fund RRSP and a ETF RRSP and you don't pay taxes until you withdraw don't you just pay regular income tax at your specified rate? Wouldn't the tax implications be the same? Just trying to figure out how "ETFs are more tax efficient"


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## OnlyMyOpinion (Sep 1, 2013)

showmethemoney45 said:


> soooo.... if you have an mutual fund RRSP and a ETF RRSP and you don't pay taxes until you withdraw don't you just pay regular income tax at your specified rate? Wouldn't the tax implications be the same? Just trying to figure out how "ETFs are more tax efficient"


You are correct re/ tax. 
ETF's are not more 'tax efficient' in an RRSP, but they may cost you less to buy and maintain than a mutual fund due to lower management expense fees.


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## showmethemoney45 (Feb 27, 2015)

OnlyMyOpinion said:


> You are correct re/ tax.
> ETF's are not more 'tax efficient' in an RRSP, but they may cost you less to buy and maintain than a mutual fund due to lower management expense fees.



Gotcha. So when all the books say these are more efficient they just mean when they are in non-registered accounts...duh.

Thanks!


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## Eclectic12 (Oct 20, 2010)

Like post #8, I've heard of ETFs being more efficient due to lower costs. For example, a bank MF tracking an index may charge a 1% MER where the comparable ETF might charge a 0.4% MER. This means it is efficient in the sense that the investor gets to keep more of their earnings/money. From a tax perspective, nothing has changed AFAICT.

Both are tracking the same thing (i.e. the index) - I don't understand how one could be more "tax efficient". Both are going to have to report similar amounts of eligible dividends, capital gains, RoC as they both have similar transactions that need to be done.


Do you have a link or quote to this "tax efficient" bit? 

So far, I've never seen it posted or written up as a tax efficiency.


Cheers


*PS*

There is one ETF that I can think of that is an exception. 

The Horizons Beta-PRO S&P500 index ETF HXS uses a swap structure. This means there are no distributions which means no yearly tax to report. This makes it similar to buying a non-dividend paying stock where the only tax event is when one sells the ETF unit(s).

High income earners/those close to the OAS clawback who want capital gains only or those looking to avoid the US gov't 15% withholding tax on dividends in a registered account (ex. TFSA) would prefer this CG only structure. If it proves popular, there may be more offered.


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## Woz (Sep 5, 2013)

When people sell their mutual fund shares they typically redeem them from the fund for cash requiring the fund to sell some of the stocks they hold. When people sell their ETF shares they typically trade them to another person or if they are redeemed, redeemed by larger institutions in-kind for shares. This can result in less taxable events for ETFs than for mutual funds.

In practice, I don’t know that it has a large effect.


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## Eclectic12 (Oct 20, 2010)

It would be interesting to track for a sample of each because I would have thought that MFs which have existed for a longer period would have already jumped on whatever choices the ETFs are using to minimise the buy/sell of shares.

I can't do a sanity comparison as the few MFs I own are in registered accounts so that there is no T3/T5 being produced.

That said ... it is interesting that a google on the subject shows a Morningstar article I can't get at that is titled "Untangling ETF Tax- Efficiency Myths".
I will have to refine my search later as I notice many of the articles are US based where the US tax regime might be different than the Canadian one.


Cheers


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## Woz (Sep 5, 2013)

It’s not really that the ETF companies are doing something different; it’s the users of ETFs that are doing something different. When I sell my ETF I sell it to someone else on the open market. I have the option to redeem it, but I don’t because it’d be slower and take more effort. When I sell my mutual fund, my only option is to redeem it. 

I do think the impact is minimal though and would only really show up when there are large outflows. If it’s something people are worried about then you’d also have to look at a funds unrealized capital gains before purchasing as that would also affect your future liability.

You can see a copy of the article you mention here: http://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405/index.php?startid=60#/62 

The first line sums up my view pretty well:

“In-kind redemptions give ETFs and edge in tax efficiency, but other factors are bigger when comparing them with mutual funds.”


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## Eclectic12 (Oct 20, 2010)

Woz said:


> It’s not really that the ETF companies are doing something different; it’s the users of ETFs that are doing something different.
> 
> When I sell my ETF I sell it to someone else on the open market. I have the option to redeem it, but I don’t because it’d be slower and take more effort. When I sell my mutual fund, my only option is to redeem it ...


Since the investor is buying/redeeming through the MF company - the MF company has the option to match up buyers/sellers to minimise the redemptions, do they not?

I can see where selling the ETF on the open market means the ETF company does not have to do anything (i.e. no bid I'm willing to take = no sale and possibly a redemption) but as the MF company is brokering the buy/sells - they have a more limited version of the same thing available to them.


If they aren't making use of it ... then the MF company is doing something different.


Now that I've thought about it a bit ... the MF company is doing something different as they are not listing their MF on the stock exchange.


Cheers


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## Guban (Jul 5, 2011)

Woz said:


> When people sell their mutual fund shares they typically redeem them from the fund for cash requiring the fund to sell some of the stocks they hold.


I was under the impression that mutual funds have a cash float so that they don't (usually) have to sell stocks if they are in a net redemption period. There is also a time period problem if the only way that a MF company can pay out is by selling stocks that they own. By the time the company knows that they have to raise money, to pay someone who is redeeming shares, they will be a day late in being able to generate the cash. I would be surprised if most fund companies can borrow money to pay people who redeem, but that would be the only way to do it if they didn't have cash on hand.


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