#1

Don't assume that you do not owe taxes on re-invested distributions

#2

Changing the registration of your account could trigger taxes

#3

Watch out for income attribution rules

Be aware of the income attribution rules in the Income Tax Act before transferring funds between spouses or between a parent and a child. Specific rules may apply that deem income and/or capital gains back to the original owner. These rules could negate any attempt to split income for tax reasons.

#4

Don't assume that you do not owe taxes on fund switches

For tax purposes, switches are generally treated as if you had sold your units of one fund and then used the cash to purchase units in another fund. A few fund families set up as multi-class shares of corporations are an exception to this rule, but may create other tax risks and pose inequities to investors who invest in such funds.

#5

Remember that the price of your fund will fall after a distribution is paid

Don't panic when the net asset value (NAV) per unit of your fund falls after a distribution is paid. Distributions reduce the NAV per unit by an amount equal to the distribution paid. While the NAV per unit will drop because of the distribution, the total pre-tax value of your account remains unchanged.

#6

Don't use ACB to measure the overall return on your investment

Many people compare the adjusted cost base (ACB) provided on client statements with the current market value of their fund as a measure of how well their investment has performed. Unfortunately, this often does not provide useful information. ACB is a tax concept that includes reinvested distributions. As more reinvested distributions are included in the ACB, the less meaningful will be the comparison. The correct way to calculate a fund's return includes distributions received, in addition to increases in net asset value per unit.

#7

Understand in-trust accounts before setting one up

Many parents do not appreciate that one of the steps to correctly setting up an in-trust account involves relinquishing ownership of the asset and ensuring that a trust relationship exists in law. It must not be possible for the property to revert back to the contributor, or capital gains may continue to be taxed in the hands of the parent - not the child. There are other steps required as well, such as ensuring that the contributor and the named trustee of the account are not the same person. Failure to set up these accounts properly exposes them to a potential Revenue Canada review.

#8

Don't assume that a low-turnover fund will always be tax-efficient

Just because a fund paid relatively few taxable distributions in one year does not guarantee that it will pay low distributions the next. The amount required to be paid out as taxable distributions in a year is affected by many factors other than just historical portfolio turnover. Low-turnover funds may have accumulated large unrealized gains in their portfolios. This creates the risk that if the manager decides to sell off such positions in a given year, a large distribution to investors could be triggered.

#9

Don't buy 100% RRSP-eligible international funds in an open account

Most 100% RRSP-eligible international equity funds use financial instruments such as stock index futures and debt of Canadian issuers to achieve full RRSP eligibility. Revenue Canada generally takes the view that gains from investments in stock index futures are fully taxable as income and not as capital gains. It is never tax-efficient to hold such funds outside of an RRSP.

#10

Don't do it yourself when it comes to taxes

Tax rules are complex, and there is no substitute for good-quality professional tax advice. A basic awareness of tax issues is helpful because it allows you to ask the right questions and to feel more secure when selecting a tax adviser. However, don't fall into the trap where a little knowledge becomes dangerous. There is a lot of money at stake when it comes to tax matters. You should never undertake important transactions without first seeking specific tax advice that is personal to you from a qualified tax adviser.

Notice:- Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this Executive Notes are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein, readers should seek advice that is appropriate to their personal circumstances from a professional advisor.