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Recently, the IFID Centre at the Field Institute in Toronto examined 10-year returns from 343 equity and balanced mutual funds managed by Canadian companies and found that performance of these funds on an after-tax basis was significantly different from returns on a pre-tax basis. When examining your mutual fund account statement and looking at the returns for your various funds, you're not getting the whole picture about just how your funds are performing. The government's tax system is eating away at your wealth creation process. So, what does this mean to you and your wealth creation plans? If you're a member of the Baby Boomer generation between ages 39 and 57, you may be in for a surprise says AIC Limited, an investment fund manager. Furthermore, if you've invested in non-registered funds, you're losing returns. After-tax research found that if you're an investor in the highest tax bracket, you lost, on average, 1.35% annually to taxes on any Canadian equity or balanced fund because of distributions. This was based on a study done over a 10-year period beginning in 1991.* As Baby Boomers continue to age and with billions of dollars expected to pass from one generation to the next over the next decade, more people will have non-registered money to invest. A focus on after-tax investing is becoming more and more critical. The ranking of mutual fund performance on a pre-tax basis is significantly different from the after-tax ranking. Funds ranked in proximity on a pre-tax basis had a 46% probability of having that ranking reversed on a after-tax basis. * Mutual fund rankings on a pre-tax basis are not relevant when investing outside of a registered plan. "Your mutual fund manager's attitude towards tax may affect your overall fund performance" counsel's AIC. Before you invest, ask whether the manager's style encompasses a strategy to minimize taxes annually. .
As an investor, you should be aware of how your investment is to be taxed. There's currently no requirement in Canada to report after-tax returns to the investor. AIC in sponsoring this research wanted to substantiate the significant impact that taxes play in calculating a realistic or true rate of return. (See report)
The Globe and Mail, Tax Matters columnist Tim Cestnick, CA,CFP,TEP in his opening preamble on this subject (May 2003) illustrates his point with his wife cleaning lady - "Some things just don't make sense to me. My wife has a woman come over once a week to do the cleaning, so that she's freed up to volunteer at a day-care centre, where our cleaning lady sends her kids. Now, let me get this straight. We pay the cleaning lady
$80 each week, and it costs her $80 each week to send her kids to the
day-care.
To review the Globe article, click here.
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