Capital Gains Refund Mechanism – Why Mutual Fund and ETF Investors Potentially Pay Less Tax

When I see tax returns for do-it-yourself investors, I am often struck by how much tax they pay on their investments. Many high net worth investors also pay a lot of tax on their investments. However, when I see tax returns for mutual fund investors, most of the time they pay very little tax on their investment income, even when their investments are up a lot. Why? Read more…

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  1. Ed Rempel on May 11, 2018 at 11:29 PM

    Hi EL,

    If you want to do the 8-Year GIS Strategy, you have to invest very tax-efficiently and be careful to avoid or minimize any taxable income.

    Segregated funds tend to be setup as trusts, which is generally less tax-efficient. Mutual funds can be setup either as a trust or a corporation. Trusts issue T3s and corporations issue T5s. Corporations are usually more tax-efficient.

    Other factors are also important for tax-efficiency. It generally is most effective to invest in equity (stocks) funds or portfolios with a buy-and-hold philosophy. Avoid funds focused on income such as dividends or interest.

    Corporate class funds are mutual funds where the fund company puts many mutual funds into one company. The advantage is that they can allocate any taxable income to funds that didn’t have taxable income, which can mean you get smaller T5s.

    Another good option is a portfolio manager in order to make all your investment fees tax-deductible. The fee deduction can offset taxable income from your investments or other taxable income for tax purpose, to give you more GIS. My Index Plus Portfolio Manager works well for the GIS Strategy for this reason.


  2. EL on April 23, 2018 at 9:48 PM

    Hi Ed,

    Thanks for your reply and good to know that I am not duplicate taxed.

    My agent has just confirmed that my investment was SEGREGATED FUND CONTRACT
    with Manulife call GIF select and the capital gain was indicated on T3 and not T5. I have no book that I can refer to. They send me statement twice a year.

    Since I am planning to do the 8-year GIS Strategy , I am now 62, should I cancel this seg fund account to achieve zero income by the end of 2019 when I turn 63? What type of investment I should use for self-made dividends to give me cash flow and have no income for that 8years ?
    What is Corporate class funds? Will it generate cash flow or income?



  3. Ed Rempel on April 21, 2018 at 10:20 PM

    Hi El,

    The capital gain on your T3 should increase the book value of your investment. It normally does, and then you are not duplicate taxed.

    What did the statement show to support the $19,039 gain? Was that the gain from net invested or from book value? If it is from book value, that is useful for tax purposes, but not for rate of return. Many factors affect book value. You cannot calculate rate of return from book value.

    By the way, note the type of slip you get. If you receive a T3 for a fund, it is probably not very tax-efficient. Corporate class funds are more tax-efficient and issue a T5.


  4. el on April 21, 2018 at 6:31 PM

    Hi Ed,

    I have received a T3 for yr 2017 from Manulife which indicated box 21 capital gain is $5415.39. This investment was purchased thru my agent under her account. Which I am receiving a statement only whenever I am asking for one. From the statement I know that the plan name call GIF Select, non registered which I purchased in 2014. I did not receive that capital gain amount from my agent but only the statement showed that my account has gained $19039.71. May I ask how can I claim the tax credit in my 2017 return to avoid the duplicate tax that will be recurring.

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