Comments on: How Return OF Capital Works http://www.milliondollarjourney.com/how-return-of-capital-works.htm Building Wealth through Saving and Investing Sat, 21 Nov 2009 03:00:37 -0500 http://wordpress.org/?v=abc hourly 1 By: Jineshwar singh http://www.milliondollarjourney.com/how-return-of-capital-works.htm/comment-page-1#comment-60409 Jineshwar singh Thu, 13 Nov 2008 17:41:36 +0000 http://www.milliondollarjourney.com/how-return-of-capital-works.htm#comment-60409 Is it true to say that corporate class mutual funds levy more in management expense ratio (MER) than non corporate class funds? From a tax stand-point, is it better (financially) to invest in corporate mutual funds for a retired person paying 30% income tax? Is the extra payment in MER worth for receiving ROC (Return on Capital)? Many thanks Is it true to say that corporate class mutual funds levy more in management expense ratio (MER) than non corporate class funds?
From a tax stand-point, is it better (financially) to invest in corporate mutual funds for a retired person paying 30% income tax? Is the extra payment in MER worth for receiving ROC (Return on Capital)?

Many thanks

]]> By: WealthManager http://www.milliondollarjourney.com/how-return-of-capital-works.htm/comment-page-1#comment-46016 WealthManager Tue, 29 Jul 2008 17:41:13 +0000 http://www.milliondollarjourney.com/how-return-of-capital-works.htm#comment-46016 One question I've been trying to get clarification on regarding ROC is how to handle ROC when it's reported annually and there are mid-year partial dispositions? How does one allocate a yearly amount to calculate average unit cost just prior to sale (and thus capital gains calculation)? Using CRA's example: http://www.cra-arc.gc.ca/E/pub/tg/rc4169/README.html It would appear you just ignore the annual ROC and apply to the remaining units. In a situation where 90% of the security was sold, nearly all of the ROC amount would be used against the remaining 10% in the given year, thus not accurately representing the correct proportions. Is there something else that could/should be done here? This assumes of course that you can't get a more detailed breakdown (e.g. monthly, quarterly) which is more common with trusts vs. mutual funds. Cheers! One question I’ve been trying to get clarification on regarding ROC is how to handle ROC when it’s reported annually and there are mid-year partial dispositions? How does one allocate a yearly amount to calculate average unit cost just prior to sale (and thus capital gains calculation)?

Using CRA’s example:
http://www.cra-arc.gc.ca/E/pub/tg/rc4169/README.html

It would appear you just ignore the annual ROC and apply to the remaining units. In a situation where 90% of the security was sold, nearly all of the ROC amount would be used against the remaining 10% in the given year, thus not accurately representing the correct proportions.

Is there something else that could/should be done here? This assumes of course that you can’t get a more detailed breakdown (e.g. monthly, quarterly) which is more common with trusts vs. mutual funds.

Cheers!

]]> By: Philip Baron http://www.milliondollarjourney.com/how-return-of-capital-works.htm/comment-page-1#comment-38969 Philip Baron Wed, 11 Jun 2008 15:57:18 +0000 http://www.milliondollarjourney.com/how-return-of-capital-works.htm#comment-38969 In an incorporated mutual fund structure, an ROC class of shares can be used to provide a fixed monthly return of capital distribution to higher income investors looking for tax efficient cash flow. At NexGen Financial, the Return of Capital Class can be utilized in any one of 15 of the 16 funds at a distribution of 7.5% per annum. This creates tax efficiency since the investor is not taxed on the original principal returned. The ACB is lowered as distributions paid. As mentioned above this is ideal for high income investors looking for tax efficient cash flow, investors looking to defer capital gain liabilities, investors looking to manage "clawback" concerns on old age security payments, tax free transition from growth to income, and tax efficient charitable giving. www.nexgenfinancial.ca In an incorporated mutual fund structure, an ROC class of shares can be used to provide a fixed monthly return of capital distribution to higher income investors looking for tax efficient cash flow. At NexGen Financial, the Return of Capital Class can be utilized in any one of 15 of the 16 funds at a distribution of 7.5% per annum. This creates tax efficiency since the investor is not taxed on the original principal returned. The ACB is lowered as distributions paid. As mentioned above this is ideal for high income investors looking for tax efficient cash flow, investors looking to defer capital gain liabilities, investors looking to manage “clawback” concerns on old age security payments, tax free transition from growth to income, and tax efficient charitable giving.

http://www.nexgenfinancial.ca

]]> By: WhereDoesAllMyMoneyGo.com http://www.milliondollarjourney.com/how-return-of-capital-works.htm/comment-page-1#comment-35791 WhereDoesAllMyMoneyGo.com Thu, 15 May 2008 19:58:44 +0000 http://www.milliondollarjourney.com/how-return-of-capital-works.htm#comment-35791 There might be a few, but the same argument applies as for mutual funds in general versus indexation. Indexing products have low turnover and are pretty tax efficient compared to actively managed portfolios with high turnovers. Many broad mandate funds don't beat their benchmarks, however I see that the real benefit of ROC fund structures is as mentioned before, when you have the non ROC version (in a corporate class structure) while accumulating, and then switching to ROC versions later when you need the income. You can delay massive amounts of taxation until much later. However, with the new TFSA accounts - this will negate both the ROC and corporate class structures for the new generation of investors who will be building up room faster than they can use it. The TFSA has wide ranging implications! But for those who have windfalls (sales of businesses for example), they may do well to examine the tax savings of investing the lump sum in a corporate class, ROC structure for tax efficient cashflow. Fidelity and CI and Franklin Templeton are three of the big providers and all have large fund selections. The savings can be quite good especially if there is a lot of tax inefficient income (i.e. a higher proportion of fixed income in the portfolios). But best to compare all alternatives. Some find they are happy to save on fees used indexed products or purchase a diversified portfolio of higher yielding securities. There might be a few, but the same argument applies as for mutual funds in general versus indexation. Indexing products have low turnover and are pretty tax efficient compared to actively managed portfolios with high turnovers. Many broad mandate funds don’t beat their benchmarks, however I see that the real benefit of ROC fund structures is as mentioned before, when you have the non ROC version (in a corporate class structure) while accumulating, and then switching to ROC versions later when you need the income. You can delay massive amounts of taxation until much later.

However, with the new TFSA accounts – this will negate both the ROC and corporate class structures for the new generation of investors who will be building up room faster than they can use it.

The TFSA has wide ranging implications!

But for those who have windfalls (sales of businesses for example), they may do well to examine the tax savings of investing the lump sum in a corporate class, ROC structure for tax efficient cashflow. Fidelity and CI and Franklin Templeton are three of the big providers and all have large fund selections. The savings can be quite good especially if there is a lot of tax inefficient income (i.e. a higher proportion of fixed income in the portfolios). But best to compare all alternatives. Some find they are happy to save on fees used indexed products or purchase a diversified portfolio of higher yielding securities.

]]> By: FrugalTrader http://www.milliondollarjourney.com/how-return-of-capital-works.htm/comment-page-1#comment-35784 FrugalTrader Thu, 15 May 2008 19:12:54 +0000 http://www.milliondollarjourney.com/how-return-of-capital-works.htm#comment-35784 Thanks for the clarification Preet! What is your opinion on ROC funds? Are there any that have consistently outperformed the market? Thanks for the clarification Preet! What is your opinion on ROC funds? Are there any that have consistently outperformed the market?

]]> By: WhereDoesAllMyMoneyGo.com http://www.milliondollarjourney.com/how-return-of-capital-works.htm/comment-page-1#comment-35772 WhereDoesAllMyMoneyGo.com Thu, 15 May 2008 16:07:03 +0000 http://www.milliondollarjourney.com/how-return-of-capital-works.htm#comment-35772 For T-class funds, when your ACB reaches zero, every distribution becomes taxed as a capital gain (less actual interest and dividend income). Basically the portion of the distribution that was ROC and was not subject to tax, is now completely subject to tax at 50% x MTR. Also a clarification: a fund doesn't necessarily need to be set up as a mutual fund corporation to distribute ROC. Funds that distribute ROC are usually classified at T-class funds, which may be structured as either unit trusts or corporations. The advantage of the corporations is that you can start with the non-ROC fund and then when it comes time for cashflow, you can switch a portion of the funds into the T-class version to get the tax-efficient cashflow. The goal is to defer taxes as long as possible. Preet For T-class funds, when your ACB reaches zero, every distribution becomes taxed as a capital gain (less actual interest and dividend income). Basically the portion of the distribution that was ROC and was not subject to tax, is now completely subject to tax at 50% x MTR.

Also a clarification: a fund doesn’t necessarily need to be set up as a mutual fund corporation to distribute ROC. Funds that distribute ROC are usually classified at T-class funds, which may be structured as either unit trusts or corporations.

The advantage of the corporations is that you can start with the non-ROC fund and then when it comes time for cashflow, you can switch a portion of the funds into the T-class version to get the tax-efficient cashflow. The goal is to defer taxes as long as possible.

Preet

]]> By: Dividend Growth Investor http://www.milliondollarjourney.com/how-return-of-capital-works.htm/comment-page-1#comment-35771 Dividend Growth Investor Thu, 15 May 2008 15:49:59 +0000 http://www.milliondollarjourney.com/how-return-of-capital-works.htm#comment-35771 Most of the income trusts achieve their high yields because their distributions include return of capital. Thus, when I invest I usually buy stocks which I understand how they make money and are able to pay dividends. Also dividend payout ratios should be checked for reasonableness - if over 100% I am not getting in.. Most of the income trusts achieve their high yields because their distributions include return of capital. Thus, when I invest I usually buy stocks which I understand how they make money and are able to pay dividends. Also dividend payout ratios should be checked for reasonableness – if over 100% I am not getting in..

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