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 | Segregated Funds and Tax
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| A segregated fund is considered a trust for tax purposes. This is important for two reasons:
- The segregated fund will allocate all taxable income and realized capital gains to investors. This avoids having income taxed inside the fund at the top marginal rate.
- The fund acts as a conduit, that is income and capital gains retain their characteristics as they flow through to the investor and appear on the T3 in the same way they were realized in the fund. In other words, dividends will be reported as dividends, interest as interest and so on.
The following are some unique tax advantages of segregated funds, as compared to mutual funds:
Flow Through Of Capital Losses A mutual fund does not flow through capital losses. Rather, losses are subtracted from the capital gains within the fund and only the net capital gains will be shown on the T3. In a year where losses are greater than gains, the excess losses are carried forward to offset gains in a future year.
Segregated funds can flow through and report capital losses to investors. In a year, for example, where there are both capital gains and losses to report, investors will have an amount reported in the capital gains box (Box 21-- same as a mutual fund) and an amount in the "Insurance Segregated Fund Capital Losses" (Box 37 -- only available to segregated funds). The advantage to the segregated fund investor is that capital losses not used in the current year can be carried back three years or carried forward to future years. In other words, the fund doesn’t choose when to claim capital losses, the investor does.
All Taxable Events ReportedWith a mutual fund, only the distributions relating to fund activity are reflected on the investor’s T3. If an investor redeems any of their units, they must calculate the gain and loss and report these on their tax return. Another advantage related to segregated funds is that the insurer tracks the cost base for each investor and all taxable events are reflected on a T3. There is no additional accounting required by the investor.
Probate Taxes And Other Estate FeesSegregated funds are insurance (annuity) contracts and, as such, a beneficiary can be named to receive any proceeds upon the death of the life insured (annuitant). This means that the proceeds are paid directly to the beneficiary and do not flow through the estate. These proceeds can be paid without delay and avoid probate taxes and many other fees associated with the settling of an estate, such as legal and accounting fees. Creditor protection may also be available where the named beneficiary is a member of the family class (spouse, parent, child or grandchild). |
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