1 MUTUAL FUND TAX GUIDE For your 2013 Tax Return
2 LESS = MORE THE LESS TAX YOU PAY, THE MORE YOUR INVESTMENTS WILL EARN
3 February 2014 Did you know that taxes are probably the biggest expense you ll face over your lifetime? Now imagine if you could save on taxes to help get the maximum return on your investments. The Mackenzie Mutual Fund Tax Guide is designed to help you do just that. It begins by making it easier for you to understand how your mutual fund investments are taxed and reported on your annual income tax return. Inside, you ll find explanations of various tax slips, information about 2013 tax rates and changes to tax rules that may affect you. And the guide also explains a number of specific tax strategies that can help minimize the tax you ll pay, allowing you to get the most out of your savings and investments. For example, income splitting between family members, including pension income, will free up a considerable amount of tax money that you can save or invest. Here are a few more tax-savings ideas for you to consider: Don t forget to maximize your Tax-Free Savings Account (TFSA) and invest in mutual funds, which will grow tax-free. The contribution limit for TFSAs has been $5,000 per year since 2009, and increased to $5,500 in So if you have not yet used your TFSA, you can put in $31,000 in Not only can withdrawals from your TFSA provide you with non-taxable cash, you can re-contribute the amount withdrawn to your TFSA as long as you remain within your limit. As well, money put into a Registered Retirement Savings Plan (RRSP) can defer taxes to future years. The 2013 RRSP maximum is 18% of earned income to a maximum of $23,820 (plus any unused contribution room you may have). If you ve maxed out your registered plans, invest in corporate class funds. Not only do they reduce the tax you pay on your investment income, you can change your investment selection on a tax-deferred basis as your needs dictate. Corporate class funds are also a tax-savings option for corporate investors. And if you have a disability, don t forget to maximize tax-deferred savings in a Registered Disability Savings Plan (RDSP) by catching up on matching government grants going back to Contributions of $3,500 in 2014 and $5,000 in each of 2015 and 2016 will bring an RDSP account up to $31,500 in government grants, with a maximum of $10,500 per year. For investors with Mackenzie who file taxes in the United States, a new US-friendly annual information statement (AIS) will be made available on request. Even though our tax guide is comprehensive, Canada s taxation system is highly complex and ever-changing. And that s why I recommend working with a financial advisor to come up with the right tax-savings strategies for you. Sincerely, Carol Bezaire Senior Vice President, Tax and Estate Planning Carol Bezaire Senior Vice President, Tax and Estate Planning Mackenzie Investments
4 Contents CHAPTER 1 What s new in 2013?...6 CHAPTER 2 All about mutual fund distributions What types of income does my mutual fund investment generate? 2. Why do some funds issue T3s (RL16 for Québec) and others T5s (RL3 for Québec)? 3. Why do funds make distributions? 4. Is my year-end distribution prorated if I invest in, say, November or December? 5. I didn t receive any distributions in cash. Why did I still get a tax slip? 6. What is return of capital? Do I pay tax on this? 7. How do I report income from my US-dollar account? 8. When I received a distribution, why did the price of my mutual fund drop? 9. What if my fund didn t declare a distribution? 10. Do mutual fund corporations pay out distributions in the same manner as mutual fund trusts? 11. Do segregated funds pay out distributions in the same manner as mutual fund trusts? CHAPTER 3 What tax slips will I receive from Mackenzie? Non-Registered Accounts - T3 (RL16 for Québec) and others T5s (RL3 for Québec) 2. Registered Accounts 2a. Registered Retirement Savings Plans (RRSPs) RRSP Contribution Receipts 2b. Registered Retirement Income Funds (RRIFs) 2c. Registered Education Savings Plans (RESPs) 2d. Locked-In Retirement Accounts (LIRAs) and Locked-In Retirement Savings Plans (LRSPs) 2e. Life Income Funds (LIFs) and Locked-In Retirement Income Funds (LRIFs) Withdrawal Receipts T4RIF (RL2 for Québec) 2f. Registered Disability Savings Plans (RDSPs) 3. Information applicable for non-residents of Canada NR4 4. Information applicable for US tax filers - PFIC AIS
5 CHAPTER 4 What happens if I redeemed or exchanged mutual fund securities during the year? How do I calculate my capital gains or capital losses? 1a. How do I calculate the adjusted cost base (ACB) of my securities? 1b. I know the ACB of my investment. How do I calculate the capital gain or loss? 2. Can I use the adjusted cost base (ACB) shown on my Mackenzie statement? 3. What do I do with capital losses? 4. How do I report redemptions on my US-dollar account? 5. What is a deemed disposition? 6. Tax consequences of a fund merger CHAPTER 5 Mackenzie tax-advantaged products and strategies...28 Mackenzie Corporate Class Funds Mackenzie Series T Tax-Free Savings Account Registered Disability Savings Plan (RDSP) The Mackenzie Charitable Giving Fund CHAPTER 6 Who do I contact if I have questions?...30 APPENDIX: The Forms...31 Quick Facts for Investors 1. Where do I report T3 (RL16 for Québec) distributions on my tax return? 2. Where do I report T5 (RL3 for Québec) distributions on my tax return? 3. Where do I report RRSP contributions on my tax return? 4. Where do I report withdrawals from my RRSP on my tax return? 5. Where do I report withdrawals from my RRIF on my tax return? 6. Where do I report my capital gains and losses on my tax return? 7. Where do I report my PFIC income?
6 6 MUTUAL FUND TAX GUIDE 2013 CHAPTER 1 What s new in 2013? 1. First-time Donor s Super Credit (FDSC) The federal charitable donation tax credit provides individuals with a non-refundable tax credit of 15% on the first $200 of annual contributions, plus 29% on donations in excess of $200. Spouses/common-law partners are permitted to combine donations to maximize tax savings. In 2013, the Federal Budget introduced a temporary 25% First-time Donor s Super Credit. The FDSC is in addition to the foregoing tax credits on the first $1,000 donation. This will raise the credit available on the first $200 to 40% (15% + 25%) and to 54% (29% + 25%) on donations between $200 and $1,000. This calculation will be available for the 2013 tax filings. Does this new rule apply to you? If you or your spouse/common-law partner have not claimed any donation credits (or the FDSC for years following 2014) since 2007, you would qualify as a First-time Donor. Please note: Donations must be cash only donations of appreciated publicly-listed securities will not qualify for the higher tax credit, but will allow any unrealized capital gain to be eliminated if donated in-kind. 2. Extension of Claim Period for the Adoption Expense Tax Credit The Adoption Expense Tax Credit (AETC) is a 15% non-refundable tax credit that allows adoptive parents to claim eligible adoption expenses relating to the completed adoption of a child under the age of 18 (up to $11,669 per child in 2013). This tax credit has only been available in the taxation year in which an adoption is finalized and only included eligible expenses incurred between the time that a child is matched with his or her adoptive family and the time that the child begins to permanently reside with the family. The change as of 2013 will allow expenses to be used beginning at the time of applying to register for adoption with an approved adoption agency or if an adoption-related application is made to a Canadian court, if that is earlier. 3. Workers Age 60 and Over Review the Canada Pension Plan Rules as they apply to you If you are between the ages of 60 and 70 and participated in the workforce in 2013, you should review the rules for CPP contributions (for all employees outside of Quebec). For employees between the ages of 60 and 65, CPP contributions continue to be mandatory, even if you are taking benefits. The employee contribution will be added to the calculation of your benefits in the following years. Once you reach age 65, CPP contributions are optional but you must make a specific election to opt out.
7 MUTUAL FUND TAX GUIDE Extension of the Investment tax credit Flow-through shares allow companies to renounce or flow through Canadian exploration expenses to investors who can deduct the expenses in calculating their own taxable incomes. The mineral exploration tax credit is an additional benefit, equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow through investors. The 2013 Federal Budget extended eligibility of this credit for one year, to flow-through agreements entered into on or before March 31, End of Deduction for Safety Deposit Box Rental In the past, taxpayers could deduct from their income, the annual cost for renting a safety deposit box from their financial institution if it was used in connection with earning investment income from a portfolio (i.e., to store and protect paper documents relating to investments). The Federal Budget eliminated this deduction as of Tax Reporting Assistance to US Taxpayers investing in Mutual Funds Mackenzie Investments and other Canadian mutual funds and Exchange-Traded Funds (ETFs) are viewed differently by the US Tax Authorities (IRS) and Canadian Tax Authorities. The IRS views Canadian mutual funds and ETFs as Passive Foreign Investment Corporations, which means they are subject to prescribed tax rules intended to curb the extent to which US persons can defer tax in the US through foreign investments. This can affect investors who reside in the US or who hold US citizenship/green cards and must file tax returns in both Canada and the US. In addition to T3 and T5 Canadian reporting, for affected investors, Mackenzie will provide a US PFIC annual information statement (AIS) which will detail specific ordinary earnings, net capital gains and other distribution information that will ease the burden of the US filings. This personalized tax reporting is available on all series of all Mackenzie Funds.
8 8 MUTUAL FUND TAX GUIDE 2013 CHAPTER 2 All about mutual fund distributions This chapter describes the distribution process and tax features of mutual funds. For a detailed explanation of how to report distributions on your income tax return, please see Appendix. 1. What types of income does my mutual fund investment generate? Mutual funds invest in a variety of stocks, bonds and other securities that generate various types of income for the fund. Also, when the fund sells an investment, it realizes a capital gain or capital loss on the transaction. Canadian dividends and capital gains are taxed at a lower rate by the federal and provincial governments compared to other income sources. Dividend income is eligible for the dividend tax credit and only 50% of a capital gain is taxed. As with your salary, interest income is fully taxed at your highest personal tax rate during the year. 2. Why do some funds issue T3s (RL16 for Québec) and others T5s (RL3 for Québec)? The type of income that your fund distributes to you will vary depending on whether the fund is structured as a mutual fund trust or a mutual fund The following table shows how each type of income is taxed. Investment Type of income earned Tax category Highest marginal tax rate* (Ontario 2013) After-tax value of $100 of income at highest marginal tax rate in Ontario Highest marginal tax rate (Québec 2013) After-tax value of $100 of income at highest marginal tax rate in Québec Shares of Canadian corporations Dividends Eligible Dividends 29.5% $ % $65 Other income Other income 46.4% $ % $50 Foreign stocks and bonds Canadian treasury bills, bonds, and mortgages When the fund sells investments Foreign interest and dividends Foreign non-business income 46.4% $ % $50 Interest Other income 46.4% $ % $50 Capital gains (losses) Capital gains (losses) 23.2% $ % $75 For a more detailed description of the income distributions of mutual fund trusts compared to mutual fund corporations, please see Question 10 in this chapter. *This ignores the 2% surtax that applies on income in excess of $509,000.
9 MUTUAL FUND TAX GUIDE corporation. Mutual fund trusts issue a T3 tax slip and mutual fund corporations issue a T5 tax slip containing investment income information. Residents of Québec will also receive a RL16 tax slip with their T3 tax slip and a RL3 tax slip with their T5 tax slip. 3. Why do funds make distributions? Funds make distributions so that, overall, you pay less tax. Here s how: Income earned by a mutual fund is subject to tax. If the income remains in the fund, the fund will pay the tax. However, if the income is distributed to investors, they pay the tax. Since mutual funds always pay tax at the highest tax rate for each category of income, and since many investors are taxed at a lower rate, the fund pays out the income so that it is taxed at a lower rate in the investor s hands rather than at the higher rate in the fund. Therefore, all investors are better off by having the fund pay a distribution. Many mutual fund investments are held inside registered plans. Distributions paid by a mutual fund into a registered plan are not taxable until withdrawn. 4. Is my year-end distribution prorated if I invest in, say, November or December? If you have investments in a fund when it pays a distribution, you will receive the full distribution, regardless of how long you have owned the fund. MACKENZIE TAX TIP Not all mutual fund distributions are taxed in the same manner. For example, mutual fund trusts distribute taxable income generated from a number of sources, from fixed income investments to equities. By comparison, a corporate class fund distributes only Canadian dividends or capital gains, which are taxed at a preferential rate. Remember, paying less tax can increase your overall investment returns, so when investing consider the structure of your mutual fund. The distribution received by each investor is determined by the number of units owned by that investor on the record day for the distribution multiplied by the declared distribution per unit. Investments purchased in non-registered accounts late in the year may have tax implications. For more information, please consult your financial advisor. 5. I didn t receive any distributions in cash. Why did I still get a tax slip? Distributions made by each fund are reinvested automatically to purchase additional units/shares of the fund. No sales charge is payable under this automatic reinvestment program. 1
10 10 MUTUAL FUND TAX GUIDE 2013 CHAPTER 2 Automatic reinvestment of distributions, however, does not provide any tax benefit. You receive the same tax treatment as you would if you actually received cash distributions and immediately purchased more units of the fund. When distributions are automatically reinvested, however, you profit from the compounding growth of the value of your investment. When you use Mackenzie Investments One-Step Dollar Cost Averaging you benefit from dollar cost averaging in a non-registered account, which reflects the various purchase prices every time a distribution is reinvested. This affects your adjusted cost base and may reduce the tax payable when you sell units. 6. What is return of capital? Do I pay tax on this? Distributions from some funds include a return of capital. This is an amount included in the distribution that is above and beyond the taxable income of the fund for the year. You do not pay tax on this amount and you do not include it in your taxable income for the year. The return of capital, however, may cause a decrease to your adjusted cost base. When you sell your fund, a higher capital gain may result. The return of capital is included in the detailed breakdown of distributions on the back of the tax slip so that you can calculate the adjusted cost base of your investment (see the adjusted cost base calculation on pages 19-22). For a T3, it is found in box 42. T5 tax slips do not record this amount. 7. How do I report income from my US-dollar account? For Canadian income tax purposes, all transactions must be reported in Canadian dollars. Your T3 (RL16 for Québec) and T5 (RL3 for Québec) tax slips have been issued in Canadian dollars. Distributions paid to your US dollar account have been converted to Canadian dollars at the rate of CDN$ On the back of your T3 (RL16 for Québec) or T5 (RL3 for Québec) slip we have indicated the relevant exchange rates. 8. When I received a distribution, why did the price of my mutual fund drop? When a fund makes a distribution, its unit price drops by an amount equal to the distribution per unit. However, the overall value of your investment is unchanged. Here s why: If your distributions are automatically reinvested, they are used to purchase more units of the fund. As a result, you will own more units. When you multiply the higher number of units by the new, lower price, you will find that the value of your holdings is unchanged. If your distributions are paid out in cash, the remaining value of your investments plus the cash in hand will equal the value of your holdings before the distribution. 9. What if my fund didn t declare a distribution? Distributions are not an indicator of fund performance. There is no link between the amount of the distribution made by a fund in any year and the fund s performance for that year.
11 MUTUAL FUND TAX GUIDE The following example of an investment in a mutual fund trust shows why the value of your investment remains unchanged when you receive a distribution. Activity Calculations Total Investment Value Before a distribution You own 100 units at $10 per unit. $1,000 Distribution declared Distribution of $0.50 per unit. You receive $50 (100 units x $0.50) Unit price drops The fund unit price is now $9.50. ($10.00 less $0.50) Distribution reinvested You reinvest the $50 to buy additional units at $9.50 per unit. You receive units ($50 $9.50 = 5.263) so that you now own units After the distribution (if you reinvested) You own units at $9.50 per unit. $1,000 After the distribution (if you received cash) You own 100 units at $9.50 per unit. You received $50 in cash. $950 $50 $1,000 Unless a fund has a fixed distribution, generally a distribution is paid to ensure that the fund does not have to pay tax. Any increase in the value of investments in the fund are not included in the taxable income of the fund until an investment is sold. In this way, the increase in value of the mutual fund s investments can compound tax-free until they are sold and new investments are acquired. To understand this, let s look at the components of fund performance: Performance Component Net income, which is equal to dividend and other income earned by the fund less management expenses Realized gains on the sale of portfolio securities Unrealized gains from market appreciation of portfolio securities Taxable? Yes Yes No
12 12 MUTUAL FUND TAX GUIDE 2013 CHAPTER Do mutual fund corporations pay out distributions in the same manner as mutual fund trusts? No, trusts and corporations pay out differently. When income is distributed from a mutual fund trust, it flows through to the investor so that the trust can distribute the full range of income shown in the table on page 8. The trust may also flow through the dividend tax credit and a foreign non-business tax credit. This arises when the fund has tax withheld by foreign governments on interest and dividends earned in foreign countries. Mutual fund corporations can only flow through Canadian dividends, capital gains dividends and the dividend tax credit. 11. Do segregated funds pay out distributions in the same manner as mutual fund trusts? Although segregated funds and mutual funds have many similarities, there are some differences in how segregated funds are treated under the Canadian Income Tax Act. Segregated fund investors are not investors of a fund, but contract holders of an insurance policy. This means that income earned in the segregated fund is deemed to be allocated to the contract holders, not distributed out to investors as with a mutual fund. In other words, allocations are not paid out to investors by way of a cheque or through the purchase of additional units, but instead all income is reinvested and reflected by an increase in the unit price. Allocations are reflected by an increase or decrease in the adjusted cost base (ACB). MACKENZIE TAX TIP Looking for income while paying the least amount of tax as possible? Mutual funds offer both systematic withdrawal plans (SWPs) and tax-efficient withdrawals from corporate class funds (Series T). Both options provide cash flow that is a combination of tax-free return of capital and capital gains or dividends, which are taxed at a far lower rate than income. 2
13 MUTUAL FUND TAX GUIDE CHAPTER 3 What tax slips will I receive from Mackenzie? 1. Non-Registered Accounts T3 (RL16 for Québec) and T5 (RL3 for Québec) To provide you with investment income information, mutual fund trusts issue T3 tax slips and mutual fund corporations issue T5 tax slips. Residents of Québec also receive a Relevé 16 tax slip for distributions from a mutual fund trust and a Relevé 3 for distributions from a mutual fund corporation. These tax slips do not record any capital gains or losses that you may have realized on the redemption of your mutual fund investment during the year. Tax reporting requirements on the redemption or disposition of your investments are discussed on page 18. To reduce the number of tax slips you receive, Mackenzie issues a consolidated T3 tax slip for distributions from Mackenzie funds that are trusts, and a separate consolidated T5 tax slip for distributions from funds that are corporations. The back of each T3 (RL16 for Québec) and T5 (RL3 for Québec) shows a detailed breakdown, by fund, of the distributions. Mackenzie issues a tax slip if you received $1 or more in distributions from a fund during the year. However, if you received less (as shown on your annual statement of account), you are still required to report this amount on your income tax return. T3 (RL16 for Québec) and T5 (RL3 for Québec) tax slips are issued for non-registered accounts only. Distributions paid to registered accounts (RRSP, RRIF, RESP, LIF, LIRA, LRIF, PRIF, DPSP, RPP, LRSP, GRSP, RDSP and TFSA) are not taxable as they remain in the tax shelter. 2. Registered Accounts Depending on the type of registered plan, you may receive contribution and withdrawal receipts. Tax receipts that are used for these taxable transactions are described on the following pages. You will not receive a receipt for distributions made by the funds to a registered plan because they are not subject to tax. As well, capital gains (or losses that are realized on the redemption or exchange of your investments within a registered plan) are also not taxable until the funds are taken out of the plan. You do not report them on your tax return until the funds are taken out of the plan. The distribution cannot be used as a deductible RRSP contribution. Tax receipts will not be provided for withdrawals made from your Tax-Free Savings Account (TFSA) because withdrawals are not taxable. But if a TFSA holder dies, the recipient of the TFSA may be taxed on any growth in the TFSA from the date of death to the date of distribution. A T4A receipt will be issued for any portion of the deceased s TFSA that may be taxable.
14 14 MUTUAL FUND TAX GUIDE 2013 CHAPTER 3 2a. Registered Retirement Savings Plans (RRSPs) RRSP Contribution Receipts When you make an RRSP contribution, you can generally deduct the amount from your income on your tax return, thereby reducing the amount of tax you pay. We issue three types of contribution receipts (r1, r2, r3). The type you will receive depends on when you made the contribution, and whether you transferred in a retiring allowance to your RRSP. r1 r2 Rest of Year receipts If you made a contribution to your Mackenzie RRSP, or your spouse s Mackenzie RRSP, between March 1, 2013 and December 31, 2013, you will receive a Rest of Year contribution receipt. This receipt is marked Contributions During the Remainder of st 60 days receipts If you made contributions during the first 60 days of 2014, you will receive a contribution receipt marked 1st 60 days. If you make more than one contribution during this period, you may receive more than one receipt. You have until March 3, 2014 to make a contribution that is deductible from your 2013 income. We consolidate RRSP receipts for the 1st 60 days for systematic contributions (this includes Pre-Authorized Chequing transactions & Group RSP contributions). These transactions are consolidated and issued after the deadline. The only RRSP receipts that we issue on the fly are for lump sum contributions. r3 MACKENZIE TAX TIP Always take advantage of taxdeferred compounding to help your investments grow faster. One way to do this is to invest in a corporate class fund which allow you to change your asset mix. When you do, you won t have to pay tax on your capital gain or loss until you want to. And by paying less tax, you ll have a greater amount of money working for you. Transfer of a Retiring Allowance to a Mackenzie RRSP If you transferred in a Retiring Allowance under section 60(j.1) of the Income Tax Act, you will receive a separate contribution receipt in that amount. Is the receipt different for a contribution made to a spousal plan? Yes, slightly. Under the section, Name of annuitant, the name of your spouse will be shown. The social insurance number (SIN) of your spouse will also appear. If the contribution is not for a spousal plan, then the Name of annuitant section will state same as contributor and only your SIN will be shown. 3
15 MUTUAL FUND TAX GUIDE RRSP Withdrawal Receipts T4RSP (RL2 for Québec) If you withdraw funds from an RRSP, you must add the amount of the withdrawal to your income. By law, we are required to withhold a percentage of the amount withdrawn and send it to Canada Revenue Agency or Revenu Québec. When completing their tax returns, residents may owe additional tax to Canada Revenue Agency or Revenu Québec. Withholding tax rates are listed on page 32. If you made a withdrawal from your RRSP during the year, you will receive a T4RSP (RL2 for Québec). This receipt shows the amount withdrawn, after allowing for any redemption charges if applicable, and any tax that has been withheld. If you are a non-resident, you will receive an NR4 receipt that shows the net amount withdrawn and the tax that has been withheld. If I make a withdrawal from more than one fund, how many receipts will I receive? You will receive a single T4RSP (RL2 for Québec) tax receipt if the withdrawals were from the same account. What happens if my spouse made a withdrawal from an RRSP to which I contributed? Your spouse will receive a T4RSP (RL2 for Québec) and will generally include the withdrawal in his or her income. However, if the withdrawal was made in the year in which you contributed to the plan, or in the previous two calendar years, you must include the amount withdrawn in your income for the year in which the withdrawal was made. This rule does not apply if you are separated or divorced. 2b. Registered Retirement Income Funds (RRIFs) Each year, other than the year in which the RRIF is established, you must withdraw a minimum amount from your RRIF. Withdrawals from a RRIF are included as income in the year of withdrawal. If you withdraw more than the minimum amount, we must withhold tax at the time of withdrawal. The minimum amount to be withdrawn, and the amount of tax required to be withheld on withdrawals over this amount, depends on the following factors: the value of the account, your age (the annuitant), or your spouse s age, and the year in which you moved the RRSP assets to a RRIF. Please consult your financial advisor for more information.
16 16 MUTUAL FUND TAX GUIDE 2013 CHAPTER 3 Do I receive a contribution receipt when I transfer an RRSP to a RRIF? In most instances you will not receive a receipt on the transfer of your RRSP to a RRIF. Can I transfer other amounts to a RRIF? Yes, in very limited circumstances. For example, if your spouse dies and you are the sole beneficiary of your spouse s RRSP, you are permitted to transfer their RRSP to your RRIF on or before December 31 of the year after the year of death. In this instance you will receive two receipts, a T4RSP (RL2 for Québec) to report the income inclusion and a contribution receipt for the same amount that will offset the income inclusion. RRIFs Withdrawal Receipts T4RIF (RL2 for Québec) If you made a withdrawal from your RRIF during the year, you will be issued a T4RIF (RL2 for Québec). It will show the amount withdrawn and the tax that has been withheld. If you are a non-resident, you will receive an NR4 receipt. 2c. Registered Education Savings Plans (RESPs) Contributions made to an RESP are not taxdeductible, and therefore you will not receive a tax receipt. There is no maximum annual contribution to a RESP, but there is a lifetime limit of $50,000. The federal government has provided a Canada Education Savings Grant (CESG) equal to 20% of the first $2,500 annual contribution to a RESP per beneficiary under the age of 18. MACKENZIE TAX TIP Investing on behalf of a child under age 18 outside of an RESP can pose tax problems for the adult contributor. Under the Canadian Income Tax Act, income other than capital gains is attributed to the adult and capital gains are taxed in the hands of the child. The tax burden can be reduced by investing in a corporate class fund, which allows you to defer taxes. The maximum annual grant is $500 creating a maximum lifetime total grant of $7,200. Additional grants are also available for low-to-middle income families as well as for Alberta residents. The Quebec government offers the Quebec Education Savings Incentive which pays a grant of up to $250 annually into an RESP. Depending on family income up to an additional $50 per year can be added to the basic grant. Grants are retroactive for up to three years. The Saskatchewan government offers the Saskatchewan Advantage Grant for Education Savings ( SAGES ) which pays a grant of up to $250 annually into an RESP. Legislation was implemented in 2013 for retroactive payments back to January 1, Please ask your advisor if you qualify. You will not receive the grant payments in cash, instead Human Resources and Skills Development Canada forwards the grant(s) to Mackenzie for investment in the RESP. 4
17 MUTUAL FUND TAX GUIDE The growth portion of the RESP (i.e., all interest, dividends, CESG and capital gains generated by the contributions) at the time that it is paid out to the beneficiary from the plan is included in the income of the beneficiary in the year of payment. A T4A (RL1 for Québec) tax receipt will be issued to the beneficiary for the growth portion paid out (the original amounts contributed to the RESP are paid out tax-free). 2d. Locked-In Retirement Accounts (LIRAs) and Locked-In Retirement Savings Plans (LRSPs) Since the assets in these accounts are locked in, tax receipts are not normally issued. 2e. Life Income Funds (LIFs) and Locked-In Retirement Income Funds (LRIFs) Withdrawal Receipts T4RIF (RL2 for Québec) If you made a withdrawal during the year from your LIF or LRIF, you will be issued a T4RIF (RL2 for Québec), which will show the amount withdrawn, and the tax that has been withheld if applicable. Non-residents will receive an NR4 receipt. 2f. Registered Disability Savings Plans (RDSPs) Contributions to an RDSP are not tax-deductible, and therefore you will not receive a tax receipt. There is no maximum annual contribution to an RDSP, but there is a lifetime limit of $200,000. Contributions to an RDSP can be invested and grow tax-deferred, and the Government of Canada provides generous grants and bonds to eligible beneficiaries. The growth portion of the RDSP (i.e., all interest, dividends, Canada Disability Savings Grants, Canada Disability Savings Bonds and capital gains generated by the contributions) is taxable to the beneficiary when it is withdrawn from the RDSP. A T4A tax receipt will be issued to the beneficiary for the growth portion that is paid out. 3. Information applicable for non-residents of Canada NR4 Non-residents holding a non-registered account will not receive a T3 or T5 tax slip but instead will receive an NR4 supplementary tax slip to report the taxable portion of the distributions from the funds. The NR4 tax slips have not been consolidated and you will receive a separate receipt for each of your funds that paid a distribution. Depending on your country of residence, Mackenzie must withhold 15% to 25% tax on your distribution, excluding any capital gains or return of capital components. Your distribution, excluding any return of capital component, is shown in Box 16 Gross Income. The tax, which Mackenzie withheld from your distribution and remitted to Canada Revenue Agency, is shown in Box 17. Withholding taxes paid to Canada Revenue Agency are generally deductible against tax payable in your country of residence. If you made withdrawals from a registered account in the year, you will receive an NR4 tax slip that shows the amount withdrawn in Box 16 and the tax that has been withheld in Box Information applicable for US tax filers PFIC AIS In addition to an NR4, T3 or T5, Mackenzie will supply a PFIC (AIS) or detailed income statement as required. For further information, please consult your financial or tax advisor.
18 18 MUTUAL FUND TAX GUIDE 2013 CHAPTER 4 What happens if I redeemed or exchanged mutual funds securities during the year? Registered Accounts If you hold your securities in a registered account (RRSP, RRIF, RESP, LIF, LIRA, LRIF, PRIF, DPSP, RPP, LRSP, GRSP and TFSA), any gains realized on the redemption of those units are not subject to tax. Non-Registered Accounts If you hold your securities in a non-registered account, and redeemed or exchanged your securities during the year, you will need to report the corresponding capital gains or losses on your tax return. Please refer to your Annual Statement of Account to identify redemptions or exchanges that occurred during the year. In addition, you will also need to report any deemed dispositions. Please see page 23. Fund Switches However, if you switch from shares of one fund to shares of another fund within the Mackenzie Capital Class structure, the switch occurs on a tax-deferred rollover basis so that you will not realize a capital gain or capital loss on the switch. The cost of the shares of the new fund acquired on a switch will be equal to the adjusted cost base of the shares switched from the old fund. If you change shares of one series of a fund to another series of the same fund, the tax consequences are similar. Fund Exchanges An exchange is the sale of securities of one fund to purchase securities of another fund. When you exchange Fund A for Fund B, you have actually sold, or redeemed Fund A and purchased Fund B. It is therefore a taxable transaction.
19 MUTUAL FUND TAX GUIDE Calculating your adjusted cost base (ACB) For actions you can take with respect to capital losses, please see page How do I calculate my capital gains or capital losses? To calculate your capital gains or capital losses, you first need to calculate the adjusted cost base (ACB) of your units. The following tables describe, and walk you through, the ACB and capital gains calculations using a hypothetical example. MACKENZIE TAX TIP To make sure your adjusted cost base (ACB) is correct, it s important to keep accurate records of your mutual fund transactions, including reinvested distributions. Your ACB affects the tax you pay on your capital gain (or loss) which occurs when you sell your mutual fund units. 5 The total of all amounts paid to purchase your securities including any sales commission paid at the time of purchase The amount of any reinvested distributions The return of capital component of distributions The ACB of any securities previously redeemed = your The ACB of securities 1a. How do I calculate the ACB of my securities? The ACB is easier to calculate on a total investment basis rather than on a per unit/share basis. To obtain the ACB per unit/share, divide the total ACB by the number of units/shares held. For a partial redemption, the capital gain or loss is determined by multiplying the ACB per unit/share by the number of units/shares redeemed.
20 20 MUTUAL FUND TAX GUIDE 2013 CHAPTER 4 ACB Example (refer to the next page for calculations) Transaction 1 Purchase During 2012 an investor purchased $5,000 of Fund A, a Mutual Fund Trust at $14.00 per unit for a total of units ($5,000 divided by $14.00). Transaction 2 Purchase Later during 2012, the investor made a second purchase of $5,000 of Fund A at $15.00 per unit for a total of units ($5,000 divided by $15.00). Transaction 3 Distribution On December 31, 2012, the fund paid a distribution of $0.30 per unit. This investor received a distribution of $ ( units x $0.30) which was reinvested in additional units at $ per unit, the price at year end additional units were purchased ($ divided by $ ). The distribution also included a return of capital of $ per unit, or $5.04 in total ( units x $0.0073). After the distribution, the ACB becomes $ per unit ($10, divided by units). Transaction 4 Redemption On June 30, 2013, the investor redeemed 300 units at $18 per unit for gross redemption proceeds of $5, The investor paid a 5.5% redemption fee at that time and therefore received net proceeds of $5,103 in cash (5.5% x $5,400 = $297 redemption fee). The ACB of the 300 units redeemed is $4, (300 multiplied by the ACB per unit of $ ). The total Adjusted Cost Base of the remaining units is reduced by $4, The new total ACB is $5,847.84, the remaining number of units is and the ACB per unit remains at $ The ACB per unit immediately after a partial redemption is the same as the ACB per unit immediately before the redemption.
21 MUTUAL FUND TAX GUIDE ACB Calculations The ACB of your units, on a total investment basis is equal to the following: The ACB would be calculated as follows: Transactions 1 & 2 Total Cost Units ACB Per Unit The total of all amounts paid to purchase your units, including any commissions you paid at the time of purchase: $5, $5, $10, Transaction 3 Plus: The amount of any reinvested distributions $ Less: The return of capital component of distributions (regardless of whether or not the distribution was paid in cash or reinvested in additional units) ($5.04) $10, Transaction 4 Less: The Adjusted Cost Base of any units redeemed ($4,354.26) (300.00) Adjusted Cost Base of units remaining $5,
22 22 MUTUAL FUND TAX GUIDE 2013 CHAPTER 4 1b. I know the ACB of my investment. How do I calculate the capital gain or loss? The capital gain or loss from the example shown would then be calculated as follows: Activity Proceeds of disposition $5, (the gross amount of the redemption which is equal to the net asset value per security the price on the date of the redemption multiplied by the number of units redeemed i.e., $18 per unit x 300 units): Less The Adjusted Cost Base of the securities (see Adjusted Cost Base calculation in previous chart) ($4,354.26) Less: Any expenses incurred on the redemption of the securities (such as redemption fees and administrative costs i.e., 5.5% redemption fee $5,400 x 5.5%) ($297.00) Capital gain (loss) $748.74
23 MUTUAL FUND TAX GUIDE Can I use the adjusted cost base (ACB) shown on my Mackenzie statement? You should always use your own investment records to calculate the adjusted cost base and the capital gain or loss. Mackenzie is required to report your sale or switch from one fund to another mutual fund except a switch within the Mackenzie Corporate Class structure, to Canada Revenue Agency. Please refer to your statement, which contains necessary information for completing your income tax return for reporting capital gains and losses. You will not receive any other form (T5008) (RL18 for Québec), which provides information for capital gain and loss calculations. While every effort is made to ensure the accuracy of the ACB of your securities, our record keeping cannot include any adjustments that are specific to your individual circumstances, such as a deemed disposition. (Please see section 5 on this page for a description of deemed dispositions.) Also, the ACB shown on your statement may not include all adjustments for the return of capital component of distributions. For tax purposes, you are required to maintain records to support the amounts reported on your tax returns. An ACB worksheet similar to that shown on the previous page will assist you in your record keeping. 3. What do I do with capital losses? Capital losses can only be used to reduce or offset capital gains realized in the current tax year, the previous three taxation years, or they can be carried forward indefinitely to reduce future capital gains. To carry back a net capital loss, you must file Form T1A Request for loss carryback and file it with the tax return for the year in which the loss arises. You can obtain copies of the form from your local tax office or get it online. 4. How do I report redemptions on my US-dollar account? For Canadian income tax purposes, all transactions must be reported in Canadian dollars. You will have to translate the US-dollar proceeds to Canadian dollars. The ACB of your investment needs to be converted from US dollars to Canadian dollars using the exchange rate in effect at the time of each transaction for purchases, reinvested distributions, and the return of capital component of distributions. 5. What is a deemed disposition? Transactions other than a redemption may give rise to a deemed disposition. The types of transactions that can give rise to a deemed disposition include, but are not limited to, the following: Death of an investor in most circumstances The transfer of your securities from a nonregistered investment account to an RRSP (any deemed capital losses arising on the transfer are deemed to be nil) If you gift the securities to someone other than your spouse (if you gift property to your spouse, the attribution rules may apply) Ceasing to be a Canadian resident
24 24 MUTUAL FUND TAX GUIDE 2013 CHAPTER 4 The proceeds of a deemed disposition are equal to the fair market value of the investment at the time of the transaction. Generally, the difference between the deemed proceeds of disposition and the adjusted cost base will result in a capital gain or loss. Please consult Canada Revenue Agency s Capital Gains Guide or your financial or tax advisor for more information. 6. Tax Consequences of a Fund Merger Mackenzie may initiate a fund merger where the interest of investors in certain funds are best served by merging the fund into another. Fund mergers can only proceed with investor approval or by Independent Review Committee approval combined with advance investor notice. Approval from Canadian securities regulators may also be required. Trust-to-Class Merger Units of the discontinued mutual fund trust are exchanged for shares of the continuing Mackenzie corporate class fund. This merger results in a disposition of the investor s units for proceeds equal to the fair market value of the shares received on the merger. Non-Registered Investors If a capital gain is realized on the merger, an investor has two options: 1. To report the Capital Gain: An investor will report the disposition of the mutual fund trust units on Schedule 3 of their income tax return for the taxation year that includes the date of the merger. 2. To defer the Capital Gain: An investor must complete a Tax Election Form and Power of Attorney, including signatures, and send it to Mackenzie before the relevant due date. You can obtain this tax package by calling Mackenzie Client Relations at (or ). This will authorize Mackenzie to complete the necessary tax election forms and file them on the investor s behalf with CRA (and Revenu Québec, if applicable) to defer the capital gain on the investor s units until the investor disposes of their shares of the Mackenzie corporate class fund. The investor, for this option, is not required to report the merger transaction on their income tax return.
25 MUTUAL FUND TAX GUIDE If a capital loss is realized on the merger, this amount should be reported on Schedule 3 of the investor s income tax return to offset any capital gains that an investor realized during the year. Furthermore, any unused portion of the investor s capital losses can be used to reduce capital gains realized in the previous three taxation years or they can be carried forward indefinitely to reduce future capital gains. Registered Investors There is no tax impact to registered investors. Trust-to-Trust Taxable Mergers Units of the discontinued mutual fund trust are exchanged for units of the continuing Mackenzie Fund. This merger results in a disposition of the investor s units for proceeds equal to the fair market value of the units received on the merger. More income tax information on mergers can be found in the information circulars sent to investors or on our website at mackenzieinvestments.com. Trust-to-Trust Merger or Class-to-Class Merger Tax-Deferred Mergers Units of the discontinued mutual fund trust/class are exchanged for units of the continuing mutual fund trust/class. This transaction for Canadian income tax purposes is not a disposition and thus is not taxable to the investor. The cost of the new units of the continuing fund is equal to the adjusted cost base of the units that were originally held.
26 26 MUTUAL FUND TAX GUIDE 2013 CHAPTER 4 Fund Mergers January 1, 2013 to December 31, 2013 Date Terminating Fund Name Continuing Fund Name Type of Merger August 2, 2013 Mackenzie All-Sector Canadian Symmetry Balanced Portfolio Trust to Trust Balanced Fund August 2, 2013 Mackenzie Cundill Global Balanced Fund Mackenzie Cundill Canadian Balanced Fund Trust to Trust August 2, 2013 Mackenzie Cundill Global Dividend Fund Mackenzie Global Dividend Fund Trust to Trust (formerly known as Mackenzie Universal Global Infrastructure Income Fund) August 2, 2013 Mackenzie Cundill International Class Mackenzie International Growth Class Corp to Corp (formerly known as Mackenzie Universal International Stock Class) August 2, 2013 Mackenzie Focus Far East Class Mackenzie Emerging Markets Class Corp to Corp (formerly known as Mackenzie Universal Emerging Markets Class) August 2, 2013 Mackenzie Focus International Class Mackenzie International Growth Class Corp to Corp (formerly known as Mackenzie Universal International Stock Class) August 2, 2013 Mackenzie Focus Japan Class Mackenzie International Growth Class Corp to Corp (formerly known as Mackenzie Universal International Stock Class) August 2, 2013 Mackenzie Ivy All-Canadian Class Mackenzie Canadian All Cap Value Class Corp to Corp (formerly known as Mackenzie Saxon Stock Class) August 2, 2013 Mackenzie Maxxum All-Canadian Mackenzie Canadian All Cap Dividend Class Corp to Corp Dividend Class (formerly known as Mackenzie Saxon Dividend Income Class) August 2, 2013 Mackenzie Maxxum Monthly Income Fund Mackenzie Canadian All Cap Balanced Fund Trust to Trust (formerly known as Mackenzie Saxon Balanced Fund) August 2, 2013 Mackenzie Sentinel Managed Return Class Mackenzie Canadian Bond Fund (formerly known as Mackenzie Sentinel Bond Fund) Corp to Trust August 2, 2013 August 2, 2013 Mackenzie Universal All-Canadian Growth Class (A Class) Mackenzie Universal All-Canadian Growth Class (B Class) Mackenzie Canadian All Cap Value Class (formerly known as Mackenzie Saxon Stock Class) Mackenzie Canadian All Cap Value Class (formerly known as Mackenzie Saxon Stock Class) August 2, 2013 Mackenzie Universal Canadian Shield Fund Mackenzie Canadian All Cap Value Class (formerly known as Mackenzie Saxon Stock Class) August 2, 2013 Mackenzie Universal Health Sciences Class Mackenzie US Growth Class (formerly known as Mackenzie Universal North American Growth Class) August 2, 2013 Mackenzie Universal Technology Class Mackenzie US Growth Class (formerly known as Mackenzie Universal North American Growth Class) Corp to Corp Corp to Corp Trust to Corp Corp to Corp Corp to Corp
27 MUTUAL FUND TAX GUIDE Fund Mergers January 1, 2013 to December 31, 2013 Date Terminating Fund Name Continuing Fund Name Type of Merger August 2, 2013 August 2, 2013 Mackenzie Universal U.S. Emerging Growth Class Mackenzie Universal World Real Estate Class Mackenzie Global Small Cap Growth Class (formerly known as Mackenzie Ivy Enterprise Class) Mackenzie Global Dividend Fund (formerly known as Mackenzie Universal Global Infrastructure Income Fund) August 16, 2013 Mackenzie Saxon Microcap Fund Mackenzie Canadian Small Cap Value Class (formerly known as Mackenzie Saxon Small Cap Class) August 16, 2013 Mackenzie All-Sector Canadian Equity Fund Mackenzie Canadian All Cap Value Class (formerly known as Mackenzie Saxon Stock Class) Corp to Corp Corp to Trust Trust to Corp Trust to Corp August 16, 2013 Mackenzie Cundill World Fund Mackenzie Cundill Value Class Trust to Corp August 16, 2013 Mackenzie Focus All-Canadian Class Mackenzie Canadian All Cap Value Class Corp to Corp (formerly known as Mackenzie Saxon Stock Class) August 16, 2013 Mackenzie Ivy European Fund Mackenzie Ivy European Class Trust to Corp August 16, 2013 Mackenzie Maxxum All-Canadian Equity Class Mackenzie Canadian All Cap Value Class (formerly known as Mackenzie Saxon Stock Class) Corp to Corp August 16, 2013 Mackenzie Sentinel Short-Term Government Bond Fund Mackenzie Canadian Short Term Income Fund (formerly known as Mackenzie Sentinel Short-Term Income Fund) August 16, 2013 Mackenzie Universal Global Growth Fund Mackenzie Global Growth Class (formerly known as Mackenzie Universal Global Growth Class) August 16, 2013 Mackenzie Universal Precious Metals Fund Mackenzie Precious Metals Class (formerly known as Mackenzie Universal World Precious Metals Class) December 6, 2013 Mackenzie Sentinel Cash Management Fund Mackenzie Canadian Money Market Fund (formerly known as Mackenzie Sentinel Money Market Fund) Trust to Trust Trust to Corp Trust to Corp Trust to Trust