Taxes

Taxes, along with fees, can take a sizeable bite out of your returns. Tax liabilities are often generated from portfolio turnover, which is the cholesterol of investing - keeping it low is key to staying in good financial shape. To help ensure you're managing your portfolio in a tax-efficient manner, there are a number of strategies you can pursue.

Structure Your Portfolio with Taxes in Mind

If you hold both a non-taxable account (RRSP or RRIF) and a taxable account (investment account), be sure to structure your overall portfolio so that you hold tax-inefficient investments in your non-taxable account.

Generally speaking, there are three types of investment income that are subject to tax in Canada:

• Interest income: income received from a bond or money market security.
• Dividend income: income received from a common share.
• Realized capital gains: the profits received from the sale of a security.

Interest income is taxed at your highest marginal tax rate, and is therefore the most tax-inefficient form of investment income. Capital gains and dividends received from eligible Canadian corporations receive favorable tax treatment. Only 50% of a realized capital gain is taxable in your hands, while the federal and provincial dividend tax credits help reduce the tax you pay on eligible dividend income.

We expect that the primary sources of investment income generated from the Steadyhand funds will be as follows:

• Savings Fund: interest income.
• Income Fund: interest income and dividend income.
• Equity Fund: realized capital gains and dividend income.
• Global Equity Fund: realized capital gains and dividend income.
• Small-Cap Equity Fund: realized capital gains and dividend income.

To the extent possible, you should structure your portfolio of Steadyhand funds with the fixed income funds held in your RRSP or RRIF, and the equity funds held in your investment account. If you have unique income needs or a complex tax situation, you should consult a tax advisor for further advice.

Minimize Turnover within Your Portfolio

The quickest way to make a small fortune is to start with a large fortune and trade it a lot.- Wall Street Wisdom Our portfolio managers do their part to limit turnover within our funds, and it’s up to you to do yours. In other words, limit trading within your portfolio. Aside from the fact that frequent switching between funds will more than likely damage your long-term returns, it will also lead to unwanted capital gains.

While you should seek to limit turnover within your portfolio, you shouldn’t do so at the expense of rebalancing. If you find that your asset mix has strayed noticeably from your strategic target, it’s important that you rebalance your portfolio. This may trigger tax consequences, but over the long term it’s more important to stay on track with your investment objective than it is to minimize your taxes.

Be Aware of Pending Distributions

If you are considering purchasing units in a fund, be aware of any accrued income or capital gains that have been realized but not yet distributed. For example, if you purchase units towards the end of a calendar year in a fund that realized substantial capital gains earlier in the year, you will receive a capital gains distribution at the end of the year, even though you did not participate in the gains.

To determine if a particular Steadyhand fund has realized a large capital gain(s) that is pending distribution, feel free to email us or give us a call at 1.888.888.3147.

Additional Resources

If you’re seeking additional information on taxes, check out the following sites:

• Canada Revenue Agency
• Deloitte
• PriceWaterhouseCoopers
• Ernst & Young