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What Is An Annuity?

"An annuity is like a mortgage payment in reverse. Instead of borrowing money, you are investing money with a financial institution like Manulife. With a simple, one-time deposit, Manulife will make regular income payments to you that contain both interest and principal. But, unlike a mortgage that ends after a specific period, Manulife Annuity payments can continue for the rest of your life, no matter how long you live." - Manulife Financial

What are Seg Funds?

"Segregated funds and mutual funds both offer investors an opportunity to ‘grow’ their investment capital (the money they invest), and provide access to professional fund management. Usually, both allow investors to diversify with different fund managers and fund types.

Segregated fund contracts are insurance contracts known as individual variable annuities that offer death benefits and maturity guarantees. Segregated fund contracts offer the growth potential of mutual funds, plus valuable wealth protection features only available through an insurance company." - Manulife Financial

Common questions for the 2010 Tax season

GIANCARLO ALFONSO, Marketing Director, Eastern Region, HUB Financial

info@justincaseinsurance.com

Tax Advantages of Segregated Funds VS Mutual Funds

With the 2010 tax season upon us, advisors are likely to be questioned on their clients’ tax liability. Notably, two of the most common questions investors will ask are:

I haven’t sold any units, so why did I receive a T3 slip?

The income earned within a segregated fund must be allocated to each unit holder on an annual basis. This allocation is done periodically throughout the year. At the end of the year, the income allocated to each unit holder is reported to that unit holder on a T-3 Slip.

The value of my fund has declined so why is there income or a capital gain reported on my T3?

All income earned by a fund during the year must be allocated out to the unit holders. It is important to understand that income can be attributed in two ways. The first is through gains (losses) and income earned by the Fund itself as a result of the fund manager’s trading profits, as well as through dividends and interest received on the investments. The second source is through gains incurred when the individual investor redeems fund units at a profit. For tax purposes, most mutual funds are set up as trusts. What this means is that income earned by the fund itself is flowed through to unit holders. By distributing the income to investors, the investors pay tax at a potentially lower rate. Sources of income distributed to unit holders can be in the form of interest, dividends, capital gains and foreign income. Unless the investments are held within an RRSP, income received on your clients’ investment funds is reported on their T3 Tax Slip and must be declared on their tax return.

How is Tax Allocated

Mutual fund income is distributed, either by deposit or automatic re-investment. Many mutual funds distribute income either semi-annually or annually to all unit holders of record on a certain day, regardless of how long the unit holder actually held units in the fund. Segregated fund income is not distributed but allocated. The income that is allocated is not paid out to the investor by way of cheque or the purchase of additional units in the fund, but instead all income is reinvested and reflected through an increase in the unit price. Income earned within a segregated fund is allocated to unit holders on a monthly basis. Furthermore, tax reporting is made simpler with segregated funds such that the insurance companies keep track of the unit holder’s adjusted cost base. When an investor redeems units, they are issued a T3 that shows the exact amount of taxable gains they must report on their income tax return. Mutual fund unit holders are not provided with a T3 slip when they redeem units. They must calculate the gains or losses themselves. As well, Capital losses within a segregated fund are allocated to its investors. The capital losses can be used to offset capital gains from any source in the previous three years or they can be carried forward indefinitely to offset future capital gains. Capital losses within a mutual fund are maintained within the fund and used to offset future capital gains within the fund. In summary, some of the major tax advantages of segregated funds over Mutual Funds are:

• Income is not distributed but allocated to the unit holder

• Insurance companies keep track of the unit holder’s adjusted cost base for tax reporting

• Income earned within a segregated fund is pro-rated to investors on a monthly basis

• Capital losses within a segregated fund are allocated to its investors When it comes to income tax reporting, segregated funds clearly have the advantage.

Annuities & Segregated Funds
Investor Profile

1. Which of the following statements best describes your objective for the money you are investing?

a)   Preservation of Capital
b)   Growth through a balance of capital gains and income
c)   Growth through capital gains and some income
d)   Growth primarily through capital gains

a)  Under 2 Years
b)  2 - 5 Years
c)  6 - 10 Years
d)  11 - 15 Years
e)  Over 15 Years

a)  Low (Less than 10%)
b)  Medium (Between 10% - 25%)
c)  High (Over 25%)

4. Which of the following best describes your level of investment knowledge?

a)   Novice
b)   Some familiarity
c)   Reasonably knowledgeable
d)   Quite knowledgeable
e)   Very knowledgeable

5. Typically, investments which are more volatile (i.e., tend to go up and down in value) will, over the long term, have greater potential for return. With regards to this statement, how much of a drop in value over one year could you tolerate before becoming uncomfortable?

a)   Less than 10%
b)   1% to 3%
c)   3% to 5%
d)   6% to 10%
e)   More than 10%

a)   Highest $13,500 Lowest $10,400
b)   Highest $17,100 Lowest $9,700
c)   Highest $19,700 Lowest $8,800
d)   Highest $21,800 Lowest $7,900
e)   Highest $26,600 Lowest $6,700

7. Which of the following best describes your employment circumstances?

a)   Full-time
b)   Self-employed
c)   Part-time
d)   Retired
e)   Other

a)   Under $25,000
b)   $25,000 - $50,000
c)   $50,001 - $80,000
d)   $80,001 - $125,000
e)   Over $125,000

a)   $25,000 or less
b)   $25,001 - $50,000
c)   $50,001 - $100,000
d)   $100,001 - $250,000
e)   Over $250,000

a)   Under 30
b)   30 - 39
c)   40 - 54
d)   55 - 69
e)   Over 69

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