Millennia III - Taxation

Since Millennia III is not offered for new contract since October 29, 2007, this section is presented for informative purposes to contract holders.

There are important differences between the tax treatment of income generated from segregated funds and mutual funds, held in non-registered accounts.
 

• How are the taxation differences explained?
• How is income from segregated funds allocated?
   

How are the taxation differences explained?

While mutual funds periodically make cash or unit distributions of income (interest, dividends, capital gains), segregated funds do not distribute income. Instead, the income is kept in the funds and clients benefit from it through changes in the value of their units. The number of units consequently remains the same, except in the event of purchase or surrender.

However, the income from segregated funds is allocated to clients each year, as required by law. This allocation is based on the amount of time each share was held. The allocation thus takes into account all the investors who held units during the year, whether or not they still hold them. This is not the case with mutual funds.

	Mutual Funds	Segregated Funds
Interest income generated by ABC fund	100 000 $	100 000 $
Total number of units outstanding for ABC fund	2 million	2 million
Number of units purchased by client	2 000	2 000
Date client purchased units	September 1	September 1
Amount of time client held units	No distinction between a client who has held units for a short period and a client who has held them since the beginning of the year	122 days out of 365
Income distributed to client on December 31 and entered on client's tax slip - mutual funds	100 000 $/2 000 000 X 2 000 = 100 $	n/a
Income allocated to client on December 31 and entered on client's tax slip - segregated funds	n/a	100 000 $ X 2 000/2 000 000 X 122/365 = 33 $

How is income from segregated funds allocated?

Stage 1: allocation of interest and dividend income
First, interest and dividend income are allocated to all clients who held units during the year. Thus, clients who surrendered units are allocated interest and dividend income along with clients who still hold units at the end of the year. The allocation is, of course, based on the number of days in the year the units were held, as shown in the table on the previous page.

On the T3 slip from the Canada Customs and Revenue Agency, interest income is entered in box 26 and dividend income in boxes 23, 32 and 39.

Stage 2: allocation of capital gains and losses
The second stage of allocating income from segregated funds consists in the allocation of capital gains and losses. This stage has three distinct phases:

... those realized by the client
In the first phase, capital gains and losses are allocated to clients who have surrendered units, according to the gain they realized or the loss they incurred. A capital loss is reported on the tax slip of a client who incurred a loss upon surrendering the units and a capital gain is reported on the tax slip of a client who sold units that increased in value.

... those realized by the fund
The next two phases consist in allocating capital gains and losses to all clients who held units on December 31. These are gains and losses resulting from the portfolio managers' transactions.

Specifically, in the second phase, a gain or a loss is allocated to clients according to the value of their units. For example, if the market value of a client's units is less than the adjusted cost base (ACB), that client will be allocated a capital loss. On the other hand, a client whose units have a market value that exceeds the ACB will be allocated a capital gain.

Lastly, if there are still gains or losses after the first two phases, the remainder is allocated to all clients who held units on December 31, based on the number of units and the amount of time they were held (time-weighted units). This represents the third and final phase of the allocation of segregated funds capital gains and losses.

On the T3 slip from the Canada Revenue Agency, capital gains are entered in box 21 and capital losses in box 37.

More boxes mean more flexibility
Segregated funds allow for more efficient and flexible tax planning than mutual funds because capital gains and losses during the year are entered separately on clients' tax slips. Tax planning is thus left to the discretion of clients, who can choose the best time to use the losses to reduce their capital gains. This might be:
 

• for the current year
• for one of the last three fiscal years
• for a future fiscal year