TAXING INCOME FROM SEGREGATED FUNDS

The most effective and tax-friendly way to generate a steady investment income is to set up a segregated fund withdrawal plan. It's one of the best features of segregated funds. These withdrawal plans, set up for investments outside RRSP's, create significant tax benefits.

The most obvious attraction is that you have complete control over how much income you get, when you get it and for how long it lasts. By contrast, the far better-known annuity, involves a trade of your capital in return for a guaranteed income amount.

Let's say you invest $100,000 in an equity or equity index fund at $10 per unit which grows by 10 percent in year one and that is the amount you plan to withdraw. It would appear that a $10,000 capital gain will be realized the sale of the units, but this is not the case.

The actual realized gain is the difference between the purchase price of $10 and the current market value of $11 or $1 per unit. You need to redeem 909 units to generate $10,000. Thus 909 x $1 or $909 is your gain. Under current tax law, 75% of that gain is taxable. That's $682. Assuming you have to pay the average top marginal tax rate of 50%, your total tax exposure for income of $10,000 per year is a mere $341.

Contrast that with a GIC. Assuming you're in the top bracket, the annual tax hit on income of $10,000 is a staggering $5000. And here's another benefit. As you won't have as much reportable income while still maintaining your cash flow, you will minimize or eliminate the clawback of your Old Age Security benefits. Add to this a guarantee of the return of up to 100% of your capital at maturity or death, less withdrawals, and you have a great income plan for at least part of your capital.

If you wish to talk to us, ask questions or need help in completing a form.please go to fundPURCHASE FORM  or CONTACT US.