The Impact of Personal Income Taxes on Returns and ... · 866 canadian tax journal / revue fiscale canadienne (2003) vol. 51, no 2 the unitholders. The use of a trust is beneficial,

(2003) vol. 51, no 2 ■ 863

The Impact of Personal Income Taxeson Returns and Rankings of CanadianEquity Mutual Funds

Amin Mawani, Moshe Milevsky, and Kamphol Panyagometh*

P R É C I S

À partir des données sur les rendements de 343 fonds d’actions et fonds mutuelséquilibrés gérés par des compagnies canadiennes au cours d’une période de dix ans,cet article évalue l’influence que les impôts sur le revenu des particuliers exerce sur laperformance relative des ces fonds ainsi que sur leur classement. Nous proposons unalgorithme permettant de classer les fonds mutuels selon leur rendement après impôtet calculons des mesures d’efficacité fiscale et d’excédent fiscal dans le contextecanadien, en mettant en évidence les hypothèses sous-jacentes à nos calculs.

Notre principal résultat est que le classement de fonds sur la base de leurrendement avant impôt diffère significativement de leur classement sur la base de leurrendement après impôt, et ce résultat s’avère robuste. Nous estimons à 46 % laprobabilité que deux fonds dont les classements avant impôt sont voisins auront desclassements inversés lorsque ceux-ci sont établis sur la base des rendements aprèsimpôt. Enfin, nous estimons qu’un investisseur qui fait face au taux marginal d’impôtsur le revenu le plus élevé perd environ 135 points de base en impôts sur lesdistributions de fonds, en supposant un taux de rendement annuel moyen avant impôtde 9,01 % tel que suggéré par notre échantillon.

Ces résultats devraient intéresser les nombreux Canadiens qui détiennent des fondsmutuels en dehors de leurs comptes enregistrés. Les investisseurs qui choisissent leurportefeuille de fonds mutuels en se basant sur la performance des fonds dans le passédevraient examiner les rendements historiques après impôt, les gestionnaires de fondsexerçant un important contrôle sur l’efficacité fiscale.

* Of the Schulich School of Business at York University, Toronto. A. Mawani acknowledges researchgrants from the Social Sciences & Humanities Research Council of Canada, and M. Milevskyand K. Panyagometh acknowledge research funding from The IFID Centre at the FieldsInstitute via their sponsor, AIC Limited. The authors would like to thank John Campea, TimCestnick, Stephen Clarke, Dan Collison, Jamie Golombek, Scott Mackenzie, Alan Macnaughton,Tom Matthews, Don Mckye, John Mountain, Chris Robinson, and Janny Vincent for helpfulcomments during the course of this research. The authors also thank Morningstar Canada andFundata Canada for providing the mutual fund data.

864 ■ canadian tax journal / revue fiscale canadienne (2003) vol. 51, no 2

A B S T R A C T

This article examines 10 years of returns from 343 equity and balanced mutual fundsmanaged by Canadian companies to assess the impact of personal income taxes on thefunds’ relative performance and rankings. We propose an algorithm for computingafter-tax returns, which we use to generate after-tax mutual fund rankings. We alsocompute measures for tax efficiency and tax overhang in the Canadian context andhighlight the assumptions made for the purposes of this computation.

Our main and robust result is that the ranking of funds on the basis of their pre-taxreturns is significantly different from their ranking on the basis of after-tax returns.We also find a 46 percent probability that two funds whose pre-tax rankings areadjacent will have their rankings reversed when the ranking is done on an after-taxbasis. Finally, we found that an investor with the highest personal marginal tax rate lostapproximately 135 basis points to taxes on fund distributions from the average annualpre-tax return of 9.01 percent in our sample of funds.

These results should be of interest to the large number of Canadians who holdmutual funds outside their registered accounts. Investors who select mutual funds onthe basis of past performance may want to focus on measures of historical after-taxperformance, since fund managers do have substantial control over tax efficiency.

KEYWORDS: MUTUAL FUNDS ■ PERSONAL FINANCE ■ DISTRIBUTIONS ■ CAPITAL GAINS ■

PERFORMANCE ■ TRUSTS

C O N T E N T S

Introduction 864The Tax Treatment of Mutual Fund Distributions 865Literature Review 869Data Sources and Sample Selection 872Results 874Concluding Remarks 878Appendix: An Algorithm for Computing After-Tax Returns 880

I N T R O D U C T I O N

The Canadian mutual fund industry is currently debating whether mutual fundsshould be required to disclose after-tax performance data in their annual prospec-tuses and public advertisements. In the United States, the Securities and ExchangeCommission (SEC) has required mutual funds to disclose after-tax returns sinceApril 2001, and professional organizations such as the Association for InvestmentManagement and Research (AIMR) fully support the SEC’s position. In Canada, theCapital Markets Branch of the Ontario Securities Commission recently solicitedindustry input on this issue, but there is no consensus among mutual fund companies.

Because of the significant inf luence of overall market conditions (bull or bear)on investment returns, mutual funds usually compete with each other on the basis oftheir relative rankings rather than their absolute returns. A pre-tax ranking, how-ever, does not take into account holding period or turnover of assets inside the fund

personal income taxes and canadian equity mutual funds ■ 865

and therefore the taxable distributions made to investors. Differences in investmentstrategy, including holding-period decisions, generate differences in tax liability,and therefore differences in after-tax returns and rankings.

Motivated by the disclosure debate—and by the investing public’s insatiable inter-est in historical returns—we have analyzed 343 equity and balanced mutual fundsthat are Canadian trusts managed by Canadian companies and marketed predomi-nantly to Canadian investors. We selected only funds for which 10 years of historicaldata were available, and we analyzed the 10-year data for these funds to determinewhether personal income taxes significantly affected the relative ranking of thefunds. Our algorithm tracks the growth of an original dollar invested in a fund onJanuary 1, 1992, traces all the amounts and types of distributions made by the fund,assumes that taxes are paid out of the distributions, and assumes that the after-taxamounts are reinvested in the same fund at the current fund unit value. We comparethe final value of the fund on December 31, 2001 with the initial value on January1, 1992 to arrive at total and annualized after-tax returns.

Our results for these Canadian managed funds confirm similar studies donewith managed funds in the United States: the ranking of funds according to theirafter-tax returns is significantly different from their ranking according to their pre-tax returns. Our results also show a nearly 50 percent probability that the after-taxranking of two funds whose pre-tax rankings were adjacent will reverse their pre-tax ranking. These results lead us to conclude that the mutual fund industry shouldadopt a uniform method for computing after-tax returns.

Do mutual fund managers explicitly consider changes in tax rates or tax law inmaking their holding-period decisions? It would be interesting to know whetherthe drop in the capital gains inclusion rate from 75 percent to 50 percent in 2000prompted fund managers to hold more investments that yielded capital gains andthus to distribute more capital gains, at the expense of dividend-paying stocks anddividend distributions. Unfortunately, we do not have sufficient time-series datafor the new low-tax-rate regime to address this issue.

The next section of the article examines the Canadian tax treatment of mutualfund distributions. We then review the literature on the magnitude of the effects oftaxes on distributions. The two subsequent sections describe the data sources forour statistical analysis of historical returns and rankings and set forth our keyresults. The final section offers some concluding remarks.

T H E T A X T R E ATM E N T O F M U T U A L

F U N D D I ST R I B U T I O N S

Mutual funds are generally set up as trusts.1 They are, therefore, taxed annually onall income, dividends, and capital gains earned in the trust that is not distributed to

1 Mutual funds may also be structured as corporations; these funds, often referred to as corporateclass mutual funds, allow an investor to switch from one fund, or share class, to another on atax-deferred basis. Distributions from a corporate class fund (reported on a T5 slip) are taxedin the same manner as distributions from a mutual fund trust. Consequently, the results of this


the unitholders. The use of a trust is beneficial, since the trust serves as a conduitfor investment income and capital gains.2 Mutual fund trusts are taxed at thehighest marginal tax rate on all forms of income earned, so they usually distributetheir earnings to unitholders at least once a year. In general, unitholders are noworse off under this zero-retention strategy than they would be under any alterna-tive approach, and if their marginal tax rates are below the maximum rate they maybe better off. Mutual fund distributions retain their character in the hands of theunitholders, who then pay tax at their respective marginal rates on the distributedinterest, dividends, and capital gains.

Distributions to unitholders are reported annually on a T3 information slip andusually reinvested in additional units at the unit price on the date of distribution aspart of an automatic savings plan. Given the automatic reinvestment of the entiredistribution, unitholders must have access to other sources of cash in order to paytaxes on the distribution. In theory, a unitholder could ask the fund company toreinvest only a fraction of the distribution and remit the remainder to the taxauthorities to cover the tax bill. This approach would simplify the task of trackingcash f lows and computing after-tax returns for both unitholders and researchers.In computing after-tax returns for this study, we assume that taxes are paid fromthe distributions made and that only the net distributions are reinvested in addi-tional units. It is important to note that the economic after-tax rate of return is thesame whether the entire distribution is reinvested and taxes are paid out of anothersource or only the after-tax amount of the distribution is reinvested.

Investors’ marginal tax rates will of course vary by income level and province ofresidence. Table 1 shows how a typical investor residing in British Columbia in2001 might convert an advertised pre-tax return into a meaningful after-tax return.Note that if the investor does not redeem the fund units at year end she will notpay any taxes on the unrealized capital gains. These gains are attributable to appreci-ated securities within the fund that have not yet been sold by the manager.

The greater is the ratio between the after-tax return and the pre-tax return, themore tax-efficient is the fund. In the example in table 1, ratio is 85 percent (7.66percent, the after-tax rate of return, divided by 9.01 percent, the pre-tax rate ofreturn). In general, but not always, funds that minimize turnover—that is, thebuying and selling of securities during the year—are more tax-efficient than otherfunds, since they have less realized gains to distribute. In some cases, mutual funds

study should apply similarly to corporate class mutual funds. As of July 31, 2002, according tothe Investment Funds Institute of Canada, corporate class mutual funds represented 3.38 percentof all mutual fund assets in Canada ($13.5 billion out of a total $400.5 billion).

2 A trust that qualifies as a unit trust or mutual fund trust can avoid the 21-year deemedrealization rule and other unfavourable rules that apply to ordinary trusts. For more detaileddescriptions of the taxation of mutual fund trusts, see Peter Botz, “Mutual Fund Trusts andUnit Trusts: Selected Tax and Legal Issues” (1994) vol. 42, no. 4 Canadian Tax Journal 1037-58,and Maurice C. Cullity, “General Concepts and Types of Trusts for Tax Purposes,” in Report ofProceedings of the Fortieth Tax Conference, 1988 Conference Report (Toronto: Canadian TaxFoundation, 1989), 36:1-27.


can take advantage of the capital gains refund mechanism (CGRM)3 to avoid anyarising of tax at the mutual fund level. Depending on the level of redemption of itsunits or shares, the CGRM allows a mutual fund to claim a refund of the tax arisingat the mutual fund level in relation to taxable capital gains.

The ratio of the tax loss associated with liquidation or redemption (which intable 1 equals 1 percent, or 7.66 percent minus 6.66 percent) to the pre-liquidationafter-tax return provides a measure of the tax overhang, or the tax liability that may betriggered by locked-in gains. Capital gains are realized when the fund manager sells astock that has appreciated in value. Unrealized gains are manifested in the apprecia-tion of the net asset value of the fund, which remains untaxed until the underlyingstocks are sold or the fund units are redeemed.4 For investors in non-registeredaccounts, appreciation of the fund’s net asset value owing to unrealized gains offersgreater tax-deferred compounding than does the realization of capital gains, whichtriggers immediate taxes. Frequent turnover of stocks by the fund manager increasesrealized capital gains, thereby reducing opportunities for tax-deferred compound-ing and increasing the wedge between pre-tax returns and after-tax returns.

Turnover of stocks inside a mutual fund will not necessarily trigger realizedcapital gains. High turnover of stocks that have declined in value will not triggerrealized capital gains, whereas low turnover of significantly appreciated stocks may

TABLE 1 Example of an Annual After-Tax Return Calculation for aResident of British Columbia Who Invested $10,000 onJanuary 1, 2001 in a Mutual Fund that Earned a Pre-TaxReturn of 9.01% During the Calendar Year

Distributions After-tax return After-tax returnand gains Taxes duea (pre-liquidated) (fully liquidated)

Canadian dividends . . . . . . . $70.25 $70.25 × 0.360 $44.96 $44.96= $25.29

Ordinary interestincome . . . . . . . . . . . . . . . . $32.12 $32.12 × 0.487 $16.48 $16.48

= $15.64Realized capital gains . . . . . $387.11 $387.11 × 0.243 $293.04 $293.04

= $94.07Unrealized capital gains . . . $411.52 $0 $411.52 $411.52

× (1 − 0.243)= $311.52

Total dollars . . . . . . . . . . . . . $901.00 $135.00 $766.00 $666.00Total rate of return . . . . . . . 9.01% 1.35% 7.66% 6.66%

a The highest statutory marginal tax rate for a British Columbia resident in 2001 was 48.7% forinterest income, 36% for dividend income (reflecting a gross-up and dividend tax credit), and24.3% for capital gains (ref lecting a 50% inclusion rate).

3 Subsection 132(1) of the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended.

4 Money market funds generally operate differently, in that they credit all income daily andthereby keep the unit value of the fund constant.


trigger large realized capital gains (and, therefore, distributions). Turnover can alsobe triggered by shareholder redemptions and avoided by injecting new money intothe fund. In the absence of protection from the CGRM, net redemptions can force afund’s managers to sell some of its stocks, thereby distributing realized capital gainsto the remaining unitholders.

Capital gains distributions are added to the adjusted cost base (ACB) of the fundunit, a measure that reduces the liability for capital gains tax upon eventual redemp-tion of the fund unit. Consequently, taxes paid on annual capital gains distributionsmay be viewed as simply a pre-payment of taxes.5

There are three rate-of-return measures that are of interest to individual inves-tors. The first is the pre-tax rate of return, already widely reported and advertisedby fund companies and the financial media. Investors who hold their mutual fundsin a tax-sheltered registered plan may find this number sufficient for all of theirinvestment planning. Investors who hold mutual funds outside of a registered plan,however, may find two other numbers more important. The first is the pre-liquidationafter-tax return. This measure captures the return an investor would obtain fromsimply buying and holding the fund, and it reflects the tax burden on realized capitalgains and on dividend and interest income earned inside the fund. The secondmeasure is the investment return that results from selling the mutual fund unit atthe end of the reporting period; it captures the additional tax burden of unrealizedcapital gains that is triggered when the fund unit is redeemed. Figure 1 depicts therelationship between these three measures of return. The three measures may bedescribed arithmetically as follows:

1) The pre-tax return equals (P1 − P0 + D1) /P0, where P1 is the unit price at theend of the holding period, P0 is the unit price at the beginning of holdingperiod, and D1 is dividends received during the holding period.

2) The pre-liquidation after-tax return equals the pre-tax return minus the taxon interest and dividend income earned by the fund and on capital gainsrealized from sale of individual stocks inside the fund.

3) The post-liquidation after-tax return equals the pre-liquidation after-taxreturn minus the tax on capital gains realized at redemption of the mutualfund unit.

Funds that experience declines in net asset values may still make positive capitalgains distributions, since fund managers buy and sell stocks on a regular basis.Although attempts are made to crystallize losses and thereby offset the gains, anynet gains are f lowed through to unitholders. Thus, for example, Trimark CanadianEndeavour fund distributed 5.7 percent of its net asset values despite a 4.3 percentdrop in net asset values during 2002.

5 The financial press regularly warns investors to avoid buying into a fund just before it is aboutto make a large distribution, since this action will trigger immediate taxes on the unitholders.


L I T E R AT U R E R E V I E W

Unlike US mutual funds, mutual funds that are managed by Canadian companiesand marketed mostly to Canadian investors do not have to disclose their after-taxinvestment returns. Yet taxes exceed management fees and brokerage commissionsin their ability to erode long-term investment returns. Although all fund companiesdisclose their pre-tax returns net of management fees (MERs), there is no provisionfor recognizing tax expense.

After-tax returns on any investment depend on the investor’s tax circumstances.Indication of the difference between pre-tax return and pre-liquidation after-taxreturn may not offer investors a precise measure of their personal tax burden, but itdoes offer some measure of relative tax efficiency. Furthermore, to the extent thatinvestors select funds on the basis of ranking, they should at least be aware that relativeranking based on a measure of pre-tax return is significantly different from relativeranking based on a measure of post-tax return.

Various measures of tax wedge or tax efficiency have been proposed in the lit-erature. Randolph,6 for example, defines effective portfolio turnover as the ratio ofrealized capital gains to total (realized plus unrealized) capital gains; the smaller isthe ratio, the greater is the tax effectiveness. Randolph considers his derived measuresuperior to reported turnover, since the latter may ref lect turnover that triggerslosses rather than gains. Turnover, like cholesterol, may be either bad or good.

One way in which to remain attractive to investors is to be tax-efficient. Dickson,Shoven, and Sialm7 provide empirical evidence that funds find it easier to be tax-

FIGURE 1 The Relations Between Different Types of Mutual Fund Returns

Pre-tax return

Post-liquidationafter-tax return

Pre-liquidationafter-tax return

6 William Lewis Randolph, “The Impact of Mutual Fund Distributions on After-Tax Returns”(1994) vol. 3, no. 2 Financial Services Review 127-41.

7 Joel M. Dickson, John B. Shoven, and Clemens Sialm, “Tax Externalities of Equity MutualFunds” (2000) vol. 53, no. 3, part 2 National Tax Journal 607-28.


efficient if they are in favour with investors and able to attract new money. Bergstresserand Poterba8 explore the relation between the after-tax returns of US equity mutualfunds and the subsequent new money that poured into these funds over the 1993-1998 period. They find that after-tax returns have more power to explain new cashinf lows than do pre-tax returns. Moreover, other things being equal, funds withlarge overhangs of unrealized capital gains attracted less new money than did fundswithout substantial unrealized gains.

Huddart and Narayanan9 found that fund managers considered taxes in theirdecisions to divest individual stocks in the fund. For growth funds, they found astatistically significant relationship between unrealized losses and decisions to divest.To be more specific, fund managers were more likely to liquidate their stocks if thesedivestments triggered capital losses then if they triggered like-sized capital gains.

The materiality and the long-term impact of the so-called tax wedge are welldocumented in the literature. Thorfinnson and Kiss10 simulate the impact of turnoveron after-tax returns in a Canadian context. They start their analysis with a $1 millionequity portfolio invested at 12.4 percent for 20 years and simulate the effects ofdifferent turnover rates. They show that a turnover rate of 8.5 percent reduces per-formance by 1.2 percent, whereas turnover rates of 35 percent and 80 percent reduceit by 2.5 percent and 3.0 percent, respectively.

Table 2 shows the after-tax accumulated amount that is consumable by the inves-tor under different scenarios for the fraction of gains realized annually. The investorstarts with an initial investment of $10,000 in a mutual fund that earns 15 percentannually in each of the next 15 years; realized or distributed capital gains are taxedat the rate of 25 percent in the year of realization or distribution. The first columnshows the fraction of unrealized capital gains (or pre-tax portfolio growth) that isrealized each year. When liquidated, this fraction generates distributions (of real-ized capital gains) and triggers taxes payable along the way.

For example, if the fund sold 100 percent of the stocks in the portfolio in each year,then an initial investment of $10,000 would grow to $49,488 after taxes. If, however,the fund did not sell any of its stock holdings—the ultimate buy-and-hold strategy—$10,000 would grow to $63,527. Thus the second of the two extreme cases providesthe mutual fund investor with 30 percent more consumable dollars than the first.

Fortin and Michelson,11 in a study of US-managed funds during the period1976-1993, found after-tax returns to be approximately 15 percent less than pre-

8 Daniel Bergstresser and James Poterba, Do After-Tax Returns Affect Mutual Fund Inf lows?NBER Working Paper no. 7595 (Cambridge, MA: National Bureau of Economic Research,March 2000).

9 Steven Huddart and V.G. Narayanan, “An Empirical Examination of Tax Factors and MutualFunds’ Stock Sales Decision” (2002) vol. 7, no. 2-3 Review of Accounting Studies 319-41.

10 Mike Thorfinnson and Jason Kiss, “The Overlooked Piranha” (1996) vol. 9, no. 3 CanadianInvestment Review 17-21.

11 Rich Fortin and Stuart Michelson, “What Mutual Funds Really Return After Taxes” [April1996] Journal of Financial Planning 60-65.


tax returns, even without considering state taxes. The tax wedge they computedvaried widely across fund categories; it ranged from approximately 30 percent forcorporate, government, and international bond funds to 10 percent for small-capand international equity funds. Our results, shown in table 3, are similar: an averageof 15 percent of the pre-tax return is lost to taxes on realized capital gains that aretriggered by the turnover initiated by the fund managers. In other words, the pre-liquidation after-tax return is approximately 85 percent of the value of the pre-taxreturn.

A frequently cited study by Jeffrey and Arnott12 considered whether activelymanaged mutual funds can produce sufficient returns from trading to cover notonly management fees and trading costs but also the taxes induced by the turnover.They found that it is possible for active management to increase the after-tax valueof returns, but only with careful planning. The implications of this conclusion arefar-reaching: If most fund managers have a difficult time adding value by adoptingan active investment strategy rather than a passive one, then the additional taxburden associated with an active strategy can only make things worse.

After-tax returns also depend critically on what holding period the fund’s man-agers select, since annual fund distributions are not uniform across the year. Mostmutual fund trusts calculate and distribute capital gains only at year-end, since it isdifficult to determine net annual gains or losses earlier. It is possible, therefore, tochange after-tax returns significantly by either including or excluding the month ofdistribution. Given the vagaries of the stock market, however, pre-tax returns aresubject to the same sensitivity.

TABLE 2 Relation Between Fund Turnover and AccumulatedPortfolio After 15 years—$10,000 Investment and15 Percent Annual Return

Fraction of capital gains Amount accumulatedrealized each year (%) after 15 years ($)

0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,52710 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,90720 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,34030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,82240 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,35450 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,93360 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,55870 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,22780 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,94090 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,694

100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,488

Note: These results assume a 15 percent annual rate of return and a 25 percent annual marginaltax rate on realized capital gains for the entire period.

12 Robert H. Jeffrey and Robert D. Arnott, “Is Your Alpha Big Enough To Cover Its Taxes?”(1993) vol. 19, no. 3 The Journal of Portfolio Management 15-25.


In the case of the approximately 46 percent of investments by Canadians inmutual funds that are held inside registered accounts (registered retirement savingsplans, registered retirement income funds, registered education savings plans, andother, similar plans),13 the disclosure of after-tax returns is irrelevant, since thisincome is not subject to tax until it is withdrawn.14 For sheltered investments, therankings of pre-tax returns in table A1 in the appendix, below, are more relevant thanthe rankings of after-tax returns, subject to the caveats that historical rankings donot necessarily predict future rankings and that the rankings in the appendix are notadjusted for risk. The remaining 54 percent of investments in mutual funds are heldin non-registered accounts that attract tax on an annual basis. Thus the marketsegment for which after-tax returns are more relevant than pre-tax returns is sub-stantial. Furthermore, investors who hold mutual funds inside registered accountsmay still be interested in their funds’ tax efficiency, since they may wish to hold thesame funds outside their registered accounts. Poterba, Shoven, and Sialm15 elabo-rate on this point in their investigation of how retirement savers decide to allocatetheir investments between registered and non-registered accounts.

The tax rates that the various studies have used in calculating after-tax returnrange from the highest federal rate, excluding state and municipal taxes,16 to anarbitrary 35 percent.17 Our analysis uses the highest personal combined (federaland provincial) statutory tax rate in Canada adjusted for year and type of income(interest, dividends, or realized capital gains). Furthermore, the results we show infigures 2, 3, and 4 do not change substantially if one substitutes the medium-bracket tax rate (the federal rate of 22 percent adjusted for provincial income taxes,year, and type of income) for the top-bracket tax rate. As awareness of mutual fundfees increases and brokerage costs for buying and selling equities decline, manyindividuals who face the top-bracket marginal tax rate may switch from holdingmutual funds to holding stocks directly. The findings of this study, however,remain applicable even if the mutual fund clientele is more likely to be in themiddle tax bracket than the upper tax bracket.

D ATA S O U R C E S A N D S A M P L E S E L E C T I O N

Our study combines data from two sources: Morningstar Canada and FundataCanada. These data provided us with net asset values and distributions for all retailmutual funds managed by Canadian companies that had at least a 10-year record of

13 As of December 2001. See Investor Economics, Insight Index Funds Report, February 11, 2002.

14 At which time it is taxed at ordinary rates, regardless of the type of income earned.

15 James M. Poterba, John B. Shoven, and Clemens Sialm, Asset Location for Retirement Savers,NBER Working Paper no. 7991 (Cambridge, MA: National Bureau of Economic Research,November 2000).

16 Securities and Exchange Commission, “Final Rule: Disclosure of Mutual Fund After-TaxReturns,” January 18, 2001 (release nos. 33-7941; 34-43857; IC-24832; file no. S7-09-00).

17 Randolph, supra note 6.


performance on December 31, 2001. We found some discrepancies between thetwo sources, particularly in the classification of the distributions, and used an inde-pendent source—“The 15-Year Review of Mutual Funds” published semi-annuallyby The Globe and Mail, to reconcile the differences. In some cases, we examined thefund company’s annual reports to determine the correct classification.

Our analysis suggested that whereas net asset values and the magnitude of funddistributions were fairly consistent across different databases there were someinconsistencies in the classification of distributions. We found instances of negativedistributions (which apparently can occur, though very rarely, in the case of segre-gated funds of insurance companies), dividend funds that distribute all their gainsas interest, and a variety of other puzzling anomalies. In some cases, dividend andinterest distributions were aggregated and classified as interest distributions; inothers, foreign sources of income were not segregated.

After a variety of judgment calls to resolve conflicting and ambiguous distribu-tions, we reduced the data set to 343 equity and balanced funds with a record duringthe entire 10-year period January 1992 through December 2001. In our best estimate,this sample size represents approximately 90 percent of the universe of equity andbalanced funds, managed by Canadian companies, that have a 10-year history.

Table A1 in the appendix lists the 343 funds, their pre-tax and post-tax returnsover the 10-year period, and their relative rankings in respect of these returns. It isimportant to note that these rankings do not take into consideration differences inrisk among the funds. In making actual investment decisions, one should compareonly funds with the same risk. Furthermore, past returns and rankings of any typemay not be indicative of future returns and rankings. Table 3 summarizes the datain table A1.

Our data do not include equity and balanced funds that may have operated duringthe period 1992-2002 but did not have a complete 10-year performance history.For example, our analysis would exclude a fund that was operational in the early1990s but that subsequently closed down owing to poor performance. Omissionsof this kind lead to what is known as the survivorship bias problem, which plaguesmuch of the literature on mutual fund performance. One likely consequence ofsurvivorship bias is that observed average returns will be higher than true averagereturns, since “losers” are more likely than “winners” are to have disappeared fromthe performance record. Since we are concerned with the impact of taxes onrelative ranking and returns, rather than with performance relative to an index, weare not concerned about the problem of survivorship bias.18

Finally, in our regression analysis, we deleted 14 observations of mutual fundswith negative 10-year performance records, since the tax-efficiency algorithm doesnot allow for negative returns (worse becomes better under the algorithm).

18 Interestingly, Cambridge (the funds with the worst performance) recently announced arestructuring and merging of funds that will likely remove them from future databases as well.


R E S U LTS

Table 3 shows that the annualized pre-tax returns for the 343 funds averaged to9.01 percent over the period. They ranged from a high of 21.58 percent to a low of−16.16 percent, with a standard deviation of 4.45 percent. The average annualizedpre-liquidation after-tax return was 7.66 percent; the highest-ranked fund accord-ing to this measure earned 18.84 percent and the lowest ranked fund earned −16.77percent. The standard deviation of pre-liquidation annualized after-tax return was4.35 percent. Finally, the average annualized post-liquidation after-tax rate of returnover the 10-year holding period was 6.66 percent. The range in this case was from16.21 percent to −16.77 percent, with a standard deviation of 3.90 percent.

Table 3 clearly shows that taxes on distributions are material. An investor whofaced the top statutory rate lost an average of 135 basis points (that is, 9.01 percentminus 7.66 percent) from the average annualized pre-tax return to income taxespaid on the fund’s annual distributions; the result was an average tax efficiency of85 percent (7.66 percent divided by 9.01 percent). An additional 100 basis points(7.66 percent minus 6.66 percent) per annum were lost to capital gains taxes uponredemption of the fund units at the end of the 10-year period. The 343 funds inour analysis ranged in their tax efficiency from 25 percent to 100 percent; the lattercase implies a pre-liquidation after-tax return that is equal to the pre-tax return.

Table 4 shows the calculation of after-tax returns for a randomly selected equitymutual fund. We describe the detailed step-by-step algorithm in the appendix.

As figures 2, 3, and 4 show, the ranking of the mutual funds in our samplechanges significantly if one compares the funds on an after-tax basis rather than a

TABLE 3 Summary of Results in Table A1

Numberof funds Standardobserved Mean Median deviation Maximum Minimum

percent

Pre-tax returna . . . . . . . . . . . . 343 9.01 9.10 4.45 21.58 −16.16Pre-liquidation after-tax

returna . . . . . . . . . . . . . . . . . 343 7.66 7.81 4.35 18.84 −16.77Post-liquidation after-tax

returna . . . . . . . . . . . . . . . . . 343 6.66 6.78 3.90 16.21 −16.77Tax loss to distributionb . . . . 343 1.35 1.25 1.12 7.13 0.00Tax loss to liquidationc . . . . . 343 1.00 1.02 0.62 2.63 0.00Tax efficiencyd . . . . . . . . . . . . 329 84.91 86.75 12.80 100.00 25.31Tax overhange . . . . . . . . . . . . 329 11.98 12.93 5.37 22.95 0.00

a Based on compound annual returns from 343 funds over the period January 1, 1992 throughDecember 31, 2001. The calculations use the highest tax rates in Canada.

b Pre-tax return minus pre-liquidation after-tax return.c Pre-liquidation after-tax return minus post-liquidation after-tax return.d 1 − (tax loss to distribution/pre-tax return); the calculation excludes funds with negative returns.e Tax loss to liquidation/pre-liquidation/after-tax return; the calculation excludes funds with

negative returns.


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pre-tax basis. Figure 2 plots the pre-tax rankings against the pre-liquidation after-tax rankings for all the mutual funds in our sample. Each point represents one of themutual funds. A fund that falls below the diagonal line had a pre-liquidation after-tax ranking that was higher than its pre-tax ranking; a fund that falls above the diagonalhad a pre-liquidation after-tax ranking that was lower than its pre-tax ranking.

The average absolute value of the difference between pre-tax rankings and pre-liquidation after-tax rankings was 28. In other words, the average fund moved 28places higher or lower in a ranked list of the 343 funds in our sample. For 50 percentof our sample funds, the difference between the fund’s pre-tax ranking and its pre-liquidation after-tax ranking was no more than 19 places. The maximum change inranking in our sample was a drop of 185 places.

Figure 3 plots the pre-tax rankings of the mutual funds in our sample againstthe post-liquidation (after a 10-year holding period) after-tax rankings. The aver-age absolute value of the difference between pre-tax rankings and post-liquidationafter-tax rankings was 18. In other words, the average fund moved 18 places higheror lower on a ranked list of the 343 funds in our sample.

Figure 4 plots the pre-liquidation after-tax rankings against the post-liquidation(after a 10-year holding period) after-tax rankings for all of the mutual funds in oursample. The average absolute value of the difference between pre-liquidation after-tax rankings and post-liquidation after-tax rankings was 11.

The main message of figures 4, 5, and 6 is that the relative performance of amutual fund can become either better or worse if it is ranked on the basis of its after-tax returns rather than its pre-tax returns. The change evidenced by the scattering ofafter-tax rankings away from the diagonal persists regardless of variations in individu-als’ marginal tax rates, holding-period assumptions, or choice of historical period.

Figure 5 shows the probability that the pre-liquidation after-tax ranking willreverse the pre-tax ranking of funds that are more or less adjacent on the pre-taxranking scale. For example, suppose that an investor selects a mutual fund on thebasis of its rank on the pre-tax return scale. As the first bar of figure 5 shows, if the gapbetween the pre-tax return of the selected fund and the pre-tax return of anotherfund is 1 basis point or less, there is a 46 percent probability that the pre-liquidationafter-tax ranking will reverse the pre-tax ranking. Paradoxically, as the differencebetween funds’ pre-tax returns increases, the probability of ranking reversal alsoincreases. This outcome suggests that higher pre-tax returns generally require a moreactive management style—that is, one that involves a higher turnover of invest-ments inside the fund, and consequently higher fund distributions and correspond-ingly lower after-tax returns. For example, when the gap in pre-tax returns increasesfrom 1 basis point or less to 1 to 2 basis points, the probability of ranking reversalincreases from 46 percent to 66 percent. Altogether, as figure 5 shows, there is a 47percent chance that the pre-liquidation after-tax ranking of adjacent mutual fundswill reverse the pre-tax ranking. Figure 6 shows the probability of reversals inranking in comparisons of pre-tax returns and post-liquidation after-tax returns.Altogether, as figure 6 shows, there is a 45 percent chance that the post-liquidationafter-tax ranking of more or less adjacent mutual funds will reverse the pre-tax ranking.


FIGURE 2 Pre-Tax Return Rankings Versus Pre-Liquidation After-Tax Return Rankings

After-tax ranking lower than pre-tax ranking

Pre

-liq

uida

tion

aft

er-t

ax r

etur

n ra

nkin

g

Pre-tax return ranking

After-tax ranking higher than pre-tax ranking

1 51 101 151 201 251 301 351

1

51

101

151

201

251

301

351

These results suggest that selecting funds for taxable accounts on the basis of theirrelative rankings in terms of pre-tax returns may lead to erroneous investmentchoices. Of course, past returns may not provide any indication of future returns.

One measure of tax efficiency is the ratio of the pre-liquidation after-tax returnto the pre-tax return. Tax-efficient funds have less turnover than other funds andconsequently a higher tax overhang—that is, higher unrealized capital gains. Taxoverhang is defined more formally as the ratio of the tax loss that is attributable toliquidation of mutual fund units to the pre-liquidation after-tax return. Figures 7,8, and 9 show that funds with a high level of tax efficiency generally tend to havehigh tax overhangs.


Figure 10 shows that pre-tax return measures of pure equity funds do not seemto have any statistical association with the funds’ tax efficiency (or after-tax returns).This outcome suggests that it may not be easy to predict a pure equity fund’s after-tax return or tax efficiency on the basis of its pre-tax return; hence the off-diagonalscattering in figures 2, 3, and 4. The obvious implication is that fund managers whorank high on a pre-tax basis may not necessarily rank high on an after-tax basis.Figure 11 shows a similar result for balanced mutual funds.

C O N C LU D I N G R E MA R K S

The study discussed in this article developed an algorithm for computing the after-tax returns of mutual funds in a Canadian context and then compared the relative

FIGURE 3 Pre-Tax Return Rankings Versus Post-Liquidation After-Tax Return Rankings

After-tax ranking lower than pre-tax ranking

Pos

t-liq

uida

tion

aft

er-t

ax r

etur

n ra

nkin

g

Pre-tax return ranking

After-tax ranking higher than pre-tax ranking

1 51 101 151 201 251 301 351

1

51

101

151

201

251

301

351


performance of 343 mutual funds managed and marketed by Canadian companieson a pre-tax and post-tax basis during the period 1992-2001, inclusive.

Individual taxable investors will, of course, seek to maximize their after-tax returns.To some extent, taxes on distributions are within the control of fund managers;consequently, investors should monitor their funds’ tax implications in much thesame way as they monitor the funds’ risk and diversification characteristics. Ofcourse, this monitoring should be done carefully, since—like pre-tax returns—after-tax returns for a single quarter or year may not necessarily reflect the fund’stax implications in the long term.

Our algorithm for calculating after-tax returns may not be universally accept-able, and we do not expect a single tax-efficiency measure that all members of the

FIGURE 4 Pre-Liquidation After-Tax Return Rankings Versus Post-Liquidation After-Tax Return Rankings

Post-liquidation after-tax ranking lower than pre-liquidation after-tax ranking

Pos

t-liq

uida

tion

aft

er-t

ax r

etur

n ra

nkin

g

Pre-liquidation after-tax return ranking

Post-liquidation after-tax ranking higher than pre-liquidation after-tax ranking

1 51 101 151 201 251 301 351

1

51

101

151

201

251

301

351


industry can agree upon to evolve soon. Indeed, all of the measures suggested inthe literature have difficulties, and no measure is able to show the effect of taxes ona particular unitholder. Yet the fact that it is difficult to measure after-tax returns orto agree on a measure does not mean that nothing be done. Our analysis clearlyshows that income taxes do matter, and that they are material. For investors whoheld mutual funds outside of registered accounts, taxes on annual fund distributioneroded approximately 135 basis points, or 15 percent, of the annualized pre-tax returnfor an average fund over the period January 1, 1992 through December 31, 2001.

A P P E N D I X : A N A LG O R I T H M F O R C O M P U T I N G

A F T E R - T A X R E T U R N S

The formulas we have used to calculate mutual fund returns are adapted fromDickson and Shoven.19 Following Securities and Exchange Commission (US)20 andDickson and Shoven, we calculated after-tax returns by assuming that any taxes due

FIGURE 5 Probability That the Ranking of Two Funds on the Basis of Their Pre-Liquidation After-Tax Returns Will Reverse

Their Ranking on the Basis of Their Pre-Tax Returns

0

10

20

30

40

50

60

700-

1

1-2

2-3

3-4

4-5

5-6

6-7

7-8

8-9

9-10

10-1

5

15-2

0

20-3

0

30-5

0

50-1

00

>100

Tota

lDifference in basis points between the pre-tax returns of

two funds with adjacent rankings

Pro

babi

lity

(%)

47.7%

19 Joel M. Dickson and John B. Shoven, Ranking Mutual Funds on an After-Tax Basis, NBERWorking Paper no. 4393 (Cambridge, MA: National Bureau of Economic Research, July 1993).

20 Supra note 16.


FIGURE 6 Probability That the Ranking of Two Funds on the Basis of Their Post-Liquidation After-Tax Returns Will Reverse

Their Rankings on the Basis of Their Pre-Tax Returns

0

10

20

30

40

50

60

70

0-1

1-2

2-3

3-4

4-5

5-6

6-7

7-8

8-9

9-10

10-1

5

15-2

0

20-3

0

30-5

0

50-1

00

>100

Tota

l

Difference in basis points between the pre-tax returns of two funds with adjacent rankings

Pro

babi

lity

(%)

45.6%

on a distribution are paid out of the distribution when the distribution is reinvestedand thus reduce the amount reinvested. Moreover, for multiple distributions ondifferent days in the month, we assume that the new units received from reinvestingone payment has no claim on any further distributions made in the same month.

Pre-tax return = #,

BT NAVPST T n⋅

−Initial investment

1

1 (1)

Pre-liquidation after-tax return = #,

AT NAVPST T n⋅


1

1 (2)

and

Post-liquidation after-tax return =#

,AT NAVPS TUGT T n⋅( ) −


1

1 (3)


FIGURE 7 Equity and Balanced Mutual Funds: The Relation Between Tax Efficiency and Tax Overhang

Tax overhang = −0.2141 + 0.3932 (tax efficiency)R2 = 0.8789

Tax

over

hang

(%)

Tax efficiency (%)

20 30 40 50 60 70 80 90 1000

5

10

15

20

25

FIGURE 8 Equity Mutual Funds Only: The Relation Between Tax Efficiency and Tax Overhang


Tax

over

hang

(%)

Tax efficiency (%)

0 10 20 30 40 50 60 70 80 90 1000

5

10

15

20

25


0 5 10 15 20 2520

30

40

50

60

70

80

90

100

Tax efficiency = 0.7646 + 0.8551 (pre-tax return)R2 = 0.0564

Pre-tax return (%)

FIGURE 10 Equity Mutual Funds Only: The Relation Between Pre-Tax Return and Tax Efficiency

Tax

eff

icie

ncy

(%)

FIGURE 9 Balanced Mutual Funds Only: The Relation Between Tax Efficiency and Tax Overhang


Tax

over

hang

(%)

Tax efficiency (%)

0 10 20 30 40 50 60 70 80 90 1000

5

10

15

20

25


where

#BTT = the number of units at the end of a holding period assuming theentire distribution is reinvested,

#ATT = the number of shares at the end of a holding period assuming theafter-tax distribution is reinvested,

NAVPST = the net asset value per unit at the end of a holding period,n = the number of a holding period, andTUG = the tax on unrealized gain.

# ## # #

,BT BTBT BT CG BT

t tt t t t t t

tDiv

SF= + ⋅ + ⋅ + ⋅

−

− − −1

1 1 1intNAVPS NAVPS NAVPSt t t

(4)

##

# #

# #AT

ATAT

NAVPS

AT CG

AT D AT F Dt

tt

t

t G t

t

t Div t

t

t FxDiv t

t

t t

NAVPS

t iv

NAVPS

t x iv

NAVPS

t t

t t

=+

⋅ −( ) ⋅[ ]+

⋅ −( ) ⋅[ ]

+⋅ −( ) ⋅[ ]

+⋅ −( ) ⋅[ ]

−− −

− −

11 1

1 1

1 1

1 1

int t Cint

SFt , (5)

# # ,BT ATNAVPS0 0

0= = Initial investment

(6)

0 2 4 6 8 10 12 1420

30

40

50

60

70

80

90

100

Tax efficiency = 0.6876 + 1.6367 (pre-tax return)R2 = 0.0286

Pre-tax return (%)

Note: Coefficient is statistically insignificant.

FIGURE 11 Balanced Mutual Funds Only: The Relation Between Pre-Tax Return and Tax Efficiency

Tax

effic

ienc

y (%

)


where

tintt = the highest combined personal marginal tax rate in Canada forinterest at time t,

tCGt = the highest combined personal marginal tax rate in Canada forrealized capital gains at time t,

tDivt = the highest combined personal marginal tax rate in Canada fordividend at time t,

tFxDivt = the highest combined personal marginal tax rate in Canada forforeign dividend at time t,

CGt = the capital gain distribution at time t,Divt = the dividend distribution at time t,FxDivt = the foreign dividend distribution at time t,SFt = the split factor at time t,NAVPSt = the net asset value per share at which the distribution at time t is

reinvested,NAVPS0 = the net asset value per share at the beginning of a holding period,

andTUG = the tax on unrealized gain.

TUG AT NAVPS ACBT T URCGT Tt= ⋅ −( ) ⋅[ ]max # , ,0 (7)

where

tURCGT = the highest combined personal marginal tax rate in Canada forcapital gain at the end of a holding period, and

ACBT = the adjusted cost base per unit at the end of a holding period.

ACBTC

ATtt

t=

#, (8)

where

TC TC AT AT CGt t t t t t CGt tt t

= + ⋅ ⋅ −( )[ ] + ⋅ ⋅ −( )[ ]− − −1 1 11 1# #int int

+ ⋅ ⋅ −( )[ ] + ⋅ ⋅ −( )[ ]− −# # ,AT AT F Dt t Div t t FxDiviv t x iv tt t1 11 1D (9)

and

TC0 = Initial investment. (10)

Table 4, above, shows a sample calculation based on information from theElliott & Page Equity Fund. We assume that an initial investment of $1,000 in the


Elliott & Page Equity Fund at the NAVPS on December 31, 1991—$28.70. Accord-ing to equations 6, 10, and 8,

#BT on December 31,1991 = #AT on December 31, 1991 = 1000/28.7 = 34.84321,TC on December 31, 1991 = Initial investment = $1,000,

and

ACB on December 31, 1991 = $1,000/34.84321 = $28.70.

On June 30, 1992, the fund distributes a dividend of $0.07 per units, which willbe reinvested at $30.37. According to equations 4, 5, 9, and 8,

#BT on June 30, 1992 = 34.84321 + [(34.84321 × 0.07)/30.37]= 34.92352,

#AT on June 30, 1992 = 34.84321 + {[34.84321 × 0.07 × (1 − 0.3660)]/30.37}= 34.89412,

TC on June 30, 1992 = $1000 + [34.84321 × 0.07 × (1 − 0.3660)]= $1001.54634,

and

ACB on June 30, 1992 = $1001.54634/34.89412 = $28.70244.

On August 30, 1992, Elliott & Page Equity Fund did not make any distributionsbut split its units with a split factor of three. According to equations 4, 5, 9, and 8,

#BT on August 30, 1992 = 34.92352 × 3 = 104.77056,#AT on August 30, 1992 = 34.89412 × 3 = 104.68236,

and

ACB on August 30, 1992 = $1001.54634/104.68236 = $9.56748.

On December 31, 1992, the fund distributes capital gains of $0.294 per unit,which is reinvested at $10.18. Thus,

#BT on December 31, 1992 = 104.77056 + [(104.77056 × 0.294)/10.18]= 107.79635,

#AT on December 31, 1992 = 104.68236 + {[104.68236 × 0.294*(1 − 0.3870)]/10.18}= 106.53561,

TC on December 31, 1992 = $1001.54634 + [104.68236 × 0.294 × (1 − 0.3870)]= $1020.41241,

and

ACB on December 31, 1992 = $1020.41241/106.53561 = $9.57813.


The same procedures are used to calculate #BT, #AT, TC, and ACB of other years.At the end of the 10-year holding period, December 31, 2001, #BT = 232.15333,#AT = 175.90001, TC = $1845.76079, ACB = $10.49324, and NAVPS = $10.25.According to equations 1, 2, and 3,

Pre-tax return =⋅( )

− =232 15333 10 25

10001 9 06

110. .

. %,

Pre-liquidation after-tax return =⋅( )

− =175 90001 10 25

10001 6 07

110. .

. %,

and

Post-liquidation after-tax return

=⋅( ) − ⋅ −( ) ⋅[ ]

− =

175 90001 10 25 175 90001 10 25 10 49324 0 244 0

10001 6 07

110. . max . . . . ,

. %.

Note that tURCG at liquidation is 24.4 percent. Since the NAVPS at liquidation isthe same as the ACB ($10.25), the tax on unrealized gain is zero.

888 ■ canadian tax journal / revue fiscale canadienne (2003) vol. 51, no 2T

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. . .

. . .

. . .

. . .

. . .

. . .

. .

18.2

318

.23

15.6

55

33

0.00

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Sign

atur

e A

mer

ican

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all C

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nies

. . .

. . .

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.17

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151.

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uadr

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ivid

end

Fund

(MX

) . .

. . .

. . .

. . .

. . .

. . .

. . .

16.5

815

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13.3

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78

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Trim

ark

Fund

—SC

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

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16.5

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. . .

. . .

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. . .

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nal V

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. . .

. . .

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d .

. . .

. . .

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16.1

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. . .

. . .

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15.5

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. . .

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15.4

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Alta

mir

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lect

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und

. . .

. . .

. . .

. . .

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. . .

. . .

. . .

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. . .

. . .

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den

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. . .

. . .

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7A

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. . .

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14.6

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Maw

er N

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a Fu

nd .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.14

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10.7

310

.02

2559

413.

910.

7173

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6.62

(Tab

le A

1 is

con

tinue

d on

the

next

pag

e.)


BPI

Am

eric

an E

quity

Fun

d .

. . .

. . .

. . .

. . .

. . .

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l Cap

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C N

orth

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eric

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row

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und

Inc.

. . .

. . .

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14.5

314

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0015

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s Age

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lan

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. . .

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. . .

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XU

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. . .

. . .

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ss F

. . .

. . .

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Am

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. . .

. . .

. . .

. . .

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. . .

. . .

. . .

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Nat

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. . .

. . .

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orth

Am

eric

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quity

Fun

d .

. . .

. . .

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7.85

Roy

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.13

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3626

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681.

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1Fi

delit

y G

row

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mer

ica

Fund

Ser

ies A

. . .

. . .

. . .

. . .

13.6

210

.60

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8.96

Mac

Cun

dill

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e Fu

nd S

erie

s A .

. . .

. . .

. . .

. . .

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.13

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7838

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enai

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ce G

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. . .

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.13

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6939

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Mac

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Can

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. . .

. . .

. . .

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.13

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12.5

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4029

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771.

7694

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7M

D G

row

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vest

men

t Lim

ited

. . .

. . .

. . .

. . .

. . .

. .

13.3

111

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3938

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orld

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wth

. . .

. . .

. . .

. . .

. . .

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. . .

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13.2

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104

673.

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2670

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Mac

Unv

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ure

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

13.1

612

.96

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Mac

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dill

Can

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n Se

curi

ty F

und

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es A

. . .

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d .

. . .

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. .13

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ity F

und

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. . .

. . .

. . .

. . .

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ch U

.S. E

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. . .

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GO

F C

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eric

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alue

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. Cla

ssic

. . .

. . .

12.8

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9678

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Saxo

n B

alan

ced

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. . .

. . .

. . .

. . .

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. . .

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rbit

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12.5

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8

TA

BL

E A

1Co

ntin

ued

Pre-

Post

-Pr

e-Po

st-

liqui

datio

nliq

uida

tion

liqui

datio

nliq

uida

tion

Tax

loss

toPr

e-ta

xaf

ter-

tax

afte

r-ta

xPr

e-ta

xaf

ter-

tax

afte

r-ta

xm

utua

l fun

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x lo

ss to

Tax

Tax

retu

rnre

turn

retu

rnre

turn

retu

rnre

turn

dist

ribu

tion

liqui

datio

nef

ficie

ncy

over

hang

(%)

(%)

(%)

rank

ing

rank

ing

rank

ing

(%)

(%)

(%)

(%)

(Tab

le A

1 is

con

tinue

d on

the

next

pag

e.)

890 ■ canadian tax journal / revue fiscale canadienne (2003) vol. 51, no 2T

AB

LE

A1

Cont

inue

d

Pre-

Post

-Pr

e-Po

st-

liqui

datio

nliq

uida

tion

liqui

datio

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tion

Tax

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l fun

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ss to

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Tax

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over

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(%)

(%)

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rank

ing

rank

ing

(%)

(%)

(%)

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AG

F C

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ian

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wth

Equ

ity F

und

. . .

. . .

. . .

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. .

12.5

512

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3137

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99.5

716

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Talv

est V

alue

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e U

.S. E

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$ .

. . .

. . .

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. . .

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8.14

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5971

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6.74

CIB

C U

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nd .

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. . .

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2856

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pire

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quity

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d .

. . .

. . .

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.12

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110

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5734

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eton

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iona

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ck F

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. . .

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ity F

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ma

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. . .

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11.9

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11.8

56.

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. . .

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731.

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.S. I

ndex

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. . .

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11.7

311

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511.

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ic A

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ican

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ue F

und

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. . .

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me

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ss F

. . .

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8280

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513

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Equ

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ife S

egre

gate

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omm

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tock

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. . .

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39.

6772

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0.00

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0016

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plet

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r C

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nies

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d .

. . .

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0773

7168

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adia

n E

quity

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11.6

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971.

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ife Id

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quity

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d .

. . .

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. . .

. . .

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6275

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0016

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Trim

ark

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adia

n Fu

nd—

SC .

. . .

. . .

. . .

. . .

. . .

. . .

.11

.52

8.70

8.02

7612

910

62.

810.

6875

.56

7.80

TD

Can

adia

n E

quity

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d—I

. . .

. . .

. . .

. . .

. . .

. . .

. .11

.51

10.9

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2877

5359

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1.63

94.7

614

.93

(Tab

le A

1 is

con

tinue

d on

the

next

pag

e.)


Fide

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con

tinue

d on

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next

pag

e.)


Sign

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next

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Can

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9.63

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d—D

iver

sifie

d Se

ctio

n .

. . .

. . .

9.57

7.08

6.45

151

219

197

2.49

0.63

74.0

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90M

AX

XU

M C

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Bal

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d Fu

nd .

. . .

. . .

. . .

. . .

.9.

558.

317.

1315

214

914

81.

251.

1886

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14.2

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .9.

557.

586.

9115

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616

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6779

.34

8.83

CI G

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Shar

es .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

9.49

8.84

7.47

154

122

128

0.65

1.37

93.1

415

.51

TA

BL

E A

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Pre-

Post

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Tax

loss

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l fun

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ss to

Tax

Tax

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retu

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ficie

ncy

over

hang

(%)

(%)

(%)

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ing

rank

ing

rank

ing

(%)

(%)

(%)

(%)

(Tab

le A

1 is

con

tinue

d on

the

next

pag

e.)


Inve

stor

s Glo

bal F

und

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

9.49

8.09

7.16

155

155

145

1.39

0.94

85.3

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Mac

Bal

ance

d Fu

nd .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.9.

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426.

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918

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8078

.18

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3St

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gicN

ova

Can

adia

n M

idca

p Va

lue

Fund

. . .

. . .

. .

9.47

8.33

7.15

157

148

147

1.15

1.18

87.9

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Inve

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. . .

. . .

. . .

. . .

. . .

. .9.

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815

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21.

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9984

.96

12.3

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Bal

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

9.42

7.05

6.49

159

220

195

2.36

0.57

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D C

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. . .

. . .

. . .

. . .

. . .

. . .

.9.

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. . .

. . .

. . .

. . .

9.38

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7.58

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0.18

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.61

Spec

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Port

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. . .

. . .

. . .

. . .

9.36

7.82

6.88

162

170

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1.54

0.94

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Fund

. . .

. . .

. . .

. . .

. . .

. . .

. .

9.31

7.25

6.43

163

206

198

2.06

0.81

77.8

511

.23

Des

jard

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aure

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n L

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sifie

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. . .

. . .

.9.

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6216

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

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6016

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

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3216

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8.21

Spec

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. . .

. . .

. . .

. . .

. . .

. . .

9.20

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1.30

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. . .

. . .

. . .

. . .

. . .

. . .

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. . .

. . .

. . .

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. . .

. . .

. . .

. . .

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. . .

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. . .

. . .

. . .

. . .

. . .

. . .

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. . .

. . .

. . .

. . .

. . .

. . .

9.09

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. . .

. . .

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822

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

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. . .

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. . .

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. . .

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168

176

1.19

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.31

TA

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Pre-

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Tax

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(%)

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(Tab

le A

1 is

con

tinue

d on

the

next

pag

e.)


TD

Can

adia

n St

ock

Fund

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

8.96

8.01

6.92

181

160

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Inve

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5497

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. . .

. . .

. . .

. . .

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8.95

8.95

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. . .

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. . .

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8.72

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. . .

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(Tab

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1 is

con

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d on

the

next

pag

e.)


Nat

iona

l Ban

k C

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Equ

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und

. . .

. . .

. . .

. . .

.8.

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Fund

. . .

. . .

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8.50

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207

151

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. . .

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8.49

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. . .

. . .

. . .

8.36

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. . .

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. . .

. . .

. . .

. . .

. . .

. .

8.33

8.33

6.78

220

147

173

0.00

1.55

100.

0018

.63

AG

F C

anad

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Tact

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Ass

et A

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tion

Fund

. . .

. . .

8.29

6.74

5.89

221

233

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1.55

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. . .

. . .

. . .

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8.27

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222

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2.59

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48.

65In

vest

ors R

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wth

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. . .

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nd .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

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Bal

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. . .

. . .

. . .

. . .

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8.23

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1.40

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. . .

. . .

. . .

. . .

. . .

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8.22

7.35

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0.86

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. . .

. . .

. . .

. . .

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8.12

8.12

6.60

227

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ond

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. . .

. . .

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8.11

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Beu

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. . .

. . .

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260

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(%)

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le A

1 is

con

tinue

d on

the

next

pag

e.)


Tran

s IM

S A

sset

Allo

catio

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nd .

. . .

. . .

. . .

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d .

. . .

. . .

. . .

. . .

. . .

. . .

.7.

976.

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9723

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623

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anad

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. . .

. . .

. . .

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Sel

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. . .

. . .

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. . .

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. . .

. . .

. . .

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. .7.

845.

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927

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. . .

. . .

. . .

. . .

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. . .

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1.42

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. . .

. . .

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. . .

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. . .

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7.76

7.76

6.29

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. . .

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. . .

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7.66

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Gre

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R B

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(Tab

le A

1 is

con

tinue

d on

the

next

pag

e.)


Roy

al S

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. . .

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. . .

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.7.

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7.50

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7.44

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198

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0019

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Mav

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7.40

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7.38

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6.82

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6.77

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taFu

nd E

quity

1 .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.6.

536.

535.

2428

724

126

60.

001.

2910

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19.7

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D In

tern

atio

nal E

quity

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. . .

. . .

. . .

. . .

. . .

. .6.

395.

604.

8928

827

427

90.

790.

7187

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12.6

8Tr

ans-

Can

ada

Pens

ion

Fund

. . .

. . .

. . .

. . .

. . .

. . .

. . .

6.34

5.16

4.54

289

286

285

1.17

0.62

81.4

812

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Des

jard

ins E

quity

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d .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

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6.33

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290

278

283

0.88

0.78

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614

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Mid

dlef

ield

Mut

ual F

unds

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ited-

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wth

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ss .

. .6.

271.

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9729

132

432

34.

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tegi

cNov

a W

orld

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ateg

ic A

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. . .

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4729

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828

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5880

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lves

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. . .

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.6.

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s . .

. . .

. . .

. . .

. . .

. . .

. . .

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6.05

4.22

3.99

294

301

300

1.82

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one

& C

o. C

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AF

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lass

. . .

. . .

. . .

. . .

.5.

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9529

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770.

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5.62

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OF

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turi

on C

anad

ian

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ance

d C

lass

ic .

. . .

. . .

5.94

4.42

4.06

296

296

297

1.52

0.37

74.4

78.

28C

lari

ca E

quifu

nd .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

5.88

4.10

3.90

297

307

304

1.77

0.20

69.8

74.

92A

ll-C

anad

ian

Cap

italF

und

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

5.83

3.91

3.75

298

310

306

1.92

0.17

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74.

27M

avri

x D

iver

sifie

d Fu

nd .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

5.83

2.72

2.72

299

316

316

3.11

0.00

46.7

30.

00St

rate

gicN

ova

Com

mon

wea

lth W

orld

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ance

dFu

nd L

td.

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .5.

784.

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0930

029

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61.

160.

5379

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6A

ll-C

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ian

Com

poun

d Fu

nd .

. . .

. . .

. . .

. . .

. . .

. . .

5.75

3.50

3.50

301

312

309

2.25

0.00

60.8

90.

00V

ista

Fund

Equ

ity 2

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

5.71

5.71

4.56

302

267

284

0.00

1.15

100.

0020

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Nat

iona

l Life

Equ

ities

Fun

d .

. . .

. . .

. . .

. . .

. . .

. . .

. .5.

695.

694.

5430

326

828

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001.

1510

0.00

20.2

3In

vest

ors U

.S. L

arge

Cap

Gro

wth

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d .

. . .

. . .

. . .

. .5.

634.

894.

1530

429

029

20.

740.

7486

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15.0

9C

ambr

idge

Am

eric

as F

und

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

5.55

1.41

1.41

305

327

326

4.15

0.00

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10.

00M

ontr

usco

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ton

Inte

rnat

iona

l Equ

ity .

. . .

. . .

. . .

. .5.

522.

942.

9430

631

431

32.

580.

0053

.32

0.00

Sign

atur

e E

xplo

rer

Fund

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

5.45

5.28

4.26

307

284

291

0.17

1.02

96.9

119

.30

(Tab

le A

1 is

con

tinue

d on

the

next

pag

e.)


AG

F Sp

ecia

l U.S

. Cla

ss .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

5.13

4.89

3.94

308

291

302

0.24

0.95

95.3

019

.42

CI E

urop

ean

Fund

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

5.09

5.00

4.01

309

289

299

0.09

0.99

98.2

219

.80

Vis

taFu

nd C

apita

l Gai

ns G

row

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. . .

. . .

. . .

. . .

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085.

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0331

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729

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ltam

ira

Res

ourc

e Fu

nd .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

4.96

4.18

3.85

311

303

305

0.78

0.34

84.2

78.

05Te

mpl

eton

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ergi

ng M

arke

ts F

und

. . .

. . .

. . .

. . .

. . .

4.89

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3.56

312

306

308

0.78

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113

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AG

F A

sian

Gro

wth

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ss .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .4.

754.

693.

7331

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330

70.

060.

9698

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ac G

row

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und

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

4.75

2.82

2.82

314

315

314

1.93

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00C

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. . .

. . .

. . .

. . .

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. . .

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4.41

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315

322

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2.26

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lves

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an F

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

4.40

4.33

3.46

316

298

310

0.07

0.87

98.4

020

.16

Vis

taFu

nd C

apita

l Gai

ns G

row

th 2

. . .

. . .

. . .

. . .

. . .

.4.

284.

283.

3731

729

931

10.

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9110

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21.1

6D

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ic C

anad

ian

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ious

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und

. . .

. . .

. . .

.4.

273.

913.

3131

831

131

20.

360.

6091

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15.2

8A

ltam

ira

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t Ter

m G

loba

l Inc

ome

Fund

. . .

. . .

. . .

.4.

243.

022.

7931

931

331

51.

220.

2371

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7.57

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s Rea

l Pro

pert

y Fu

nd .

. . .

. . .

. . .

. . .

. . .

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.4.

172.

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TD

U.S

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. . .

. . .

. . .

. . .

. .

3.90

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321

319

318

1.49

0.00

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r E

quity

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d .

. . .

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752.

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5132

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731

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5.97

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. . .

. . .

. . .

. . .

. . .

. . .

. .

3.46

1.80

1.80

323

326

324

1.65

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IM A

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ican

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d .

. . .

. . .

. . .

. . .

. . .

. . .

. .3.

402.

212.

1632

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190.

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GB

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atio

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. . .

. . .

. . .

. . .

. . .

. .

2.99

2.63

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325

318

319

0.36

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88.1

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Gre

at-W

est L

ife C

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l Est

ate

1 (G

) NL

. . .

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122.

121.

6432

632

332

50.

000.

4810

0.00

22.7

2C

I Pac

ific

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. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

1.82

1.82

1.40

327

325

327

0.00

0.42

100.

0022

.95

Inve

stor

s Pac

ific

Inte

rnat

iona

l Fun

d .

. . .

. . .

. . .

. . .

. .1.

671.

021.

0232

832

832

80.

640.

0061

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0.00

Tran

s IM

S C

anad

ian

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wth

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d .

. . .

. . .

. . .

. . .

. . .

1.57

−1.5

4−1

.54

329

333

333

3.11

0.00

nana

CI P

acifi

c Se

ctor

Sha

res

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.1.

040.

900.

7833

032

932

90.

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1186

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6A

ll-C

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ian

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ourc

es C

orpo

ratio

n .

. . .

. . .

. . .

. . .

.0.

47−1

.16

−1.1

633

133

233

21.

630.

00na

naA

GF

Japa

n C

lass

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.−0

.03

−0.2

8−0

.28

332

330

330

0.25

0.00

nana

Wor

king

Ven

ture

s Can

adia

n Fu

nd In

c. (L

SVC

C)

. . .

.−0

.61

−0.6

1−0

.61

333

331

331

0.00

0.00

nana

TA

BL

E A

1Co

ntin

ued

Pre-

Post

-Pr

e-Po

st-

liqui

datio

nliq

uida

tion

liqui

datio

nliq

uida

tion

Tax

loss

toPr

e-ta

xaf

ter-

tax

afte

r-ta

xPr

e-ta

xaf

ter-

tax

afte

r-ta

xm

utua

l fun

dTa

x lo

ss to

Tax

Tax

retu

rnre

turn

retu

rnre

turn

retu

rnre

turn

dist

ribu

tion

liqui

datio

nef

ficie

ncy

over

hang

(%)

(%)

(%)

rank

ing

rank

ing

rank

ing

(%)

(%)

(%)

(%)

(Tab

le A

1 is

con

clud

ed o

n th

e ne

xt p

age.

)


Mav

rix

Gro

wth

Fun

d .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .−1

.54

−3.4

5−3

.45

334

336

336

1.91

0.00

nana

Tran

s-C

anad

a Va

lue

Fund

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

−2.0

1−2

.21

−2.2

133

533

433

40.

200.

00na

naIn

vest

ors J

apan

ese

Gro

wth

Fun

d .

. . .

. . .

. . .

. . .

. . .

. .−2

.63

−2.6

3−2

.63

336

335

335

0.00

0.00

nana

Uni

vers

ity A

venu

e C

anad

ian

Fund

. . .

. . .

. . .

. . .

. . .

.−2

.68

−4.2

8−4

.28

337

337

337

1.60

0.00

nana

Cam

brid

ge G

loba

l Fun

d .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

−6.7

1−7

.19

−7.1

933

833

833

80.

480.

00na

naC

ambr

idge

Pac

ific

Fund

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.−8

.92

−9.2

7−9

.27

339

339

339

0.35

0.00

nana

Cam

brid

ge S

peci

al E

quity

Fun

d .

. . .

. . .

. . .

. . .

. . .

. .−1

1.00

−11.

63−1

1.63

340

340

340

0.63

0.00

nana

Cam

brid

ge B

alan

ced

Fund

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. .

−11.

11−1

1.81

−11.

8134

134

134

10.

710.

00na

naC

ambr

idge

Res

ourc

e Fu

nd .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.−1

5.19

−15.

75−1

5.75

342

342

342

0.56

0.00

nana

Cam

brid

ge G

row

th F

und

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

−16.

16−1

6.77

−16.

7734

334

334

30.

610.

00na

na

Mea

n .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

9.01

7.66

6.66

1.35

1.00

84.9

111

.98

Med

ian

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

9.10

7.81

6.78

1.25

1.02

86.7

512

.93

Stan

dard

dev

iatio

n .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.4.

454.

353.

901.

120.

6212

.80

5.37

Max

imum

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.21

.58

18.8

416

.21

7.13

2.63

100.

0022

.95

Min

imum

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.−1

6.16

−16.

77−1

6.77

0.00

0.00

25.3

10.

00

Not

e: T

he a

bove

ran

king

s are

bas

ed o

n th

e as

sum

ptio

ns d

escr

ibed

in th

e ap

pend

ix. T

he p

re-t

ax a

nd a

fter

-tax

ran

king

s are

his

tori

cal a

nd d

o no

t nec

essa

rily

impl

y si

mila

r pr

e-ta

x an

d af

ter-

tax

retu

rns o

r ra

nkin

gs in

the

futu

r e. N

eith

er th

e pr

e-ta

x no

r th

e af

ter-

tax

retu

rns a

nd r

anki

ngs t

ake

into

acc

ount

dif f

eren

ces i

nri

sk. C

eter

is p

arib

us, o

ne c

an e

xpec

t ret

urns

to b

e hi

gher

for

risk

ier

asse

ts in

a c

ompe

titiv

e fin

anci

al m

arke

t. Pr

e-ta

x re

turn

s and

ran

king

s as w

ell a

s aft

er-t

axre

turn

s and

ran

king

s ar e

stro

ngly

sens

itive

to th

e ho

ldin

g pe

riod

ass

umed

in th

is st

udy.

Hol

ding

per

iods

that

are

long

er o

r sh

orte

r th

an th

e 10

-yea

r pe

riod

assu

med

in th

is st

udy

may

pro

duce

sign

ifica

ntly

diff

eren

t ret

urns

and

ran

king

s. In

com

putin

g pr

e-ta

x an

d af

ter-

tax

retu

rns,

we

have

ass

umed

that

buy

ing

and

selli

ng c

omm

issi

ons a

re z

ero.

We

have

als

o as

sum

ed th

at fu

nd u

nith

olde

rs h

ave

no c

apita

l los

ses t

o of

fset

the

capi

tal g

ains

dis

trib

uted

by

the

fund

s.na

not a

pplic

able

.

TA

BL

E A

1Co

nclu

ded

Pre-

Post

-Pr

e-Po

st-

liqui

datio

nliq

uida

tion

liqui

datio

nliq

uida

tion

Tax

loss

toPr

e-ta

xaf

ter-

tax

afte

r-ta

xPr

e-ta

xaf

ter-

tax

afte

r-ta

xm

utua

l fun

dTa

x lo

ss to

Tax

Tax

retu

rnre

turn

retu

rnre

turn

retu

rnre

turn

dist

ribu

tion

liqui

datio

nef

ficie

ncy

over

hang

(%)

(%)

(%)

rank

ing

rank

ing

rank

ing

(%)

(%)

(%)

(%)

Documents

The Impact of Personal Income Taxes on Returns and ... · 866 canadian tax journal / revue fiscale canadienne (2003) vol. 51, no 2 the unitholders. The use of a trust is beneficial,