Selling labour funds units

Zoomer | January 1st, 2006

Question: Is there a standard hold period for labor-sponsored funds to avoid penalties upon sale? I bought the Canadian Medical Discoveries Fund in 1994, but have other investments in mind if I can sell without penalty (leaving funds within RRSP).

Answer:

At the time you bought in ’94, the holding period for tax credit purposes was five years so you can now sell the units without any tax penalties. However, you will be assessed a deferred sales charge of 2.25%, which applies in the sixth year of purchase. It decreases each year, but does not disappear until after the eighth year.

However, paying the DSC may be worth it if you reinvest the money in new units of the fund or another labour-sponsored fund. In that case, you can claim a new tax credit (as long as you haven’t already invested the $5,000 maximum for the current year.)

The holding period for tax credit purposes was extended to eight years in 1996. If you bought units after that extension and sell them early, you’ll have to repay the credits plus a deferred sales charge. Very expensive!