Tax-deferred cash flow from Fidelity

Need income? Don’t like paying taxes? Take a look Fidelity’s new T-SWP program for non-registered portfolios. Don’t be put off by the strange name. It could save you a lot of money.

SWP stands for systematic withdrawal plan. Every major fund company offers SWPs but Fidelity has gone one better with the introduction of “T” units for its Canadian Balanced Fund, Canadian Asset Allocation Fund, and Global Asset Allocation Fund. When you invest in one or more of them, you’ll receive tax-efficient monthly cash payments, currently running at a rate of $0.10 a unit.

Fidelity says that most of this cash flow will be treated as “return of capital” for tax purposes. That means that no tax is payable on that amount in the year the money is received. Tax is deferred until you sell your units or until the adjusted cost base (ACB) falls to zero, whichever comes first. The ACB is determined by subtracting the amount of tax-deferred payments received from the original price you paid for the units. So, for example, if you buy units in the Canadian Balanced Fund at $13.76 (recent price) and receive $1.20 in tax-deferred distributions over the next 12 months, the ACB will be $.56 ($13.76 – $1.20). That’s the price that would be used to calculate your capital gain or loss if you should sell at that time.

The company stresses that the $0.10 monthly distribution is not guaranteed and will be adjusted from time to time. The aim is to keep the cash flow in a range of 7.5% to 9% of the fund’s net asset value (NAV) each year.

This article originally appeared in Mutual Funds Update, a monthly newsletter that provides portfolio-building and fund selection guidance for investors. For information and to read a free sample copy, go to: http://www.buildingwealth.ca/mfudemo.cfm