Tax treatment of segregated fund
Q – I am looking to purchase dividend funds and have narrowed it down to two funds. That is the BMO Dividend Fund (MER=1.81%, Open-End) and London Life Dividend Fund (MER=2.30%, Segregated). With the BMO fund there will be taxes applied to any gains on a year to year basis plus a credit of any dividends paid out, just like any other fund in its class. However, a financial planner recommended the London Life Dividend Fund, since the dividends are re-invested back into the fund to purchase more units and you do not pay any taxes on a year to year basis. When you finally cash in the fund any gain will be treated as ‘Capital Gains’. Is this correct? If so, why doesn’t the BMO Dividend Fund have the same tax advantages?
Comparing the two funds do you have any recommendations? With segregated funds is there a such thing as an open-end fund or closed-end fund? – H.C.
A – I suggest that you probe more closely about the tax treatment of the seg fund. Simply reinvesting dividends does not make them tax-exempt. Perhaps it has something to do with the type of insurance contract the seg fund is tied to — for example,f it an investment option within a universal life policy. The insurance policy aspect would be the only way in which dividends might be tax-exempt. The BMO fund will not have any insurance application, which is why it would not get similar treatment.
As for the funds themselves, there are actually two London Life dividend funds, one managed by London Life and one by Mackenzie Financial. Make sure you know which one you are getting – the Mackenzie fund has done better lately.
None of the funds you mention has a high preferred share content, which means that they do not qualify in our books as a “true” dividend fund. All are really blue-chip common stock funds at the core.
I am not aware of any closed-end seg funds. – G.P