Q&A: Looking for tax-advantaged mutual funds

Question: I have recently used up all my RRSP contribution room and am looking
at investing in unregistered mutual funds. I know the basics about distributions
and how interest income is taxed more than capital gains and dividends. Still,
I have no idea which types of funds have the most tax advantage. Any direction
would be great. – K.T.C.

Gordon Pape answers: Coincidentally, I just completed an analysis
of tax-efficient funds for calendar year 2005 which was published in the April
issue of my Mutual Funds Update newsletter. I found that there is no
single fund category that offers across-the-board tax efficiency. Instead, you
need to look at each fund individually although your best bets will be found
in the Canadian Income Trusts and Canadian Income Balanced Groups.

Among the funds that I found were most tax-efficient last year were Northwest
Growth & Income Fund, which paid out 96c a share, all of which was tax-deferred
return of capital; RBC Tax Managed Return Fund, which paid out 72c a share of
which about 80 per cent was tax-deferred and 20 per cent tax-advantaged; and
Mackenzie Maxxum Dividend owth Fund, which paid 60c a share, also with about
an 80-20 split.

Keep in mind that the tax treatment of distributions can change from year to
year. However, some funds are structured so as to maximize tax efficiency. Ask
your broker to find them for you.

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