It’s always a good time to review the differences between how dividends are treated in mutual funds and segregated funds.
Let’s start off with the same client owning 1,000 units of both a mutual fund and a segregated fund and both the mutual fund and the segregated fund have a $10 unit price. So, the client owns 100 units of each.
Now, a dividend is realized in both funds that is equivalent to $1 per unit. This is when the treatment of dividends differ between mutual funds and the segregated funds.
In the mutual fund, this dividend will be used to purchase additional units. The client has received $1 x 100 units = $100. This $100 will be used to purchase more units, $100/$10 unit price equals 10 more units. The mutual fund client now has 110 units priced at $10 per unit or an account value of $1,100.
In the segregated fund, this dividend will be added to the assets of the segregated fund. Now the segregated fund is worth $1,100 and the client has the same number of units, 100. So, their unit price is now $11 per unit. Therefore, their account value is $11 x 100 units or $1,100.
As you can see, when the dust settles, the client has the same amount of money. The only difference is how the account value is calculated.
From a technical standpoint, a mutual fund is a trust and therefore can flow out distributions to clients. Segregated funds are not a trust, more a pooled account, which takes in distributions which can increase unit prices.
So, if a client ever asks if they can get the dividends from a segregated fund, the answer is no, the dividends get reinvested.
And one more thing, from a tax perspective, the mutual fund client and segregated fund client will have the same dividend reported to them on their T3 slips. That’s because segregated funds are deemed to be trusts for tax purposes.
Regional Manager, Wealth, Ontario
Regional Manager, Wealth, Atlantic Canada and Quebec
This communication reflects the views of Qualified Financial Services Inc. as of the date published. The information in this publication is for general information purposes only and is not to be construed as providing individual legal, tax, financial or other professional advice. Qualified Financial Services Inc. assumes no responsibility for any errors or omissions in the information contained herein nor for any reliance placed on such information. Please seek independent professional advice before making any decisions.