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Non-Registered Mutual Funds

MrMessi

Well-known member
Mar 12, 2009
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Is it worth investing, anyone who puts money in this I would appreciate some background knowledge.
 
B

burt-oh-my!

How much, what is your time frame?

There is one little-known secret about mutual funds for non-registered acounts - you want to find one with a large - i don't know the exact terminology - tax carryforward losses - so that it can earns gains for awhile and YOU as new owner will not be hit with any tax bill for gains realized in the fund.

Also - don't even think about buying one near the end of the year if 1) you are in a high tax bracket, and 2) the fund pays - and again, I don't know the exact terminilogy - distributes gains all at the end of the year. Otherwise, you can own the thing for one month, but get taxed on a year's worth of income generated in the fund even though you didn't own it all that time.
 

Tangwhich

New member
Jan 26, 2004
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Sorry I can't add much to answer the question, but regarding the tax implications, couldn't you just open them within your TFSA and not worry about it?
 
Dec 9, 2008
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Yup...you don't want to get hit with a large capital gain distribution if you're buying in a non-reg account, so you might wanna research that before you buy. Although, if you're buying it at this time of year, it probably won't be an issue and you can get information about past distributions so that might be helpful.

Not much else that I can add, but yeah, you might be best doing the TFSA thing first and then the non-reg account. I'm no financial expert, but for most investors, it would probably be best to go this route- RRSP, TFSA and then investment accounts (after maximizing RRSP and TFSA room).
 

SoftHands813

Casual Observer
Jan 2, 2008
716
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You might also consider leveraged investing.

In a nutshell (and you should investigate it thoroughly), the premise involves borrowing money for investing. You get a loan from a bank and make the monthly payments on the loan. The interest you pay on the loan can be used to reduce your taxable income come tax time. The loan is secured by the investments, as opposed to personal equity (e.g. house). Over time, the value of the investments exceeds the amount of the loan, which gives you some additional hobby money (or whatever you want to spend it on). A big plus with leveraging is the fact that you have significantly larger amounts of money working (and growing) for you. For example, a $300/month loan might generate $90,000 to work with. Most of us probably don't have a spare $90k kicking around to invest, but can prehaps afford $300/month. Since you've got significantly more money invested, the growth on that amount of money is also significantly more in terms of pure dollars.

Caveats abound, of course, which is why you should research it carefully. The quality of the investments is paramount, because even if they lose value, you're still on the hook for the outstanding amount of the loan. Depending on the types of investments you choose, they may generate dividends or capital gains, which are taxable. When you eventually wind-up the investments (which you can do at any time), you will have to pay tax on 50% of the capital gains that you realize. However, when you look at the pure dollars of net gain, it is a significantly larger amount because you're working with a bigger pile of money to start with.

Leveraged investing isn't for everyone, but it is another avenue worth pursuing.

SH813
 
B

burt-oh-my!

The thread starter said non-reg funds, and TFSAs are registered funds.

But what about buying a few actual stocks? That's why I wanted to kno whow much we are talking about? I would consider mutual funds mainly for moderatley sized acounts.
 

Mencken

Well-known member
Oct 24, 2005
1,047
40
48
You might also consider leveraged investing.

In a nutshell (and you should investigate it thoroughly), the premise involves borrowing money for investing. You get a loan from a bank and make the monthly payments on the loan. The interest you pay on the loan can be used to reduce your taxable income come tax time. The loan is secured by the investments, as opposed to personal equity (e.g. house). Over time, the value of the investments exceeds the amount of the loan, which gives you some additional hobby money (or whatever you want to spend it on). A big plus with leveraging is the fact that you have significantly larger amounts of money working (and growing) for you. For example, a $300/month loan might generate $90,000 to work with. Most of us probably don't have a spare $90k kicking around to invest, but can prehaps afford $300/month. Since you've got significantly more money invested, the growth on that amount of money is also significantly more in terms of pure dollars.

Caveats abound, of course, which is why you should research it carefully. The quality of the investments is paramount, because even if they lose value, you're still on the hook for the outstanding amount of the loan. Depending on the types of investments you choose, they may generate dividends or capital gains, which are taxable. When you eventually wind-up the investments (which you can do at any time), you will have to pay tax on 50% of the capital gains that you realize. However, when you look at the pure dollars of net gain, it is a significantly larger amount because you're working with a bigger pile of money to start with.

Leveraged investing isn't for everyone, but it is another avenue worth pursuing.

SH813
The interest you pay on the loan might not be tax deductible if CRA deems it was used to "earn" capital gains instead of income. Interest deductibility is for business purposes, ie income, not to gain capital. One small caveat to leveraged investments.
 

duang

Active member
Apr 17, 2007
1,121
0
36
Is it worth investing, anyone who puts money in this I would appreciate some background knowledge.
After maxing your TFSA [not much though since it's $15K limit max right now] you might consider corporate class mutual funds. This is a structure where a selection of funds are held in one corporation [rather than separate mutual fund trusts]. This means you can switch within the different funds with no deemed dispostion and thus you don't have to consider incurring capital gains when rebalancing for safety or opportunities. Another benefit is most distributions are minimized [and usually eliminated for years] and selecting a CC with losses on the books means future distributions are deferred even longer [as someone astutuely pointed out]. This structure also converts interest income and foreign dividends into capital gains when you ultimately sell units out of the CC [i.e. halves the tax rate]. It also allows you to defer gains until you remove funds from the structure which can mean potentially decades of deferral.

If you are using regular mutual funds in a taxable account [including corporate accounts] then you need to look at these to see if they make sense. The vast majority of taxable accounts using mutual funds would benefit from using this structure.

D.
 
B

burt-oh-my!

Good point duang, I forgot about those. They used to carry significantly higher MERs than ordinry mutual funds, but now there is almost no difference in many cases.'

WE need to know the tax rate of the purchaser though.
 

SoftHands813

Casual Observer
Jan 2, 2008
716
216
43
TFSAs are not registered funds. Contributions to TFSAs are made with after-tax dollars, as opposed to registered vehicles such as RRSPs, which are funded with pre-tax dollars. CRA allows you to deduct contributions to registered plans, but contributions to TFSAs are not deductible.

The definition of "registered" as provided by the CRA:

"A registered investment (RI) is a trust or corporation, units of shares of which are marketed as eligible investments for registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and deferred profit sharing plans (DPSPs). It is a pooled investment vehicle similar to mutual funds used by individuals."

Hope that clarifies things.

SH813
 

Mencken

Well-known member
Oct 24, 2005
1,047
40
48
TFSAs are not registered funds. Contributions to TFSAs are made with after-tax dollars, as opposed to registered vehicles such as RRSPs, which are funded with pre-tax dollars. CRA allows you to deduct contributions to registered plans, but contributions to TFSAs are not deductible.

The definition of "registered" as provided by the CRA:

"A registered investment (RI) is a trust or corporation, units of shares of which are marketed as eligible investments for registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and deferred profit sharing plans (DPSPs). It is a pooled investment vehicle similar to mutual funds used by individuals."

Hope that clarifies things.

SH813
No...that doesn't. My RRSP is not a registered fund by that definition. But it is a registered investment...consisting of equities, not funds of any kind.

The question was about using mutual funds in a non-registered account, assuming to be non RRSP and non TFSA...and my question would be...why would you use a mutual fund. I would use an ETF if I wanted diversification...much lower cost, and lots of choices for investment (but not as much choice as with mutual funds, I will admit).

The real issue is this. If you know enough about investing that you are sure a certain combination of assets is the best, and you have a mutual fund in mind that has those assets in that mix...why would you give away 2-3% per year? And if you don't know which mix will work...on what basis are you going to pick a mutual fund anyway?

If you admit you don't know...then go the low cost route and use an ETF or two or three. 90% of the time you will be better off.
 
B

burt-oh-my!

TFSAs are not registered funds. Contributions to TFSAs are made with after-tax dollars, as opposed to registered vehicles such as RRSPs, which are funded with pre-tax dollars. CRA allows you to deduct contributions to registered plans, but contributions to TFSAs are not deductible.

The definition of "registered" as provided by the CRA:

"A registered investment (RI) is a trust or corporation, units of shares of which are marketed as eligible investments for registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and deferred profit sharing plans (DPSPs). It is a pooled investment vehicle similar to mutual funds used by individuals."

Hope that clarifies things.

SH813
I think we are talking about two different things: Registered FUNDS vs REgistered PLANS.

A registered PLAN refers to it being registered with the government under some kind of legislation. It is subject to the legislation created for that plan. RRSPs, RIFs, LIFs, LIRAs, RESP, TFSA, RDSP - all registered plans.

Now, maybe the original question was about some other kind of mutual funds other than our standard ones, maybe private pools or something like that, but I am pretty sure he was talking about mutual funds in a non-registered ACCOUNT.
 
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