|
| |
How We Eluded The Bear Of 2000
The date October 13, 2000 will forever be embedded in my mind. It was the day after our mutual fund trend tracking indicator had broken its long-term trend line and I sold 100% of my clients’ invested positions (and my own) and moved the proceeds to the ...
Is your mutual fund the right one for you?
Mutual Funds are considered to be one of the best investments one can get hands on. They're very flexible and cost-effective. An excellent investment for people with restricted knowledge, time or, money.For beginners, who might have a perplexed expression ...
Playing the High-Stakes Biotech Game
Shares of biotechnology companies have declined, after the much anticipated American Society of Clinical Oncologists meeting in early June in New Orleans. This sector has been on a roll ever since Genentech (NYSE: DNA) vaulted 45% on May 19, 2003 ...
|
|
|
|
| |
While reinvestment of dividends is usually an excellent idea, it does require some record keeping on your part to avoid double taxation. Many financial planning firms provide this tracking as part of their service. In my experience almost every case that I have looked at after a sale, has resulted in the reinvestment of dividends not being accounted for.
For example, let's say you bought units or shares in XYZ mutual fund in 1990 for $ 10,000 when the shares were $5 each. So you got 2000 shares. At the end of the year, the fund will declare a dividend equal to the total of its realized capital gains, dividend and interest income etc. less the fund's expenses. Let's say this dividend worked out to 30 cents per share. On 2000 shares that is a $600 dividend or 120 more shares if the unit value hasn't changed since you bought into the fund.
You will receive a T3 slip in March for that dividend whether you take cash or additional shares for it. If it is a mutual fund corporation you will receive a T5 slip for the dividend declared at its fiscal year end. The tax effect is the same. The point to understand here is that you will be paying taxes that year on that dividend whether you receive it or not. If you reinvest the dividend in more of the same shares, for tax purposes the "average cost per share" has now risen by 30 cents per share. Your total investment is now $10,600 (2120*5.00) from an income tax point of view because you will already have been taxed in the current year for the $600.
Now lets assume they pay the same
dividend on the same unit value in 1991, 1992, 1993 and then you sell your shares in XYZ mutual in 1994 and receive net proceeds of $14,000. Most people I have found would report a capital gain of $4,000 on their tax return and forget that they already paid tax on four annual dividends. The capital gain is actually $1,600 ($14,000 - $10,000 + 4 x $600), less than half of what is often reported. The good news is that if this has happened to you, you can apply to have an adjustment for at least the last three years of tax returns and sometimes further back than that.
As you may sell a portion of your shares instead of the entire position, it is necessary to keep track of these matters on a price per share basis, rather than the total investment. By adding the dividend per share to the previous cost per share, you now have the new cost per share for future redemptions. This calculation is especially helpful if you are taking a regular monthly income from a mutual fund-often referred to as systematic withdrawal plans. As there are often twelve redemptions per year, a simple record is necessary to come up with the taxable portion for tax time.
If you don not keep track of your cost per share you will be paying more tax than necessary. If you have other losses to offset your gains, you will be using up your losses needlessly. All of these are forms of double taxation, which result from not keeping track of reinvested dividends. If you want a form for keeping track of your cost base there is a free Form for tracking ACB, which you can download, form our web site at www.money-software.com
Copyright 2004 – www.money-software.com
About the Author
Peter F. Baigent CFP, CLU, CHFC, RFP. is a Past President of the Canadian Association of Financial Planners for British Columbia, a former Director of the Canadian Association of Financial Planners. He has spoken across Canada on financial planning matters and has taught courses for the Chartered Financial Consultants & Certified Financial Planners degrees. He is the founder of Money Minders Software which produces financial planning software.
|
|
|
|
|
|
 |
Self-directed IRA adds investment optionsAZ Central.comFraud and the possibility of loss also can happen with stocks, mutual funds and other mainstream investments. But there's often an intermediary, such as a broker or financial planner monitoring things, and many financial companies restrict investors to ...and more » |
|