Question

Country: Canada

Assume you invested $100,000 in a balanced mutual fund 5 years ago through a non-registered account. Despite 2.25% in annual fees (MER) embedded in the fund, market gains brought the total value of your investment to $150,000. You want to reduce your costs by switching to a low-cost ETF which charges 0.25% in fees for an annual fee reduction of 2%. You want to know if it is worth switching it if you plan to hold onto it for 10 year. Use the following assumptions to answer the series of questions below:

·       Your marginal tax rate is 40%

·       You pay for your capital gains from the proceeds of the sale and invest what's left over (including original contribution amount) to the ETF.

·       Both the mutual fund and ETF will return 6.25% each year before fees.

·       Only account for the capital gains realized when selling the mutual fund (ignore any commissions, deferred sales charges, dividends, etc.).

Q1: Explain the tax implications of selling the mutual fund

Q2: Calculate how much you would own in taxes upon selling your mutual fund

Q3: Assuming you sold the mutual funds for $150,000 and paid taxes on the capital gains - how much will you be able to invest in the ETF?

Q4: How much would you have in 10 years if you kept the mutual fund? (This means you did not sell it and pay taxes. Instead, you kept it and left it in the account to grow)

Q5: What would your after-tax gain be if you kept the mutual fund? (Note, you need to calculate the final amount in the account, subtract taxes, and the initial investment amount

Q6: How much would you have in 10 years if you sold the mutual fund and used the after-tax proceeds to invest in the ETF?

Q7: What would your after-tax gain be on the ETF? Base this off the initial investment of $100,000. Hint: You need to account for the tax you paid when selling both the mutual fund and the ETF.

Q8: Explain which option is the best choice and justify your answer:

A. Keeping the mutual fund

B. Selling mutual fund to buy an ETF

Answer 1

-Inital Investment =100000$

-MF with Non Registered having charges-2.25% after five year investment go to the $150000

-Low cost ETF with 0.25% so reduced cost by the 2%

-Investment Horizon= 10 Years

-tax Rate 40%

-Both have return of the 6.25%

Answer 1:

Tax Implication on selling Mutual Funds.

The per Tax Impication Rules the taxx would be payable to only on Capital Gains(Return Generated from Investment) Not on the full Outcome.

Answer 2: How much Tax Needs to Pay in Selling Mutual Fund

Capital Gains= 150000(Income)- 100000(Inv)

= $50000

Tax(40%)-50000*0.4 = $20000

Answer 3:

Sold Mutual Fund and get $150000

Available to invest in ETF= 150000-20000(Tax)

=$130000

Answer 4: If investment is kept in Mutual Fund

150000$ for 10 years @6.25% return

=150000+125030(Return)=275030

Answer 5: After Tax Gains

Return=275030

-Tax = 50000

=225030

Answer 6: ETF Gains

ETF investment=130000

period =10 years

Return= 6.25%

Return=130000+108360=238360

Answer 7: After Tax Gain In ETF

238360-43344=195016

Answer 8: Best Choice

A.Keeping Mutual Fund will benefited in teams of the tax benefit as 10 year more in same security would not need to pay the taxes.

B.Selling MF & Buy ETF would provide less return based on tax