Avoiding Double TaxationWritten by Peter F. Baigent CFP, CLU, CHFC, RFP.
Many people who buy mutual funds and other stocks often end up paying tax twice when they finally sell security. This is because they do not keep track of their "average cost base" per share. This problem is very prevalent on investments when dividends have been reinvested in same security. Most mutual fund investors reinvest their dividends in more shares of same fund. Many large corporations offer dividend reinvestment programmes that allow shareholder to acquire more shares of corporation directly without any brokerage charges.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 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 shares were $5 each. So you got 2000 shares. At end of year, fund will declare a dividend equal to total of its realized capital gains, dividend and interest income etc. less 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 unit value hasn't changed since you bought into 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 dividend declared at its fiscal year end. The tax effect is 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 dividend in more of same shares, for tax purposes "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 current year for $600.
| | FINANCIAL PLANNERS! HOW DO YOU TELL THE DIFFERENCE?Written by Peter F. Baigent CFP, CLU, CHFC, RFP.
First Published Fall 1993 Eight years ago I was discussing a Financial Planning recommendation with a Judge. He made comment that he was reluctant to accept recommendations from a 'Financial Planner' because he knew of a lawyer in Vancouver who had been disbarred for misuse of his client's trust funds and was now doing business as a 'financial planner'. Unfortunately, anyone can call themselves a 'Financial Planner. This is true of many professions. Anyone can hang out a shingle as an Accountant. But, they cannot call themselves a Chartered Accountant unless they have completed a course of studies and are a member in good standing of their professional association. It is a shame that, after all of financial degrees and courses I had taken that I still had to compete with a disbarred lawyer. When I left meeting with Judge I was determined to do something to make sure I would stand out above crowd. It is sad to say but many in our business are not very honest and even more are motivated to sell client only those products that pay them most money. Some stockbrokers would have people believe they are 'Financial Advisors' when in fact they are simply stock salespeople. Most have almost no training in Taxation or Estate Planning, both of which impact a great deal on any investment recommendation. Many Life Insurance Agents hold themselves out as 'Financial Advisors' after taking a single course on insurance. Banks promote some of their people as 'Financial Advisors', when in fact they have taken a simple course in Mutual Funds and have in most cases no experience beyond that bank's products. There are some very good and well qualified people in all of these professions and financial institutions. But, point is, how do you tell difference? Shortly after incident with Judge, I joined Canadian Association of Financial Planners (CAFP). As a member I was required to subscribe to their code of ethics and answer to their disciplinary committee. In this way my clients would know that I had attained a certain level of competence and that they could report me to Association if I did something wrong. The Association grants RFP (Registered Financial Planner) degree. To maintain that degree I must be a Regular member of CAFP and have at least one Academic degree (such as CFP, CLU, CA. etc) in one of Financial Planning disciplines. 1 must then have at least two years experience with a financial planning firm and have passed a six hour competency exam, which covers all areas of financial planning. In addition, I must produce proof of at least $1,000,000.00 of Errors & Omissions Insurance, subscribe to Code of Ethics and adhere to “Six Step Financial Planning Process”. Each year I must prove that I have kept up to date with new developments through their requirements for continuing education.
|
