front end load payment process
front-end load paid to distributor at purchase
distributor then sends these to custodian
LSVCC
Labour Sponsored Venture Capital Corporations - investment funds with mandate to invest in small-medium-sized businesses. Must be held 8 years to avoid recapture of FEDERAL tax credits (if redeemed before this time has elapsed full federal tax credit from original purchase must be repaid)
trailer fee
fee paid to the distributor of he mutual fund for providing ongoing services to the holder of the fund - investment advice, tax guidance, financial statements, etc
management fee
fee paid to a fund manager for managing the fund
management expense ratio (MER)
total of all management fees and other expenses charged to the fund. However, the MER does not include trading or brokerage costs.
Net Asset Value per Share
NAVPS: [Total assets- Total liabilities]/Number of units outstanding.
Who directly pays the management fees of a mutual fund?
All expenses are deducted directly from the fund, not charged to the investor.
A mutual fund organized as an open-end trust earns $850,000 in investment income, composed of $500,000 in capital gains, $250,000 in dividends and $100,000 in investment income. What portion of this investment income will be taxable to the trust?
The open-end trust structure enables the fund itself to avoid taxation. Any interest, dividends or capital gains income, net of fees and expenses, is passed on directly to the unitholders. The fund itself does not incur any tax liability. Any income that has flowed through to the unitholder is taxed in the hands of the unitholder and the tax is based on the type of income that the fund generated.
mutual fund offering price
most mutual funds report their NAV but this is not the “real price” you pay if the fund has a front-end load. In equities you pay market price plus a commission but with mutual funds (with front-end sales charge), you pay a price that includes the NAV plus the sales charge. Your purchase price will always be higher than the NAV.
Max LSVCC investment for 15% federal tax credit
$5k
net asset value per share
navps = (assets-liabilities)/shares outstanding
Generally, mutual funds’ charters and provincial securities commissions prohibit mutual fund managers from what?
Mutual fund managers must observe a number of guidelines regarding constraints imposed by a fund’s own charter, as well as constraints imposed by provincial regulators.
- prohibited from investing in commodity futures, but not financial derivatives.
- prohibited from acquiring more than 10% of the net assets of a single issuer.
- can charge either front-end or back-end commission, or no commission at all.
- restricted from borrowing for leverage purposes.
An investor purchased $15,000 of a no-load mutual fund three years ago and sold the fund for $30,000 less a $50 closing fee this year. The investor received and reinvested capital gains distributions of $2,000 and $2,500 in the final year of holding the fund. What’s the capital gain?
The mutual fund distributions are taxed annually as received in the hands of the investor. Therefore, in order to avoid double-taxation, they must be included in the adjusted cost base (ACB) of the fund to calculate the capital gain resulting from the disposition of the fund. In this example, the capital gain is ($30,000 - $50) - ($15,000 + 2,000 + 2,500) = $10,450.
prohibited mutual funds sales practices
- The provision by fund managers of money or goods to a distributor firm or its salesperson in support of client appreciation;
- While the rate of commission set for a new fund may differ from rates of commission set for already established funds, the rate of commission on a fund can only be changed when the prospectus for that fund is renewed;
- A fund manager may not provide co-operative funds for practices which are considered general marketing expenses, such as general client mailings;
- Fund managers may not financially subsidize skill enhancement courses such as effective communications, improving presentation skills, etc.;
- There are strict guidelines with respect to the provision of non-monetary benefits. They are forbidden unless they are of such minimal value or frequency that the behaviour of a salesperson would not be influenced (such as pens, t-shirts, hats, and golf balls).
additional prohibited mutual funds sales practices
- Quoting a Future Price (mutual fund price based on net asset value on next valuation date. Based on order time, NAVPS may be priced at the end of the current business day or next business day)
- Offer to Repurchase (rep can’t make offers to repurchase securities to insulate investors from downturns)
- Selling Without a Licence (mutual fund reps must be licenced in each province they intend to sell mutual funds which requires registration with each provincial regulatory authority. It is illegal for a mutual fund rep to sell products for which the rep is not registered. For example, a mutual fund rep cannot sell stocks, bonds or insurance unless licensed to do so in that province)
- Advertising the Registration (reps may not advertise or promote the fact that they are registered with a securities authority)
- Promising a Future Price (reps can’t promise a fund will achieve a set price in the future)
