Tax-smart solutions

For illustrative purposes only. Source: Fidelity Management & Research Company. Assumptions: 2011 personal marginal tax rates for Ontario. 6% return assumption for both class and trust. T-SWP Class rate is 5% from age 65 onwards. Class annual distribution amounts to 1% of the NAV and consists of capital gains. Trust annual distribution amounts to 2% of the NAV and consists of 50% interest and 50% capital gains. Both class and trust distributions are reinvested. Capital gains tax rate = 23.2% and interest tax rates = 46.41%. At age 78, the adjusted cost base (ACB) is reduced to zero, and cash flow switches from distributions comprised of return of capital to distributions comprised of capital gains. Over time the ACB of the corporate class investment is lower because capital gains are being deferred. However, upon redemption the capital gains will then be greater than for the mutual fund trust. Mutual funds and corporate class have different rates of return and expenses, and distributions may vary. The graph shows a trend line as mutual fund/corporate class performance will vary over shorter periods of time.

Effective November 6, 2006, Fidelity introduced a 5% T-SWP and created Series T5 (DSC, LL, LL2) and S5 (ISC). The Series name for T-SWPTM 8% changed to T8 (DSC, LL, LL2) and S8 (ISC). The monthly cash flow distributions on Fidelity T-SWP are not guaranteed, will be adjusted from time to time and may include income. We will aim to keep cash flow between 7.5% and 9% of the NAV each year on T-SWP balanced funds on T8 and S8, as well as 4.5% and 5.5% of the NAV on T5 and S5 balanced funds. For equity funds, we will aim to keep cash flow between 6%  to 10% of the NAV each year on T8 and S8, and between 4% to 6% of the NAV each year on T5 and S5.

A return of capital reduces an investor’s adjusted cost base. Capital gains taxes are deferred until units are sold or until the ACB goes below zero. Investors should not confuse this cash flow distribution with a fund’s rate of return or yield. While investors in Series T8/S8 and/or T5/S5 will be able to defer some personal capital gains, they must still pay tax on capital gains distributions that arise from the sale of individual holdings by fund managers, and on interest and dividend distributions. T-SWP will also pay a distribution that must be reinvested in December, consisting of income and capital gains.