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Comparing Wrap Account Fees with Investment Fund Fees
Scott Blythe
While wrap accounts have been well-known in the United States for awhile, they’ve only recently become popular in Canada. Wrap accounts provide or “wrap” a variety of investment services such as portfolio design, asset allocation, and performance monitoring into one package for one management fee.
A common misconception regarding wrap accounts is that investors can deduct investment management fees with wrap accounts but can’t with mutual fund and segregated funds. In a wrap account, investors receive gross returns and can pay for fees outside of the account. In an investment fund, the fee is paid by the fund and after-fee returns are then distributed to investors. With non-registered investments, fees are deductible against investment income in both cases. In no case are fees on registered accounts tax deductible.
On an after fee pre-tax basis, the portfolio returns are no different for like portfolios.
| |
Wrap |
Mutual |
| Income |
$10,000 |
$10,000 |
| Fees |
- |
(2,500) |
| Reported
Returns |
$10,000 (10 per cent) |
$7,500
(7.5 per cent) |
| Wrap
Fees |
(2,500) |
- |
| Pre-tax
Return |
$7,500
(7.5 per cent) |
$7,500
(7.5 per cent) |
| Wrap
versus mutual fund tax impact. $100,000 portfolio
- 2.5 per cent fees. Fees paid and deductible
outside of the fund |
Capital |
Canadian |
| Type
of Income |
Interest |
Gains |
Dividends |
| Actual |
$10,000.00 |
$10,000.00 |
$10,000.00 |
| Taxable
Amount |
$10,000.00 |
$6,666.67 |
$12,500.00 |
| Fee
deduction |
$ (2,500.00) |
$ (2,500.00) |
$ (2,500.00) |
| Federal
Tax (at 29%) |
$ 2,175.00 |
$ 1,208.33 |
$ 2,900.00 |
| Dividend
tax credit (13 1/3 % of taxable amt) |
- |
- |
$ (1,666.63) |
| Provincial
taxes (50 % of federal) |
$ 1,087.50 |
$ 604.17 |
$ 616.69 |
| Total Taxes |
$ 3,262.50 |
$ 1,812.50 |
$ 1,850.06 |
| After tax return |
4.2 % |
5.7 % |
5.6 % |
| Fees
paid and deductible outside of the fund |
Capital |
Canadian |
| Type
of Income |
Interest |
Gains |
Dividends |
| Actual ($10000-$2500) |
$ 7,500.00 |
$ 7,500.00 |
$ 7,500.00 |
| Taxable
Amount |
$ 7,500.00 |
$ 5,000.000 |
$ 9,375.00 |
| Fee
deduction |
- |
- |
- |
| Federal
Tax (at 29%) |
$ 2,175.00 |
$ 1,450.00 |
$ 2,718.75 |
| Dividend
tax credit (13 1/3 % of taxable amt) |
- |
- |
$ (1,249.97) |
| Provincial
taxes (50 % of federal) |
$ 1,087.50 |
$ 725.00 |
$ 734.39 |
| Total Taxes |
$ 3,262.50 |
$ 2,175.00 |
$ 2,203.17 |
| After tax return |
4.2 % |
5.3 % |
5.3 % |
| Difference |
- |
$ 362.50 |
$ 351.11 |
E-mail: invest@barkermoney.com
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