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Table of Contents
Put your financial adviser on a leash
February 11, 2000
100% Foreign content for your RSP
December 22, 1999
Tax Loss Selling or Dealing With Your Mistakes
November 26, 1999
Life Stages of your RRSPs
November 12, 1999
Just give me boring (but great) rates of return
November 3, 1999
De-mystifying Demutualization - part Two
October 25, 1999
De-mystifying Demutualization - part One
October 19, 1999
Seg funds for the simple minded
September 14, 1999
The interest rate game Part 2
August 12, 1999
The interest rate game Part 1
July 30, 1999
Choosing funds: Five for the long run
July 14, 1999
New Funds: To buy or not to buy
July 2, 1999
Making sense of momentum investing
June 18, 1999
Rating the fund managers
June 4, 1999
Resource recovery hinges on supply and demand
April 30, 1999
Tech funds draw strength from favourable trends
March 24, 1999
Withdrawing from your RRSP
March 9, 1999
The economic implications of the euro - An interview with Ranga Chand
February 12, 1999
Underperforming small-cap funds have strong upside potential
January 29, 1999
How to pick a winning equity fund portfolio
January 15, 1999
View the Weekly Insight archive
   

Seg Funds for the Simple Minded

ROBERT MACKENZIE
Financial Advisor
Tuesday, September 14, 1999

All the hype surrounding segregated fund guarantees has obscured some of this product´s more useful features.

Except in a few situations, such as estate planning with older investors, paying an added cost for a guarantee is not worthwhile. But these "variable annuity contracts" are not entirely without merit. They can, for example, help us to simplify our financial life in a number of areas.

If you shop around for them, seg funds need not be inferior to or more costly than regular mutual funds. Despite the flood of new offerings, I see no reason to change my opinion of a year ago (Canadian MoneySaver, July/August 1998) that funds from Transamerica or Royal & SunAlliance represent excellent value.


  • Seg funds make tax reporting simpler.  The older I get, the less I like paperwork. Mutual funds require that investors calculate their loss or gain on a special schedule, relying on figures from their statements or transaction slips. With systematic withdrawal plans, this can be something of a chore. Seg funds, mercifully, issue a T3 slip at year-end that reports all gains or losses from sales and redemptions. As an added bonus, most seg funds, unlike mutual funds,  report the losses realized by the fund itself as well as its gains, which in some years reduces one´s total income to be declared for tax purposes. For seniors, any reduction in taxable income can mean less of a claw-back of the age amount or of OAS benefits, and thus equals more money in their pockets.

  • Seg funds make buying decisions simpler. Unlike the majority of mutual funds, seg funds normally allocate their annual distributions on the basis of how long a person has held the fund. With mutual funds, an unwary investor can buy in December and immediately pay a huge tax bill when an annual distribution is declared at year-end. The length of time the fund has been held is not taken into account. The allocation system eliminates this unpleasant surprise. I wish all funds would adopt it!

  • Seg funds can serve as simple "trust funds".  Would you like to give some money to someone but you don´t want that person to spend it unwisely? Instead of setting up a formal trust, a person can give money to another person in the form of a variable annuity contract and name themself as an "irrevocable" beneficiary. In doing so, the donor ensures that the new owner of the seg fund cannot sell any of the units without their written permission. The gift also serves as a simple "estate freeze", in that the capital growth of the fund will belong to the owner, not the donor. Although this arrangement gives so much control to the donor, they should pay the tax on the income generated by the contract each year. As an added benefit, should the owner die before the donor, the gifted money will be returned to the donor in keeping with the contract´s beneficiary designation.

  • Seg funds can serve as a simple "will". Assuming that you have had your will written and updated by a lawyer, seg funds can complement it and simplify your estate planning. If you want to give small cash gifts to your grandchildren or friends, for example, you need only make a list of them and attach it to a beneficiary designation form for the variable annuity contract. Names can readily be added or deleted as circumstances change, without the bother of amending your will. The percentages of the total seg fund benefit to be given to each person upon your death can also be specified and altered at will by submitting a revised list.  Be careful that your list doesn´t include charities or you will forego your tax break. Revenue Canada specifies that contribution receipts will be issued only if the money flows through an estate. That´s a policy that should be changed.

As added advantages, seg fund proceeds are guaranteed to some minimum amount and they are not subject to probate fees. On the downside, because seg funds do not pass through a will, any capital gains taxes on them are paid by the estate, which will reduce the share of the estate´s beneficiaries to the profit of the seg fund beneficiaries.

Robert MacKenzie is a Financial Advisor in Ottawa, Ontario.
This article was published in Canadian MoneySaver, Independent Personal Finance Advice since 1981. Visit www.canadianmoneysaver.ca or E-mail us at moneyinfo@canadianmoneysaver.ca

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