Tax, DSC Mutual Funds And Free Units

by Tax Guy - Burlington Accountant on February 24, 2010 Print This Post Print This Post

If you purchased back-end load mutual funds (also known as the deferred sales charge or DSC), you are entitled to cash in a portion of the fund every year without triggering the sales charge. However, if you don’t use it many mutual fund companies will not let you carry it over.

If you want to take advantage of these free units, you may be able to transfer your units to the front-end load or other series of the same fund without any immediate tax consequences.

Back-End Load Funds

The load charge of a mutual fund simply refers to when you pay the commission. Front load funds charge you a commission up front, when you buy the fund. This effectively reduces amount you invest.

Back-end load funds charge you a commission when you sell out of your fund. The commission is generally reduced every year depending on how long you hold the fund. Many mutual fund deferred sales charges are eliminated after five or seven years.

Free Units

Most back-end load mutual funds reduce the sales charge over time and the DSC fee is eliminated after the holding period is up. However, if you need access to your funds before the holding period is up you will have to pay the DSC fee, unless you have any free units.

A free unit refers to the mutual fund allowing you to redeem up to 10% of the value of the fund annually without paying the commission. Now this is a use it or loose it scenario: If you don’t use your 10% this year, you don’t get to carry it forward to the next year.

Tax Consequences

If you actually redeem your units for cash (or buy another mutual fund), you will have a capital gain or loss. However, if you request that the free units be moved to the front-end or other version of the same mutual fund, you can avoid an immediate the tax-event. Therefore, you can continue to hold a different version of the same mutual fund without paying any tax until you actually sell out of the fund.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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