Unfortunately, there is no free lunch and transactions cost money. In this article we will explore the different types of fees, and what
they mean.
Front-end load
A fee that is charged upon purchase of the mutual fund. This
is basically the equivalent to the commission fee charged when you buy shares
of a company.
Back-end load
A fee that is charged when you dispose of the mutual fund.
This is basically the equivalent to the commission fee charged when you sell shares
of a company. In most cases you will have either front-end or back-end load.
Management fees (expressed as MER – Management Expense
Ratio)
Management Expense Ratio expresses management and operating
fees as a ratio of the fund's average net assets. (Net assets is the fund's
total assets minus its total liabilities) Lower this ratio is the better but
obviously you will never find 0% MER, a fund's MER can be found in its
prospectus. A prospectus is a little booklet or brochure that they give you
which describes the fund, what they invest in, what their current holdings are,
their goals, fee structure, and etc. Unlike the above two types of fees, this is ongoing and not a one-time fee. Typically this fee is around 2 percent.
Penalty fees
As previously mentioned in my other articles, beware of
limitations on when you can sell your units in the mutual fund. Many mutual
funds from financial institutions will penalize you for selling within 30 days
of your most recent purchase, sometimes even 90 days or longer. Their objective
is to minimize the transaction and administration fees, this will in return
lower the MER.
"Hey, I better
not be paying tax on these fees! Do I have to report these and deduct them
against any gains and distributions?"
Don't worry, the financial institution will send you a T3 or
T5 slip and they would have already deducted all these expenses for you in
calculating your income and gain. You will not be taxed on the gross amount.
Note: Typically you will get a T5 for investment income
derived from a mutual fund, but if you own units of a mutual fund trust, then it's a T3 because
a T5 is for investments into mutual fund corporations.
As per CRA: "If
you own units of a mutual fund trust, the trust will give you a T3 slip,
Statement of Trust Income Allocations and Designations. If you own shares of a
mutual fund corporation, the corporation will give you a T5 slip, Statement of
Investment Income. This income can be capital gains, capital gains dividends, dividends,
foreign income, interest, other income, return of capital, or a combination of
these amounts." [RC4169(E)
Rev. 12]
As always, happy investing! Hope you all took advantage of the recent buy-in opportunity when the market dipped a bit, this goes for stocks and mutual funds.
-TT
