Part 2: Reporting Segregated Funds: Guarantees at Maturity

Your client owns segregated funds in non-registered accounts with guarantees at maturity. How is this treated on the tax return in the case of a withdrawal?

If the value of the fund has increased over the reset amount, the disposition is reported as a normal capital gain, as described below:

Example: Ariel purchased 500 units in a segregated fund for $5,450. During the tax year, she sold her 624 units (the number had increased over the years due to reinvestment of income allocations) for $9,048. The ACB of her units was $8,161. Her last reset was at $14 per unit. Since her proceeds amount to $14.50 per unit, the guarantee was not invoked. She has a capital gain on disposition of $9,048 – $8,161 = $887 assuming no expenses of disposition.

If at maturity the value of the fund has dropped, there is a different process: the insurer must top up the fund by contributing additional assets to bring the value up to the guaranteed amount. When it is sold at maturity, the difference between the adjusted cost base (which will include all allocations of income over time) and the proceeds received to the guaranteed amount will be accounted for. This is how to report this on Schedule 3:

Example: If the value of Ariel’s investment (previous example) was only $13 per unit, the guarantee would have been invoked and Ariel’s proceeds would be $14 per unit x 624 units = $8,736 and she would still have a capital gain but for $8,736 – $8,161 = $575 in spite of the fact that the actual value of the units was less than her ACB.

Excerpted from Jacks on Tax by Evelyn Jacks. The 2014 edition will be available in December and is now available for pre-orders in our online bookstore.