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New Tangerine Investment Fund
November 4, 2016
7:18 am
Atlas
Nunavut
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Tangerine has quietly released a new index-tracking fund as part of their investment funds (inception November 2, 2016). Its a dividend-equity fund which attempts to track the index performance of the MSCI Canada High Dividend Yield Index, the MSCI USA High Dividend Yield Index, and the MSCI EAFE High Dividend Yield Index, and has the Tang standard 1.07% MER.

I have to wonder/question the heavy asset allocation of 50% "maple" dividend equities, given the general current state of the Canadian economy and outlook (weak-Canadian economic indicators). If I were the fund manager, my allocation would be closer to 33% CAD equities and combined 66% US and INT equities. Why so heavy on the maple, Tangerine?

November 4, 2016
6:29 pm
Loonie
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Thanks, Atlas.
I don't know much about this sort of thing, but am wondering if you get the dividends if you buy into this kind of fund, or do you just get the market gyrations?
I am bearing in mind the market-linked funds offered by other banks, in which you only get the gyrations. I can't see why anyone would bother with those, as the major strength is in the dividends for most people.

November 4, 2016
9:59 pm
Norman1
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It looks like the fund will receive the actual dividends as the fund will directly purchase the securities included in the index.

This is from pages 2 and 3 of the Tangerine Investment Funds Simplified Prospectus:

In managing this component [Canadian dividend equity, U.S. dividend equity, and international dividend equity components], of the Fund, the Portfolio Sub-advisor will seek to track the performance of an index by investing directly in securities that are included in that index through optimization-based technology that creates a portfolio with overall risk/return characteristics as close as possible to the index.

For sure, a high dividend index fund that just tracks the performance of the prices of the dividend stocks is not good. A significant part of the total return from high dividend stocks comes from the dividends.

November 4, 2016
11:16 pm
Loonie
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thanks, Norman.

I guess another complication for a lot of people is the very fact that they are combining stocks with both "eligible" and ineligible dividends - from the point of view of the Dividend Tax Credit. This may mean that, in practical terms, it is not really a very good fund for hardly anyone. If you put it in non-registered, you can only use part of it for the DTC and it is a nuisance to disentangle for reporting purposes. If you put it in TFSA or RSP, you lose the benefit of the DTC entirely. Might be OK for those with a fairly small amount to invest, e.g. up to 5K. After that, should think about just buying the 3 underlying indexes separately for the appropriate pockets of your investments. However, I'm not sure it's really useful for anyone. Even a small amount can be divided into 3 funds, as most have low minimums. You could make up the trading fees in DTC and have more control. I suppose, if people are determined to buy it, the best place to put it might be TFSA if you were planning on the long term anyway and this was the right level of risk for you.

November 5, 2016
8:52 am
Norman1
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The T3 slip will separate the Canadian dividends, that qualify for the dividend tax credit, and the foreign dividends, that are categorized as foreign income.

No dividend tax credit when held through a TFSA or RRSP is not really an issue.

The dividend tax credit is compensation for the gross up of Canadian dividends: $1 of dividend received becomes either $1.18 or $1.38 of taxable income.

With RRSP and TFSA, there's no gross-up of Canadian dividends. With TFSA, the tax rate is zero.

November 5, 2016
4:56 pm
Loonie
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I think it's the other way around, that the gross-up is compensation for the DTC. However, the value of both the DTC and the gross-up in terms of tax will vary significantly according to income. It will be more significant for some people than others. It's possible, if you have low income, to actually make money on the DTC and to not be very much affected by the gross-up. For seniors who are in the lowest tax bracket (probably the majority), this could be significant. There are some calculations about this in Daryl Diamond's book, as I recall.

Each person would have to do a detailed calculation as to whether this is of benefit in their situation. If you are going to get a benefit from the DTC (and why would it exist and be widely utilized if it were all a wash in the end?), then why not take it and not have it mushed into the vagaries of RSP withdrawals and consequent tax liabilities? It's very hard to be sure of which bracket you will fall into at a later date, as we have discussed before.

I have never had a T3 but I had the impression from things that another forum member posted a while back that it was just about impossible for them to figure out their tax liability until they got the info at the end of the year and that, even then, it was very complicated. As I recall, they said they would not be able to top up their tax bracket with RSP withdrawals because they would not be able to figure it out before the end of the year. Maybe I misunderstood, but I was surprised at the time that this would be so difficult.

Personally, if I were doing this, I think I would not want this mix. I would prefer to have the categories more clearly separated so that I could choose the best place for that particular investment.

November 5, 2016
7:14 pm
Bill
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The purpose of the gross-up and the DTC calculations is to adjust for the tax already paid by the Canadian corporation (dividends are paid out of after tax money), i.e. so there is not double taxation and there is not taxation leakage when the corp and the individual recipient are taken into account together. Though it works on a macro level of course it's not perfect integration in each case due to varying tax rates for the corporation and individual involved in each case.

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