The Mawer tax effective strategy
Here’s what we do and how we do it:
1. Aim for low turnover
Our investment philosophy often leads to lower turnover among our investments. We look for companies that we would be comfortable holding through a full economic cycle or longer, making the average holding period for our securities between five to ten years. This low turnover limits the amount of realized capital gains distributed to investors over time which can translate into investors paying less tax.
2. Offset capital gains wherever possible
One strategy we use to offset capital gains is to deliberately trigger capital losses in certain securities, provided that we can invest in a highly correlated substitute. This minimizes the risk that we miss any upside in the security we sold for the 30 day period we need to be out of in order to use the loss. These losses can help offset capital gains realized in other securities.
3. Rebalancing considerations
Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation. For most of our clients, our asset mix strategy is designed to be long-term, and any changes tend to be incremental and infrequent. We believe that constantly adjusting our asset mix and rebalancing portfolios can create unnecessary transaction costs and adverse tax consequences for our clients. For discretionary managed portfolios, our Investment Counsellors consider the tax implications of rebalancing trades in our clients’ accounts and, if necessary, look for opportunities to use client cash flows instead of selling certain securities which could trigger capital gains.
4. Location matters
Our Investment Counsellors also advise the most tax efficient location to hold certain asset classes in order to minimize tax liabilities. For example, securities that generate interest income or foreign dividends may be housed in tax-deferred accounts, whereas investments that generate more tax-friendly income, such as Canadian dividends, may be housed within a taxable account.
5. A tax credit for minimizing distributions
We are also able to take advantage of the Capital Gains Refund Mechanism within each Mawer Mutual Fund, where possible. The Capital Gains Refund Mechanism is a complex set of tax law provisions designed to prevent taxing the same capital gain twice—when the taxable investor sells units for a gain and when the fund in question distributes capital gains to unitholders. We apply this special formula to determine the amount our mutual fund’s capital gains realized in a year can be kept within the fund without attracting tax. This process can help soften our clients’ tax burden.