RBC change results in higher taxes for some investors
March 24, 2016
Canada’s largest bank made a significant move that greatly affected thousands of investors. It is just another example of individual investors taking a backseat in the Canadian financial services industry.
The Royal Bank of Canada made a change to one of its mutual funds. No longer would the fund hold individual stocks and bonds, but invest in other RBC mutual funds.
In order for this to happen, securities held would be sold and the proceeds would be used to purchase RBC mutual funds.
Sounds pretty simple.
Anytime there is a “material change” to a mutual fund all investors have to be informed of the proposed changes so they can vote to approve them.
Information provided to investors by RBC encouraged them to grant their approval because it “believes that the proposed change is in the best interests of security holders.”
The communications to investors indicated all cost and expenses incurred would be paid by RBC.
This sounds fair and I am sure that it was interpreted as such by the investors who voted approval to make the change.
This is where it gets ugly.
When investments are sold within a mutual fund and there are capital gains, these gains are passed on to the investors.
Now that we are at tax time, investors are receiving notification of capital gains.
The backlash from some investors is they were not informed of any income tax considerations.
Surprise, surprise. Now investors are upset.
To state the obvious, it appears that RBC made a mistake. It should have advised investors of the full implications of them voting to approve changes to the fund.
This affected many people because the total assets within the mutual fund were approximately $2 billion.
With transparency and fairness, investors would have voted for something that would have been in their best interest.
To me, it seems the change was in the best interest of RBC.
Secondly, RBC appears to have communicated after-the-fact. The honourable route is to admit a mistake and apologize.
Perhaps a concession, like waiving management fees for a period of time, in part, would appease investors upset by these taxes.
A RBC spokesman said it had performed its own tax analysis, but because of normal market volatility, it could not predict an exact tax liability.
That sounds lame.
It could have acknowledged the tax risk and provided approximate figures.
Regardless of RBC’s position now, it clearly dropped the ball in communication to their investors.
After the fact, RBC acknowledged the tax liability and tried to take credit for spreading this liability over two years.
Really? It still is an unnecessary tax liability and whether it is incurred in one or two years is of little consolation.
For anybody who is keeping score, chalk this one up as another example of a well-respected Canadian financial firm acting in a manner that does not appear to be in the best interest of individual investors.