Investors may be experiencing a loss of income and inability to pay their bills due to the COVID-19 pandemic. There may be a need to access money held in various types of investments, including mutual funds that may have been purchased on a deferred sales chargeDeferred sales charge A sales fee that you pay when you sell an investment. Also called a “back-end load.” The fee often goes down the longer you hold onto the investment+ read full definition basis.
You should review your mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition investments to determine whether or not they are on a DSC schedule as many mutual funds sold today do not include DSCs. If they are not on a DSC schedule, no DSC redemption feeRedemption fee A fee that some mutual funds charge when you sell or redeem units. Unlike a deferred sales load, you pay this fee to the fund (not to a broker). It covers the costs of redeeming your units.+ read full definition will apply. If the investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition is on a DSC schedule, a DSC redemption fee may apply and this note addresses that situation.
Investors may be wondering whether they can get access to their money held in DSC mutual funds so they can meet their daily expenses without having to pay redemption fees. To answer this question, it is important to understand DSC charges and how they work.
Deferred sales charges or DSC
Some funds charge a fee of up to 6% when you sell your units or shares called a DSC or back-end loadBack-end load A sales fee that you pay when you sell an investment. Also called a “deferred sales charge.” The fee often goes down the longer you hold onto the investment.+ read full definition. The longer you hold a fund with a DSC, the less you’ll be charged when you sell it. The fee declines every year according to a fixed schedule. Your advisor’s firm received a commission (usually about 5%) up front from the mutual fund companyMutual fund company An investment company that pools money from investors and invests it in a mix of investments, such as stocks, bonds, and money market investments. Most mutual fund companies offer a choice of more than one fund.+ read full definition when the fund was bought. Your advisor received part of this commission. Any deferred sales charge you pay goes to the mutual fund company.
If you purchase mutual funds with a deferred sales charge, you will generally be subject to a fee if you decide to redeem before the end of the sales charge schedule, which can vary in length from 3 to 7 years. You should also be aware that DSC mutual funds typically allow you to redeem up to 10% of your holdingsHoldings Shares or other interests in a business. Also refers to investments in a portfolio.+ read full definition each year without paying a redemption fee. Sometimes this 10% allowance is cumulative, i.e., you can redeem an amount of 10% for each prior year in which you did not otherwise redeem, and sometimes it is not. Review the applicable prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition and/or discuss with your advisor how much can be redeemed given the 10% allowance.
Redemption fees and financial hardship waiver
Before you redeem any money, you should speak to your advisor to see if you will be required to pay any redemption fees. If a fee would apply, you should ask your advisor whether your advisor’s firm or the mutual fund company have a program for financial hardship that permits the waiver of redemption fees or other penalties otherwise payable in situations of financial hardship.
If your advisor or dealer do not have such a program, ask them if they will contact the mutual fund company to see if the mutual fund company does, or contact the mutual fund company directly. Contact information for the mutual fund company can be found in the Fund FactsFund Facts A user-friendly guide that provides key information about a mutual fund including fees and performance. Mutual fund companies are required to give investors a copy of Fund Facts before they decide to purchase a fund.+ read full definition or in the Prospectus for the mutual fund that you hold.
Depending on your personal circumstances and your financial situation, you may meet the criteria for waiver of the DSC fees due to financial hardship. Even if there is no formal program in place, your dealer or the fund company may be willing to consider financial hardship requests on a case by case basis. You may be asked to provide evidence of the need so gather any documentation that may assist in this process (record of employment, mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition default notice, written demand for rent arrears, death certificate, medical bills, etc.).
It is important to understand that redeeming the mutual funds will lock in any market losses. Removing funds can have long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition retirement planning or financial planning consequences.
Impact on RRSP
The withdrawn funds from an RRSPRRSP See Registered Retirement Savings Plan.+ read full definition will be included in your taxable incomeTaxable income The amount of income you have to pay tax on, after tax credits and deductions.+ read full definition in the year they are withdrawn; and taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition will be withheld from the withdrawn amount in accordance with Canada Revenue Agency requirements and the federal Income TaxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition Act. Consideration should be given as to whether withdrawing the funds will affect your access to other government benefits if a higher net income may leave you ineligible for those benefits.
We encourage you to obtain independent financial advice and/or discuss with your advisor your personal circumstances before withdrawing funds.