Amin Mawani
York University
Moshe Milevsky
York University
Kam Panyagometh
York University
Abstract: We examine 10-years of returns from 343 Canadian equity mutual funds to assess the impact of personal income taxes on their relative performance and rankings. We propose an algorithm for computing after-tax returns, which we then use to generate after-tax mutual fund rankings. We also motivate and compute measures for tax efficiency and tax overhang in the Canadian context.
Our main and robust result is that ranking of funds on a pre-tax return basis is significantly different from ranking of funds on an after-tax return basis. We also find that funds ranked in proximity on a pre-tax basis have a 46 percent probability of having their ranking reversed when the ranking is done on an after-tax basis. Furthermore, an investor with the highest personal marginal tax rate lost approximately 135 basis points to taxes on fund distributions from the average annual pre-tax return of 9.01 percent in our sample of funds.
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