Morningstar Canada today launched a suite of online tax analysis tools to help investors monitor the after-tax return performance of mutual funds in non-taxable accounts.

The tools, available on the Morningstar Web site, include Tax-Adjusted Rankings, which are the after-tax equivalent of Morningstar Ratings, the five-star system that gives investors a snapshot of a fund’s historical risk-adjusted return. These new after-tax rankings are expressed as a number between one and five. A fund’s tax-adjusted ranking is based on a composite of its tax-adjusted returns (pre- liquidation, or before the investor sells the units) over three-, five- and 10-year periods.

Also new on Morningstar’s Web site are tax-adjusted returns and an enhanced tax efficiency measure for individual mutual funds. These measures are calculated on both a pre- and post-liquidation basis (before and after fund units are sold). In addition, a new tax-cost ratio is presented, which compares a fund’s pre-tax return to its tax-adjusted return to determine the percentage of assets that an investor lost to taxes on distributions.

These new tax-impact measures are calculated only for mutual funds. Segregated funds are excluded.

Morningstar says the tools will better enable investors to determine how effectively fund managers are able to minimize taxable distributions. “The new tools also help investors make better informed decisions about which of their mutual funds to hold in RRSPs and other registered accounts, and which to hold in taxable accounts,” says Mark Warywoda, Morningstar Canada’s director of analysis.

The tools analyze a worst-case scenario for a hypothetical investor. In each instance, the tax rate used will be the highest marginal tax rate in any Canadian province or territory that year. In 2003, for example, the Morningstar tax calculations assume tax rates of 48.6% for interest, 37.3% for dividends and 24.3% for capital gains..

For most investors, the actual tax impact on individual fund returns will not be as great as shown by the Morningstar calculations, Warywoda says.