The ranking of mutual funds according to their performance after taxes are paid is significantly different than on a pre-tax basis, according to a report by The IFID Centre at the Fields Institute in Toronto.

The report, sponsored by AIC Ltd., looked at 10 years’ worth of Canadian equity funds returns from more than 340 funds to determine whether personal income taxes have a noticeable impact on the relative ranking and performance of mutual funds in Canada.

“Our main … 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,” said Moshe A. Milevsky, associate professor of finance at the Schulich School of Business at York University and executive director of The IFID Centre. Milevsky, Amin Mawani and Kamphol Panyagometh wrote the report titled “The Impact of Personal Income Taxes on Returns and Rankings of Canadian Equity Mutual Funds,” which is to be published in the Canadian Tax Journal

“Furthermore, the report indicated that an investor holding these funds outside of a tax shelter, who was in the highest personal marginal tax bracket, lost approximately 135 basis points to taxes on fund distributions from the average pre-tax return of 9.01%,” Milevsky said in a statement.

Tim Cestnick, managing director of AIC’s national tax-smart services, said the research shows the importance of having after-tax information when selecting funds so investors can make to make intelligent decisions. Nearly two-thirds of all investable wealth in Canada today is held outside of RRSPs and RRIFs where taxes can easily slow down the growth of those assets.

Michael Lee-Chin, chairman and CEO of AIC, said investors have the right to see the “true” rate of return of a fund. “We believe the report is particularly significant given today’s marketplace where transparency is critical.”

Copies of the IFID Report are available from AIC and can be downloaded in PDF format from www.aic.com.