I recently found out one of the country’s largest advisory teams isn’t offering mutual fund corporation structures, or corporate-class funds, to clients.

Even though these structures are more tax-efficient, these advisors simply sell investments without considering tax planning.

I shouldn’t be surprised. There are more than $850 billion in mutual funds nationally, but only $59 billion is in corporate-class structures. Yet there are many advantages to using such structures, especially for retirees needing income.

What are corporate-class funds?

Think of a mutual fund corporation as an umbrella structure under which you hold various mutual funds. Mutual funds can be bought and sold within the umbrella and as long as the assets do not leave the corporation, there is no deemed disposition — hence no tax payable. This has been the common use of mutual fund corporations.

Benefits for boomers

There are other benefits of the corporate-class structure for boomers.

1. Conversion of interest income to capital gains. In a mutual fund corporation, where all products within the umbrella can share costs, income, and gains, tax-inefficient interest income can be converted into tax-efficient dividends and/or capital gains.

This could reduce the tax payable by your client in the short term by almost half. In the best-case scenario, it will eliminate any immediate taxes payable if the client has capital losses they can write off against the gains.

2. Dividends from foreign issuers. As the momentum behind U.S. stocks starts to build, more and more investors will be receiving U.S. dividends. Since U.S. companies do not pay tax in Canada, the income received by Canadians is treated as foreign income rather than dividends.

To avoid the additional tax burden of this, a corporate-class structure can convert foreign income into capital gains. This gives investors additional freedom to buy dividend-paying U.S. and foreign equities and still receive favourable tax treatment on the distributions.

3. OAS clawback. A large number of Canadians have been paying into CPP and OAS their whole lives through deductions from income. Unfortunately, the government claws back those benefits when a couple’s income exceeds $66,000.

While we can’t eliminate the clawback, a corporate-class fund lets us reduce it by taking any income and converting it to capital gains. That reduces the income declared.

Tax-advantaged investing has never been more important to an advisor’s business than it is today. With exceptionally low interest rates, and more baby boomers entering retirement every day, the traditional tax planning tenets of deduct, defer and divide have become far more complex.

While I would never advocate making any investment decision simply on tax merits, with mutual fund corporations, we can now add “convert” as one more tax-planning consideration.

Keith Pangretitsch is director, national sales at Russell Investments Canada Limited, who has a passion for helping advisors grow more efficient and profitable businesses. He is an active member of Russell’s Practice Management program which has worked with more than 1,200 advisory teams across North America and Europe.

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Dont forget about the T-SWP option that give a return of capital – a completely tax free income stream

Thursday, Jan 31, 2013 at 2:37 am Reply


Thanks for the update! You may want to be careful with the word convert…For example, interest income cannot be converted into anything else, like you suggest. By the pooling of income and expenses, interest income is offset with expenses, thereby leaving other forms of income (dividends or capital gains) available to distribute to investors. In the same respect, foreign income cannot be converted into anything else either.
You did not mention one of the most important benefits…minimized distributions…this is accomplished by the pooling mentioned above and it may totally eliminate any distributions from the corporation and therefore there is no tax to pay on this. This fact may also help reduce your overall income, which may also help you avoid an OAS the way, just to be clear, people don’t pay into the OAS system, this is a Canadian pension system where eligibility is based on residency in Canada or paying into the CPP over your lifetime (40 years entitles you to the maximum amount).
You also failed to mention a distribution series of corporate class funds which allow you to receive an income from your investment by returning your capital and deferring any capital gains until the money is removed from the corporation of your adjusted cost base reaches zero.
There are many more advantages to these funds, so I am glad you scratched the surface here, so it may entice people to do their own research.

Thursday, Jan 17, 2013 at 12:25 pm Reply