In the past, when investors dispose traditional mutual funds, they must pay tax immediately on capital gains. Mutual fund industry creates one innovative product for investors’ non-registered accounts. This product is called Corporate class funds.
Why it is so attractive?
Since corporate class funds are all held within the same corporation, investors can move their money from one class fund to another without triggering any immediate tax consequences. This is very beneficial for investors in their non-registered investment account when rebalancing the portfolio as well as deferring tax in future disposition.
A very simple example, two investors,Peter and Paul, each with $100,000 to invest over 30 years,and both in a highest marginal income tax bracket.In order to take advantage of the market trends, they prefer to rebalance their portfolio every year. Peter has invested the corporate class funds, while Paul has other mutual funds. Assuming an annual 6-per-cent compound average rate of return, Peter’s funds didn’t incur capital gains taxes, which allowed her tax-deferred investment to grow to $347,873. Meantime, Paul’s investment, which was subject to taxes when switches were made, grew to just $285,677. You can also see the graph below.(sourced from CI Funds)
Sounds very good, doesn’t it?
But Corporate Class Funds may become history after Federal budget was announced in March 2016.
Budget 2016 has proposed to amend the Income Tax Act so when the investors switch between funds, the transactions will be considered for Tax Purposes to be a disposition at fair market value. The change becomes effective after September 2016.However,the measure will not apply to switches where the shares received in exchange differ only in respect of management fees or expenses to be borne by investors and otherwise derive their value from the same portfolio or fund within the mutual fund corporation (e.g., the switch is between different series of shares within the same class).
Tax gets more complicated now.
If you have any accounting/tax questions, drop us a line or give us a call. We are happy to help!
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