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Corporate Class Funds
Maximize profits and minimize taxes

For mutual fund investors, it's not just size that matters – it's structure. Structure counts when you redeem. If you're invested in a traditional mutual fund outside your registered account and want to sell units of the fund that have increased in value since you bought them, you could face a capital-gains tax. That's because a traditional mutual fund is structured as a trust, and its tax efficiencies are advantageous to the fund company, rather than to you, the investor.

But if you had instead invested in corporate class funds, you might have paid less tax in the end. That's because a corporate class fund is designed as a holding corporation, set up by a fund company to invest in a group of mutual funds, and to be tax-efficient to the investor. Unlike traditional mutual funds, corporate class funds protect you from capital gains tax – as long as you use the proceeds of a sale to buy into another class of the same fund company's holding corporation.

This means you can move in and out of funds within the same corporate class without triggering an immediate tax hit. And this is the beauty of corporate class funds: They allow you to lock in the profits from a winning mutual fund. (Of course, taxes apply when the units of a corporate class fund are redeemed for cash.)

When choosing a corporate class fund family, look for one with a wide variety of available funds. Ideally, it should include Canadian, U.S., global equity, sector and money market funds, as well as offering differing management styles.

For the right investor, corporate class funds can be a great way to make your portfolio more tax efficient. And, over the long term, tax-efficient investing can have a positive impact on the value of your portfolio.

Important Notice Update


The 2016 Federal Budget told us that exchanging units of one corporate-class fund for another would no longer be tax-deferred, and that the change would take effect Oct. 1, 2016.

However draft legislation says the changes to corporate-class taxation won’t come into force until January 1, 2017.


Corporate Class Funds Lose Tax Advantage

On March 22 in the 2016 Federal Budget, the federal government announced it was eliminating the ability of investors to switch between funds in corporate class investments without paying capital gains tax.

Corporate class funds are generally used by investors who have reached their contribution limits in tax-free savings accounts and registered retirement savings plans. Their appeal is that they represent yet another option for tax-efficient investing.

The tax benefit of corporate class funds is that you can move your money between funds within the same corporate structure without incurring a tax liability. When you finally sell, you will pay capital gains tax, but you can rebalance your holdings at any time while you own them without any tax consequences.

September 2016 deadline (see update)

The new rules go into effect on October 1, 2016. That means owners of corporate class funds have six months to take advantage of the benefits of this investment vehicle and position themselves for the future.

If you own corporate class funds, you should start now to determine what you want your portfolio to look like when the tax deferral benefit ends. For example, you might wish to sell funds that have run up in value and buy funds you believe are undervalued. Then you need to rebalance as required prior to the deadline. By acting before the new rules become law, you'll avoid the need to rebalance later and you'll minimize the tax repercussions.

Beyond rebalancing your portfolio before the deadline, there are no apparent ways to escape the tax consequences of switching funds within a mutual fund corporation.

Here's where we can help!

We work with you to develop a comprehensive financial plan designed to help you reach your goals. Then we help you decide on the best options for investing and building your portfolio.
Related Information
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Corporate Class Funds
Corporate Clase Funds may be suitable for:
  • High net worth investors who have maximized their RSPs
  • Investors who take a more aggressive approach to building an unregistered portfolio
  • Investors looking to rebalance their unregistered portfolios
Planning Calculators

 

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