07 Apr Why The New Corporate Class Mutual Fund Tax Shouldn’t Scare You
Well, I didn’t see this one coming! With the release of the 2016 Federal Budget, the Liberals decided to strike at another form of tax advantaged investing.
Although the move isn’t drastic, it does change the landscape of how to build out your non-registered accounts. Before talking about what this change means, let me first explain what a Corporate Class mutual fund actually is and how the structure works.
What is a Corporate Class Mutual Fund?
Lets look at this from an actual corporation perspective. If you own a corporation there are many tax advantages available when it comes to income and expenses. Anything that costs money to operate your business is a deduction to the income that corporation earns, so expenses offset the income generated.
This is very much the same thing inside of the Corporate Class mutual fund structure. Think of the Corporation owning all of these individual mutual funds. Inside of that corporation, the investment gains that these mutual funds generate can be viewed as the “income” produced inside of the Corporation.
Now, to offset those gains (or deduct from that income generation) there are expenses to manage the individual funds and potential losses from other funds that can bring down that income generation.
So, what this overall corporation does is offset the gains from one piece of the business with expenses and losses from other pieces of the business to minimize or completely eliminate the distribution of any income to its owners.
Clear as mud??
Before this recent change, we as owners, were able to move from one fund to the next on a tax free basis. Essentially, we could sell one fund and buy another fund, and as long as those funds were held inside of the same corporation, there was no tax distributions. Unfortunately, this will no longer be available to us come October of this year.
As soon as we sell a fund and switch into another fund we will incur a potential tax bill even if it is held within the same corporation. Take a look at this Globe and Mail article to get some more information on this.
Are Corporate Class Mutual Funds Still a Smart Investment?
At the end of the day, we never want to make an investment decision purely based on a tax bill, if it’s the right time to sell an investment you sell the investment and deal with the tax implications as they arise; it’s better to have a tax problem than an income problem.
The Corporate Class structure is still a very attractive way to invest your non-registered portfolio as long as the asset mix is in line with your overall portfolio needs, and should form a piece of the planning as the tax-preferred growth and conversions are still available.
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