If you are seeking a tax-efficient option for your non-registered investments, Corporate Class Mutual Funds might just be a gem of an investment for you. Those of you that are seeking to actively reduce your tax burden are likely already investing heavily in Registered Retirement Saving Plans (RRSPs) and Tax-Free Saving Accounts (TFSAs). However, these accounts have limitations and depending on your income level may only be able to shield a fraction of your income from taxes.
Still unclear about what corporate class mutual funds are and whether they are the right choice for you. Don’t worry we are just getting started. This guide will take you through everything you need to know about Corporate Class Mutual Funds and why you should or shouldn’t invest in them!
What Are Corporate Class Mutual Funds?
This means that you aren’t investing in various stocks and bonds but rather you are investing in shares of the mutual fund corporation.
Why is this beneficial? Well, from a tax perspective, it is far more beneficial for a corporation to realize capital gains rather than an individual. This is because corporations always get preferential tax treatment when declaring distributions as these gains are taxed as capital gains rather than as interest or foreign income (which is taxed at a much higher percentage and on the full amount of the gains made). This is the biggest advantage of Corporate Class Mutual Funds over traditional mutual funds or fixed-income investments.
Let’s take an example. When a corporation pays out a capital gain dividend to corporate investors, only 50% of it is taxable. The corporation can then transfer the non-taxable portion of the amount to the corporation’s Capital Dividend Account (CDA) where it can be withdrawn by shareholders tax-free.
The remainder of the amount is subject to tax but also at a much lower rate than traditional mutual funds as these are considered separate entities and must be taxed accordingly. Corporate class funds are part of the parent corporation and are thus taxed as a single entity and can share income, loss, expenses, and gains, and even carry forward losses to help reduce the taxable income made by the corporation as a whole. This is why this type of mutual fund is often referred to as a “tax-advantaged” mutual fund as it allows you to transfer individual funds within a certain class without needing to realize a capital gain.
Now that you have an understanding of corporate-class mutual funds, let’s take a look at some of their key benefits.
The Benefits Of Investing In Corporate-Class Mutual Funds
Most Canadians that seek to invest outside of a registered plan are often met with an overwhelming tax bill on their investment gains. With the use of corporate-class mutual funds investment gains are paid out as capital gain dividends and ordinary dividends which is a lot more tax-advantaged than the tax paid on interest earnings.
Corporate-class mutual funds also actively seek to reduce the amount of taxes incurred by pooling in expenses and capital losses to reduce taxable income.
Apart from the tax benefits corporate class funds also ensure a regular cash flow and each fund is offered as a different class of shares within a corporation. The benefit of this is that it allows an individual to switch between funds in the corporation without realizing capital gains or losses. The only time you need to pay tax is when you take money out of the corporation which is yet another major tax benefit.
The Risks Involved With Investing In Corporate Class Funds
All investments have a certain degree of risk associated with them and corporate-class mutual funds are no different. Although considered less risky than traditional mutual funds, corporate class funds tend to also be less rewarding as distributions are smaller but are more efficiently taxed. Depending on your income level this could be either a benefit or a drawback.
The other major risk is that in corporate-class funds investors/shareholders participate proportionally in any gains or losses of the fund as a whole. If the corporation's share prices fluctuate as a result of speculation it can greatly impact the gains made even if that money was invested in profitable ventures.
Corporate class funds are also managed at a professional level and as such these funds tend to be associated with higher management fees as compared to Exchange-Traded Funds (ETFs) and other Alternative Investment Funds.
Seek The Advice Of A Professional Financial Advisor Before Investing In Corporate Class Mutual Funds!
As is the case for any type of investment it is always recommended to consult with an expert financial or investment advisor before pulling the trigger. Top financial advisors in Halifax such as the ones found at Eastport Financial can help you with all your investments, insurance, retirement, and estate planning needs and guide you on how to grow, protect, save, and adapt your investments as you grow through various stages of your life.
If you would like to meet with us face to face you can also drop by our office located at 371 St. Margaret's Bay Road, Suite 201, Halifax, Nova Scotia. We would love to meet you and begin a conversation that might just change your life in more positive ways than you can count!