Believe it or not, you can have more control of your money and when you pay taxes on your investments. If you want to do some tax-smart investing this year, beyond maxing out your RRSP and Tax-Free Saving Account, you should consider adjusting your non-registered funds to a Corporate Class purchase of the same funds. It’s not a difficult switch for your financial advisor, and it will make your non-registered funds more tax-efficient by allowing potential tax deferral of capital gains and distribution of tax-efficient income.
How it works
Your non-registered investments are mutual funds and those mutual funds are available for purchase in two structures: a trust structure and a Corporate Class structure*.
With the trust structure, each mutual fund is a separate legal and tax entity. Income from these investments is typically taxable in the year it is earned.
So if the mutual fund trust produces interest, dividends or interest income – you’ll be taxed on that income that year. Or if you sell the mutual fund trust for more than you paid you’ll incur a taxable capital gain.
But, you can reduce the impact of taxes on your investment returns by purchasing the non-registered mutual funds under a Corporate Class structure.
The Corporate Class structure means that all the mutual funds are held within the same "corporation", so you gain certain benefit not available in the trust account structure. Effective January 2017, Canada Revenue Agency prevented the tax-free movement of funding from one class fund to another, but don't despair - the remaining benefits are impressive.
The Corporate Class structure combines income within the "corporation" to use it the most tax-efficient way. It aggregates the income and expenses of the corporation. That means the (higher-taxed) interest income is used to pay expenses, capital gains are written off against any capital losses, and income payouts to you are managed as lower-taxed dividends or capital gains.
Generally, Corporate Class funds work with a low dividend payout policy, tax-efficient distribution of funds (Canadian-eligible dividends and capital gains), and can hold T-Class funds which provide Return-Of-Capital (non-taxable) and thus defer taxes to a later and lower-taxed capital gain.And by the way, Revenue Canada still allows minimal non-taxed movement within the Corporate Class, but only for changing series within the same share class.
And by the way, Revenue Canada still allows minimal non-taxed movement within the Corporate Class, but only for changing series within the same share class.
Enjoy increased compound growth over the long term, immediate lower tax liability, deferred taxes, and intelligent money management. These are all good reasons to purchase your non-registered investments in the Corporate Class structure.
Is it right for you?
Individual investors - This can be a great option for the individual investor who has used up all RRSP and TFSA contribution room.
Owner-managed corporations – Not only a more tax-efficient option for after-tax profits but Corporate Class funds can help fund a corporation’s capital dividend account which may facilitate the payment of the non-taxable dividend from the corporation to its shareholders.
Trust accounts – For parents and grandparents setting up trust funds for kids and grandkids and wanting to reduce being taxed on interest and dividends (before the beneficiaries turn 18- years-old), corporate class has the potential to reduce distributions thus reducing the potential tax burden.
Seniors – A Corporate Class fund combined with a T-Class fund provides a steady stream of cash-flow by returning the investor’s original investment principal in a return of capital. This is not taxable money as the investor would have paid taxes on it already before the investment was made.
Setting it up
Your Stalker Financial Group advisor can further discuss your needs and set up the best options for your tax-smart investing this year. Don’t delay this important discussion with your financial team - Contact Stalker Financial Group today at 204.982.4743.
*Not all mutual funds have a corporate class option. Most fixed income (bond funds) do not have a corporate class option.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting, or professional advice. Readers should consult their own subject matter experts for advice on the specific circumstances before taking any action. The opinions expressed are those of the owners and writers only. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values frequently change and past performance may not be repeated. Please read the fund prospectus or the fund facts sheet before investing.