A Different Kind of Mutual Fund

One of the last things we need these days is another mutual fund.

When I started in the financial business some sixteen years ago, there were over 400 different mutual funds. Now there are over 5000 in Canada alone. But this is not another mutual fund, exactly.

Let me explain.

There are two tax structures that mutual funds are set up under. One is which most are established known as a mutual fund trust.

The second and newest type of structure is a mutual fund corporation. A fund company issues several classes of shares, call them funds, with each class of shares representing a different mutual fund. As an investor you are permitted to switch among the share classes without triggering a capital gain on the share class you previously owned. As long as your investment remains within the corporate share structure, capital gains earned on a specific class of share is deferred.

In laymans terms, if you bought an equity fund under a corporate structure and switched it for another equity or short-term fund under the corporate structure, then there is no tax or capital gain triggered.

Normally under a typical mutual fund there would be. I had a friend that wanted to switch out of a fund that she held for over ten years. The fund changed management and she wasnt comfortable with the funds new direction. Her options were to pay the capital gain of over $30,000 and switch to a new investment or leave it as is because she had such a large tax bill.

It now becomes a tax decision more than an investment decision. By establishing non-rrsp funds inside a corporate share structure, you are eliminating this problem down the road and can make sound financial decisions regardless of the tax.

A second example is this last years market downturn. If an investor wanted to switch to cash or a short-term fund because of a financial planning decision or maybe they were very uncomfortable with the volatility, then they can switch without any tax consequences.

A financial planning tip I would strongly recommend to look at is examine the non-rrsp funds you own, figure out the capital gains and losses on switching these funds around today, then imagine if they were all in corporate share structures, it would eliminate the taxes upon switching.

Several companies now offer corporate structures and most financial professionals usually only recommend corporate share funds for non-rrsp clients to save them taxes. If you dont own corporate funds outside your rrsp, now would be a good time to switch into them provided you examine the tax consequences first.

Written by Grant Hicks

Grant Hicks, C.I.M., FCSI is a professional speaker, co-author and a Retirement Planning Specialist with Manulife Securities and Hicks Financial. A leader in the financial industry, Grant has been helping Vancouver Island residents plan and create their retirement lifestyles since 1989.

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