Death and Taxes and Corporate Class Mutual Funds

Taking a more detailed look at corporate class funds and highlighting our top picks and the favourite fund families.

In our September edition of the Mutual Fund and ETFs Update, we touched on the benefits of using corporate class funds in all types of non registered accounts. The main reason that many people like these funds is the potential for lower taxes. With corporate class funds, the tax savings can come in two main ways; tax deferred switching and the potential for reduced taxable distributions.

Within a corporate class fund, investors have the ability to switch between other funds in the corporation or fund family without triggering a taxable event. This is much different from a traditional mutual fund where every switch will be treated as a sell and buy for tax purposes, which may result in triggering a capital gain. Distributions may also be reduced because all income and expenses can be spread among all the funds in the corporation, which lessens the likelihood of the funds being required to distribute income to investors.

While we understand the attractiveness of these funds for most investors, we must also caution that one should not make an investment decision based solely on the tax benefit. Corporate class funds should be reviewed and evaluated using the same criteria that you would evaluate any investment. In other words, just because a fund offers potential tax savings doesn’t mean it is a good investment.

Fortunately, there are now more corporate class choices available to investors than ever before, with a number of our favourite funds are available in a corporate class version. In fact, of the 42 funds on our Recommended List of Funds, 18 are available in a corporate class structure. They include:

In reviewing this list, there is one asset class that is noticeably lacking in choices – bond funds. There are a number of reasons for this, but perhaps the biggest is the way that the corporate class structure works. With a corporate class structures, the intention is to reduce the likelihood of distributions having to be paid to investors. Since fixed income funds typically distribute interest income, which is taxed at the highest marginal rate, corporations will try to limit their exposure to it. The result is a shortage of fixed income funds available in a corporate class.

Despite this, there are still a handful of decent options available. CI has perhaps the best fixed income offering in a corporate class structure, with many of their bond funds available. Other funds are available from such firms as Franklin Templeton, Manulife, Mackenzie, RBC and Invesco.

With the ability to switch between different corporate class funds without triggering a taxable event, a key consideration becomes the other funds in the corporation. You will want to make sure that there are a reasonable number of quality fund options available to allow you to switch without triggering a capital gain. To get a better understanding of this, we looked at all of the corporate class funds that are available and who the issuing company was.

In our review, we found that it was CI that had the broadest range of offerings in corporate class. Along with the fixed income funds we discussed above, they also have a wide range of core equity and specialty funds that are available. This would put them at the top of our list for corporate class funds. Second place becomes a bit more crowded as many of the fund companies have a good selection of funds. We would have a tough time choosing between Dynamic, Fidelity, and Mackenzie, as all the firms have a fairly broad product lineup. If we had to choose between the three, we would reluctantly go with Mackenzie as they at least have a fixed income offering available, something the other two do not.

Bottom Line: Today, most of the major mutual fund companies have some form of a corporate class offering. Unfortunately, most of the smaller, no load shops such as Beutel Goodman, Mawer, Leith Wheeler and Steadyhand do not offer such funds. Like with any funds, investors should approach corporate class funds the same way. Focus should be put on the quality of the investment and not just the potential tax savings. The fund must be high quality and serve a function in your portfolio. If it does not, it should be avoided as there are many other options available.