Question – What are the advantages of using a corporate class fund in non registered accounts?
Answer – Quite simply the main advantage of corporate class funds is lower taxes. This happens because their unique structure allows for a couple of neat features. They are:
i.) Tax Deferred Switching – When you invest in corporate class funds, you are able to switch between funds in the same mutual fund corporation (fund family) without triggering a taxable event. You can switch between the various corporate class funds as often as you like, as long as you stay invested in the mutual fund corporation. Only when you take your money out of the mutual fund corporation do you need to worry about the potential capital gains you may have earned from holding the funds. If you were using a traditional mutual fund, every time you switch between funds, it is treated as a sell and a buy for tax purposes. This means you may incur a capital gain with each transaction, which reduces the amount of money you keep invested in your account.
ii.) Reduced Taxable Distributions – With any mutual fund, it pays no income tax and must pay out all the net income that it earns to investors over the course of a year. This income is generated by such things as interest earned, dividends received and capital gains generated. The net income is offset by any expenses the fund may have such as management fees, operating expenses and the like. Within a corporate class structure, all the income earned across all the funds in the corporate offset all the expenses of all the funds. This will allow for the ability to spread income across a larger number of funds which will result in the potential for lower distributions for most investors. This will work quite well as long as the corporation doesn’t hold many funds that will generate significant amounts of interest income like bond funds. If it does, there may be higher levels of interest income which may result in distributions paid out to all investors within the corporation.
A big knock on corporate class funds was that they were more expensive than traditional funds by 20 to 40 basis points. That used to be the case, but in recent years, that cost differential has been virtually eliminated.
Many people will see the phrase “lower taxes” and want to jump into these funds right away. A word of caution – I would never suggest any investment be made for the sole purpose of reducing taxes. It needs to be an investment that is suitable for you and your objectives, it needs to fit within your portfolio and it needs to be a high quality investment. Fortunately, there are a wide range of high quality corporate class offerings available from a number of companies including CI, Mackenzie, Fidelity, Dynamic, TD and more recently RBC and PH&N.