Q. – We will be inheriting approximately $100,000 in the next few weeks. What is the best way to invest the money to receive approximately $5,000 per year in a tax efficient manner? Would T-Series mutual funds such as the CI Signature High Income Fund be a good option?
A. – First, let me say that there is no universal “best” way to achieve what the reader is asking. Everybody’s situation will be different, and a situation that might be appropriate for one individual may not be appropriate for another.
In this case, the reader is looking to generate a cash flow yield of approximately 5% on their investment in tax efficient manner. T-Series funds can be a good way to do this. Typically, with a T-Series fund, any distributions paid are considered to be “Return of Capital” for tax purposes. In the simplest of terms, a return of capital distribution is just the mutual fund company giving you your money back, so you don’t pay any tax on the distributions when you receive them. Instead, what happens is the “Adjusted Cost Base” of your investment is reduced by the amount of the distributions, so when you sell the investment, you will pay capital gains tax on a much higher amount than you would have otherwise.
This is important for two reasons. First, it defers the potential tax liability down the road. Second, the tax liability will be taxed as capital gains, which are treated more favourably from a tax perspective than interest income, but typically less favourably than dividends.
With a fund like the CI Signature High Income, the monthly distributions that the traditional version of the fund will pay will be a mix of interest, foreign income, dividends and capital gains. This may result in a less favourable tax situation than by using the T-Series, but there is no guarantee that will be the case. This means that in most cases, you would be better off going with the T-Series rather than the traditional version in a non registered account.
The CI Signature High Income Fund is a good pick for something like this. It has a great management team behind it that has a top shelf track record of delivering strong risk adjusted returns to investors. It has consistently outpaced its competition and benchmark on both an absolute and risk adjusted basis. The portfolio is a mix of high yield bonds and higher yielding equities, which should do well in the current environment. A word of caution is that if investors flock to safe haven assets like government bonds, this fund is likely to be hit very hard. Despite this risk, it remains one of our favourite funds for investors looking for a mix of income and capital gains over the long term. Factor in a 1.60% MER and you really do have a winner.
Typically, we would suggest that an investor build a more diversified portfolio using a mix of funds which can help to further diversify against risk. There are a wide range of T-Series Funds that are available that can be used for this very purpose.