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 | Investor unbound
Globe and Mail columnist Rob Carrick finds corporate-structure funds can free active investors from the straitjacket of capital-gains taxes
by Rob Carrick
The Globe and Mail
February 6, 2004
OTTAWA—Taxes are a straitjacket for people who invest outside their registered retirement accounts.
Every decision to sell a security has to be based not only against investment-related factors, but also against the potential tax hit. On one hand, you're locking in profits when you sell an equity fund that has jumped in recent trading. On the other, you're exposing yourself to a potentially hefty tax bill on your capital gains.
Recognizing the limitations on people who invest outside registered accounts, more and more mutual fund companies are introducing corporate class funds that allow investors to move out of one fund and into another without incurring an immediate tax hit.
From the investor's point of view, the mechanics of corporate class funds are simple. Typically, a fund company will create versions of its most popular funds that are part of a special corporate entity. Selling one corporate class fund will not create a potential tax liability as long as the investor puts the money into another corporate class fund. Of course, taxes are applicable whenever the investor redeems his or her corporate class holdings for cash.
The typical client for corporate class funds would be a higher net worth individual who has used up all available room in his or her registered plan and who wants to take an aggressive approach in building an unregistered investment portfolio. Why aggressive? The answer is that the whole point of sector funds is to enable the client to move from fund to fund without triggering taxes on capital gains. If a client is a buy-and-hold type who is content to stick to a properly diversified portfolio, then the benefits of the corporate class structure are wasted.
There's a cost consideration here as well. Corporate class funds tend to have management expense ratios that are 0.2 to 0.4 of a percentage point higher than the regular funds on which they're based. An example: Templeton Canadian Stock has an MER of 2.61 per cent while Templeton Canadian Stock Tax Class has an MER of 2.93 per cent. The cost of the higher MER of a corporate class fund can be offset by the tax deferral, but only if the client frequently and profitably moves from fund to fund.
A key consideration in selecting a corporate class fund family is the range of funds available. After all, the ability to switch funds without incurring an immediate tax hit has little value if there isn't a solid menu of funds to choose from. Ideally, an investor would want a corporate class that included Canadian, U.S. and global equity funds with differing management styles, as well as sector funds and money market funds for parking money temporarily.
A noteworthy twist on the corporate class theme has recently been introduced by Manulife Financial and Investors Group. Instead of offering in- house corporate class funds as most fund families do, these two have included funds managed by reputable outside managers. Manulife Investment eXchange Funds, or MIX funds, comprise 27 offerings managed by such names as Goldman Sachs, Templeton, Bissett, Fidelity and McLean Budden. Investors Group corporate class funds include products managed inhouse and by outside companies such as Mackenzie, Beutel Goodman and AGF.
Corporate class funds truly shine when an investor has reaped a hefty return in a fund and wants to lock in profits or rebalance her portfolio. Instead of wrestling with tax implications, she just sells and moves to something more promising. All the while, the investor retains the ability to pick and choose when she redeems her investment in corporate class funds and takes the tax hit. One thing to note: corporate class funds may pay taxable dividends to unitholders periodically.
Corporate class funds aren't a mass market product because of their higher cost and specialized nature. Still, for the right sort of investor they can really loosen the tax straitjacket.
Rob Carrick has been writing about personal finance, business and economics for more
than 12 years.
Copyright © 2004 Bell Globemedia Publishing Inc. All Rights Reserved.
Reprinted with permission |
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