Traditional mutual funds are set up in a “trust” structure. When you make a purchase, you buy “units” of a specific fund, for example, Fund A. However, if you decide to sell Fund A or switch to Fund B, outside a registered plan you incur a deemed disposition. If there is a profit, you’ll have a capital gain and may be subject to tax. Wouldn’t it be nice, if there were a way to defer the tax until you actually want to sell all or a portion of the investment? There is and the way is to use “corporate class” mutual funds.
“Corporate class” funds are set up in a “corporate” structure. The advantage to the corporate structure quite simply is that when you sell or switch from Fund A to Fund B no deemed disposition occurs, therefore no tax implications. Below is a simple diagram to illustrate.
Depending upon your personal financial circumstance, what follows are several strategies where “corporate class” funds may be beneficial.
1. If you earn a salary of more than $105,555 your maximum RRSP contribution limit is $19,000 for 2007. If your goal is to put away additional funds for retirement and get tax-deferred growth, consider “corporate class” funds.
2. If you are in a company with a Registered Pension Plan, when your employer makes contributions on your behalf, it reduces your RRSP room. This occurs because the Pension Adjustment (PA) must be factored into your total RRSP contribution room. Again, if your goal is to put away additional funds for retirement and get tax-deferred growth, consider “corporate class” funds.
3. If you are an older investor, you may be able to minimize or avoid the OAS clawbacks. “Corporate class” funds can help structure your cash flow by receiving capital gains which are taxed more favorably than interest income.
The above are just a few strategies to consider using “corporate class” funds in your financial plan. For further information, please contact me.
Disclaimer:” “Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.”