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Here's what industry experts from Advisor.ca have to say
Advisor Jason Pereira will still be using corporate-class funds after September 30.
A longtime advocate of the structure, Pereira was disappointed by the federal budget’s edict that switching will no longer be tax-free.
“The benefits lessen as a result,” says Pereira, partner and senior financial consultant at Woodgate Financial. “But frankly, in terms of the tax deferral, [the funds] are still completely applicable. […] Corporate-class funds let you put off your tax bill.”
Read: Mutual fund corporations lose tax advantage
Read: 3 ways the federal budget affects investors
How does the deferral work?
The various funds within the mutual fund corporation earn interest, dividends and capital gains. “Ideally, you want to make them all disappear, because that way you’re not paying tax on them,” he says.
To make that happen, the corporation takes the most highly taxed income first—interest—and uses it to pay expenses. For instance, “interest can pay for a tech fund’s expenses, since it has no income or dividends.”
Then, capital gains are written off against capital losses. “Dividends are often used to write off expenses in excess of what the interest didn’t cover.” (Dividends and capital gains can also be distributed out to the unitholders, which he says has been common lately.)
Corporate-class funds also help defer capital gains as a result of turnover. They’re also good for seniors, because they can defer dividend income, which can lead to OAS clawback.
“We’ve separated the timing of income generation and the timing of taxation. You can plan how much tax someone can pay off their portfolio in any given year.”
For instance, Pereira says, you could put a high-income earner in corporate class now, and when she retires, she could take capital gains in those years when she has little other income. “It allows us to manage their tax bill more effectively.”
Read: Budget quick hits
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