In one of my previous posts, I discuss how mutual fund corporations are becoming more popular because they offer tax-deferred investing. I explain how calculating the ACB of these investments can be challenging. As a Toronto chartered professional accountant, I’m often asked how mutual fund corporations can offer investors the ability to switch funds on a tax-deferred basis but mutual fund trusts cannot?
The answer is that corporations are allowed to do tax-free transactions with their shareholders that mutual fund trust holders cannot do with their unitholders. In particular, if you hold shares in a mutual fund corporation, you can move between the various classes of the corporation on a tax-deferred basis. Tax law does not recognize the trade of shares between classes of a single mutual fund corporation as a “sale” of the shares. Therefore, these trades are non-taxable.
The one advantage that mutual fund trusts have over mutual fund corporations is that trusts can allocate all of their income to investors, while mutual fund corporations can allocate only Canadian dividends and capital gains. For that reason, mutual fund corporations generally have equity investments. However, sellers of these investment products have come up with exotic variations of mutual fund corporations to attract investors, including classes to allow for investing in money market funds and offer so-called tax efficient classes (“T class”) by returning capital to investors.
Another consideration is cost. Typically, the mutual fund corporation will cost more in management fees than the equivalent mutual fund trust investment because the cost of the corporate structure is higher. However, this cost may be worth if if you want to switch to another fund on a tax-deferred basis.
Taxes are an important part in making any investment decision as after-tax return is what counts. This is where a Toronto chartered professional accountant becomes useful. Please contact me if you would like me to review your investment portfolio or any possible investment from a tax perspective.
William Khalilieh is a Toronto Chartered Professional Accountant based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.