Corporate Class Investments Explained
Inside of your RRSP or TFSA, you can move freely between different investment funds without triggering a taxable event. In most non-registered investments however, this is not the case. If you want to sell one investment and buy something else, this is considered a deemed disposition and is a taxable event.
While taxes will be due at some point, the problem with this is that if you don’t want to trigger the gains now, your alternative is that you may be forced to keep holding an investment that you don’t want. One fairly simple solution to this is to build a portfolio of “corporate class mutual funds” (class funds).
When you invest in class funds, you are able to switch from one investment fund to another inside of the corporation without triggering a disposition. This setup can give you a far greater ability to invest your portfolio the way you want it, with no limitations. A simple way to picture this is to consider all of the investment funds in the structure held inside one box and you are free to move between the different investments in that box. It’s only once you pull your money out of the box completely that you have to pay taxes on the growth.
A corporate class structure can also help your account grow faster by tax-deferred compounding. By deferring the taxes owed until you choose to create a disposition, your account can grow more quickly. For example: if you invest $100,000 and it grows by 10%, you now have $110,000. If you take the money out of that investment and put it in something else, you would pay taxes on the $10,000 of growth. Assuming a 25% tax rate, you are left with $107,500 to re-invest. If you invested the same amount in a corporate class structure and decided to move to a new investment, you would still have the full $110,000 to re-invest and earn new interest on next year.
Another key benefit of the class structure is the ability to utilize capital losses and expenses from one part of the “box” to offset gains in another. Interest income is generally taxed at a higher rate. Inside the corporate class structure, the administrators are able to utilize losses and expenses to offset this portion of the gains. They then pass on only the gains that are realized as capital gains or dividends to the investor which are generally taxed at lower rates. The net result is a lower overall tax bill, especially on the portion of your account that’s held in fixed income.
Of course, the tax implications of an investment are only one part of the picture. In order for the corporate class structure to work well, the underlying investment funds need to be well managed and provide value for the fees that they charge. The structure also needs to have enough good quality investment options to choose from otherwise you may still need to move money out of the structure to get into the type of investment you want to hold.
Like any investment option, there are some potential disadvantages with this type of structure. The decision to invest in corporate class mutual funds should be based on the merits of the investment option and its suitability to your objectives and risk tolerance first. Talk to your financial advisor to learn more about the different structures of investment accounts to determine which one is right for you.