The Mechanics of Corporate Class

Transcription

1 The Mechanics of Corporate Class

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3 How Corporate Class works Whether your clients have investments in their corporate accounts, non-registered investments or both, the tax efficiency of their investments is almost as important as the investments themselves. We offer the best of both worlds with funds managed by award-winning portfolio managers and the power of tax-efficiency through our Corporate Class structure. Your clients with non-registered assets face distributions and dividends that are taxed as received, and may face additional tax if they rebalance regularly. It adds up to a heavy tax burden. A tax-efficient investment alternative is Corporate Class mutual funds. In Canada, there are two principal ways to structure a mutual fund: either as a mutual fund trust, which is a stand-alone investment pool or as a mutual fund corporation, which is typically a family of funds held within one corporate structure. Today, many mutual funds are organized as corporations, with each fund representing a different class of shares. CI Investments offers over 50 corporate class mandates ranging from money market to global equity, including a suite of fully managed portfolios. This offers your clients the option of a fully diversified portfolio on a tax-advantaged platform.

4 Corporate Class Offers your clients three primary benefits: They can: SWITCH or REBALANCE among Corporate Class funds without triggering capital gains or losses; a taxable event occurs only when investors redeem from the corporation. DEFER and MINIMIZE tax payments given the low distribution payout policy, and the ability to control the timing of capital gains/losses. RECEIVE tax-efficient capital gains or Canadian dividends from all funds, regardless of mandates, and return of capital from most of our available mandates. 2 Corporate Class The Mechanics of Corporate Class

5 It all comes down to accounting Corporate Class shares create tax efficiency and other benefits for investors. All mutual funds receive various types of taxable income such as interest, dividends and capital gains. Ordinarily, a mutual fund attempts to offset interest and dividend income with the expenses that it generates, and attempts to offset any realized capital gains with any current or previously realized capital losses. With a mutual fund structured as a trust, any remaining interest income, dividends and/or capital gains that cannot be offset within the fund are distributed to investors at the end of the year. With a mutual fund structured as a corporation, only Canadian dividends and/or capital gains can be distributed to investors at year-end, so any interest income generated within the corporation must be offset or the corporation will pay tax at its corporate rate. However, the benefit of Corporate Class is that all of the funds, also known as classes, within the structure can be used to offset each other. This means: interest income generated by yield classes, such as bond and high-income classes, is offset by expenses from other classes, like foreign equities. foreign dividends generated by equities are offset by expenses generated by other classes, like Canadian equities. capital gains realized by equity funds or sectors like REITs are offset by capital losses from other sectors, like European equities. Because of this ability to combine taxable income, losses and expenses across many share classes, dividends paid by Corporate Class are either minimized or eliminated. With CI Investments, your clients are assured of tax efficiency, allowing you to focus on their other matters. Our Corporate Class Platform is structured as a mutual fund corporation as defined in the Income Tax Act: UNDER SECTION 131(8) OF THE INCOME TAX ACT: A corporation is a mutual fund corporation, if: It s a public corporation that is Canadian; Its only undertaking is the investing of its funds in capital property; and At least 95% of the fair market value of the shares issued is redeemable at the demand of shareholders. Corporate Class The Mechanics of Corporate Class 3

6 SWITCH or REBALANCE among Corporate Class shares without triggering capital gains or losses Corporate Class gives your clients the flexibility to switch and rebalance non-registered investments among all mandates within the structure without triggering immediate tax consequences. Only when your clients eventually withdraw assets from the structure will they be subject to capital gains tax. But until that time, they can take advantage of tax-deferred compounding, effectively reinvesting the tax they would otherwise have paid. Corporate Class switches and rebalancing are fully supported by a long-standing provision of Canada s tax law. UNDER SECTION 51(1) OF THE INCOME TAX ACT: The investor may switch between the various classes of capital stock of a corporation without tax consequences. Income tax becomes payable only when capital stock holdings in the corporation are sold. Income Assets withdrawn from Corporate Class structure trigger capital gains Canadian Switch between funds Specialty $ Global No capital gains are triggered when switching to different shares 4 Corporate Class The Mechanics of Corporate Class

7 DEFER and MINIMIZE taxable income with Corporate Class shares. Capital gains and losses can be timed to minimize taxes. Corporate Class seeks to minimize the annual, taxable distributions to shareholders in order to increase the rate of return on your client s investments. To accomplish this, we make use of the following tax provisions and strategies: The Capital Gains Refund Mechanism The Capital Gains Refund Mechanism (CGRM) is a provision of tax law that attempts to avoid the double taxation of capital gains. Double taxation could arise when a mutual fund has realized/unrealized gains and redemptions in a year. If an investor redeems shares, those shares are generally redeemed at their fair market value, so an investor will realize a capital gain based on the value over the adjusted cost base of the shares. However, in order to come up with the cash to fund the redemption, the mutual fund, theoretically at least, has to sell investments in its portfolio. The sale of the investments could trigger capital gains, which normally would need to be distributed to the remaining investors. Without CGRM, this would mean that investors would be taxed twice on the same transaction, once at the account level on their personal cost and then another on the dividend that they would receive. CGRM allows the mutual fund to offset a portion of the capital gains realized and therefore reduces the amount of gains required to be distributed to investors. Offsetting capital gains with capital losses among classes Due to the ability to share losses among the different classes of the corporation, when one class realizes a gain in a taxation year, that gain may be offset with the losses realized by any other class. In the corporate structure, only one corporate tax return is filed for the entire corporation, despite the multiple classes representing multiple investment strategies. Any remaining net realized gains, across all the classes, will be distributed to the investors of the various Corporate Classes. Carry losses forward Distributions from a Corporate Class can often be lower than they would be from a trust because the corporation has the ability to carry losses forward from multiple investment classes. When Corporate Class realizes a loss in a given taxation year, it will use this loss to offset future gains, if not fully utilized. Corporate Class The Mechanics of Corporate Class 5

8 The Power of TAX-DEFERRED COMPOUNDING The compounded growth from deferring tax on non-registered assets can result in significantly higher returns for your clients portfolios. The chart compares the growth of $100,000 invested in corporate class versus a mutual fund trust with both compounding at 5% annual capital appreciation. $500,000 Corporate Class Shares $400,000 Mutual Fund Trusts $407,875 $347,873 (after tax) $300,000 $297,415 $285,677 (after tax) $200,000 $100,000 $ Years The chart compares the growth of a $100,000 non-registered investment in Corporate Class and a mutual fund trust. Each is compounding at 5% annual capital appreciation with annual rebalancing and subject to 22% tax on capital gains, 27% tax on Canadian dividends, and 45% tax on interest income. In the mutual fund trust, tax is paid annually on interest income (1.5%), dividends (1.5%), and realized gains (1%), with some capital gains (1%) being realized at the end of the period. With Corporate Class, most tax is deferred until the money is redeemed from Corporate Class at the end of 30 years when it is taxed as capital gains (4.25%). A portion is taxed annually as dividends (0.75%) to recognize that Corporate Class may, at times, pay annual dividends of Canadian dividends and/or capital gains. (Tax rates are based on an average of the highest combined federal and provincial personal income tax rates for 2014). The returns shown are used only to illustrate the effects of the compounding and are not intended to reflect future values or returns on investments. 6 Corporate Class The Mechanics of Corporate Class

9 RECEIVE tax-efficient capital gains or Canadian dividends from all funds, regardless of mandate. Clients holding Corporate Classes have the ability to redeem monthly amounts from their investments. As monthly redemptions from Corporate Class trigger a disposition, this monthly cash flow is a taxable transaction. This results in a client being able to receive the monthly cash flow they need, without having the heavy taxation normally associated with interest paying investments. Expenses within the Corporate Class structure will be used to offset interest and foreign income earned to ensure tax efficiency. For any remaining Canadian dividend or capital gains income, the corporation has the discretion to allocate these amounts to any of the classes. However, it looks at various factors and focuses on fairly distributing taxable income to the applicable classes. Here is how it works: Corporate Class, including its income-oriented mandates, cannot pay dividends in the form of interest income; therefore, any interest income that s generated within the structure must be offset by expenses. If not, the structure is required to pay tax on the interest income at its corporate tax rate. Given that all types of income are either offset or minimized, the income earned is kept within the structure and reflected in an increase in the net asset value (NAV) of the applicable classes. Any redemption required to generate the monthly cash flow consists of return of capital (which attracts no tax) and tax-favoured capital gains, as the NAV increases. The chart shows the difference in the after-tax value and taxes paid on $100,000 in cash flow from interest, dividends, capital gains and return of capital. $120,000 $100,000 $90,000 $73,000 $78,000 Net after tax Taxes paid $60,000 $50,000 $45,000 $30,000 $27,000 $22,000 $0 Interest Income Dividend Income Capital Gains Return of Capital Assumes a marginal tax rate of 45% for interest income, 27% for dividend income and 22% for capital gains. Corporate Class The Mechanics of Corporate Class 7

10 T-CLASS tax-efficient customized monthly cash flow Our T-Class platform, which is built within our Corporate Class structure, creates a stream of predictable tax-deferred cash flow without sacrificing a choice of investments. T-Class can provide more after-tax cash flow than conventional systematic withdrawal plans placed on mutual fund trusts by paying monthly cash flow in the form of 100% tax-free return of capital (ROC)*. No longer are your clients confined to traditional products to fill their cash flow requirement needs. By using T-Class, your clients can: Create a predictable, tax-effective stream of monthly cash flow to meet their needs without sacrificing the potential for growth. Customize their payments by selecting a fixed dollar amount per month. Clients can request a dollar amount anywhere between 0.25% and 8% of the value of the investment. The following table shows the different tax treatment for the same investment a balanced mandate in Corporate Class-based T-Class units and Class A units of the mutual fund trust. It compares the after-tax cash flow provided by distributions from T-Class units to that provided by the trust distributions. (The comparison uses the actual distributions provided by these funds in calendar year 2013, and the tax rates for Ontario.) Signature Global Income & Growth T-Class (T5) Signature Global Income & Growth Class A Initial investment $100,000 Initial investment $100,000 Annual cash flow ROC of 5% Eligible dividends Total $5,046 $409 $5,455 Annual cash flow (4.9%) Interest income Capital gains ROC Total Income tax (29.54% on dividends) ($121) Income tax (46.4% on interest income) (23.2% on capital gains) Total $1,667 $3,022 $189 $4,878 ($773) ($701) ($1,474) Net Cash Flow $5,334 Net Cash Flow $3,404 T-Class provides $1,930 or 57% more in after-tax cash flow *Taxes are deferred until ROC is depleted. Return of capital distributions reduce the adjusted cost base (ACB) of the investment. Over time, the ACB may fall to zero, in which case 100% of the monthly payments from the T-Class investments will be classified as capital gains. Please note that T-Class shares may pay a taxable annual dividend in addition to the monthly ROC payments. 8 Corporate Class The Mechanics of Corporate Class

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12 For more information about Corporate Class, please visit This communication is published as a general source of information and is not intended to provide personal legal, accounting, investment or tax advice. Before acting on any of the information contained herein, please seek professional advice based on your personal circumstances. All charts and illustrations in this guide are for illustrative purposes only. They are not intended to predict or project investment results. Commissions, trailing commissions, management fees and expenses 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. CI Investments and the CI Investments design are registered trademarks of CI Investments Inc. First published July Queen Street East, Twentieth Floor, Toronto, Ontario M5C 3G7 I Head Office / Toronto Calgary Montreal Vancouver Client Services English: French: _E (01/15)