September 23, 2008, 6:00 am

Are Corporate Class Funds Are Threatened By The Tax-Free Savings Account (TFSA)?

by: The Financial Blogger    Category: Financial Planning,Investment, Market and Risk,Personal Finance
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I recently wrote a post about Corporate Class Funds. This special type of funds is using a corporate structure instead of the regular mutual fund format. This allows the holder to not declare any gains (dividend, interest or capital gain) for several years. In fact, the investment grows within the “corporation” until you withdraw your money. Even better, you have the possibility to switch funds within the same family without triggering capital gains.

Finally, your withdrawals are considered as ROC (Return On Capital) until you reach your primary invested amount.

Since most of their characteristics are similar to the Tax-Free Savings Account (TFSA), we might think that the Corporate Class funds didn’t exist long enough so the majority of investors benefit from it and will shortly disappear due to a lack of interest.

Actually, if you invest money in a TFSA, your investment will grow in a tax sheltered environment and the withdrawals will never be taxable. Even better, you are not limited to the number of time to invest or withdraw money compared to RRSP (where you can withdraw your money only once and never buy back this contribution).

Another good point would be that TFSA is an account and not a type of investment. Therefore, you are not limited on the asset you purchase within your TFSA account. Most investment vehicles such as stocks, GIC’s, bonds and mutual funds are accepted. Corporate Class Funds are offered by investment firm and are limited in term of family. For example, Templeton may offer 10 Corporate Class Funds and once you have selected your investment firm, you are stuck with this choice if you don’t want to trigger capital gains. Since the TFSA allows almost all type of investment, you could surely find similar funds or indexes and bond combination with a cheaper MER’s than balanced or aggressive funds charging 2%+ MER’s.

The Tax-Free Savings Account is for small investor

I do not believe that Corporate Class Funds will disappear from the investment market for the following reasons: it is presently used by more fortunate individual based on the assumption that small investors don’t even know that such funds exist. Since most investment firm will target larger investors, chances are that nobody ever tell you that you could invest your 50K in this type of fund.

Since the TFSA is limited by a contribution of $5,000 per year, it will take 40 years for an investor to transfer his 200K non-registered portfolio within such account. He rather leaves his money within his Corporate Class Funds and continues to benefit from its tax advantages.

Therefore, the Canadian Government is most likely copying the tax benefit of a Corporate Class Funds and makes it available to everybody. Don’t get me wrong, there are no specifics conditions to buy Corporate Class Funds, it is just that most people don’t know about them!

So if you have a small balance in your non-registered portfolio, there are not many incentives to buy Corporate Class Funds, you are better off waiting and invest your money through a TFSA. However, if you have more than 30K to invest right away and don’t want to wait 6 years to transfer it into a TFSA, you are definitely better off looking for Corporate Class Funds.

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