August 27, 2008, 6:00 am

Corporate Class Funds; How To Avoid Taxes For The Next Ten Years

by: The Financial Blogger    Category: Investment, Market and Risk,Trading,Types of Financial Products
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Close your eyes (after reading the first paragraph ;-)) and imagine a world where you can investment money into fixed income without having to declare your interest income at the end of the year. Even better, imagine that, regardless of your asset allocation, you don’t have to declare any gains until you withdraw money from your account.

Ok, I am now taunting your creativity; imagine an investment where you can withdraw money up to the amount of your initial investment without paying taxes. And I will continue to push the limit: imagine that this investment will only trigger capital gains instead of interest and dividend income!

Now you can open your eyes again and read the rest of this post. Unless you want to take down your financial advisor’s phone number to call him right after this read because such investment exists. It is called Corporate Class Funds.

How does this work?

Corporate class funds can be viewed as a big bag with several mutual funds. You have the possibility to select the funds you want according to your investment profile. You are also able to switch funds in the same family (same bag) without triggering capital gains.

When you withdraw money from the bag, you are first deemed to take back your capital. This option is called ROC (Return of Capital). This allows an individual to withdraw all his capital first and therefore report taxes in the future. One of the basics of tax planning is deferring taxes as far as you can.

Once you have taken all your capital, you are left with the investment growth. Regardless if it was created through capital gains, dividend or interest income, it will become capital gains when you take them out of the bag.

Where is the catch?

Honestly, I didn’t find it yet. In fact, Corporate Class Funds have higher MER’s than regular funds. They are usually about 0.30% more expensive than a regular mutual fund for the same category. They are also not sold by banks either (unless you are dealing with a broker). In fact, I really don’t know why they are not really promoted in our industry. I guess the market is just not ready to answer their clients as of to why they didn’t sell such product in the first place!

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by: jineshwar singh | August 31st, 2008 (6:06 pm)

Does Corporate class fund include bond fund? If yes, then how do you avoid annual interest accrued on the investment in the bond fund? is it worth paying 0.3% more in MER?

Hey FB – hope you are/have enjoyed the long weekend!

Couple of points:

1. Corporate class funds can make taxable distributions from time to time – I believe many did in 2007.

2. Being setup as a mutual fund corporation as opposed to a mutual fund trust is the structural difference between Corporate Class Funds and “regular” funds, but is separate from the T-SWP ability (the option to get withdrawals as ROC). Many class funds do not have the ROC option.

3. The ROC option will grind the ACB down to zero at which point all withdrawals will be a distributed capital gain – but still this is more tax effective. Consideration needs to made, or communicated, that if planning for cashflow later this will have a significant impact down the road.

4. I believe Fidelity’s class funds are the exact same MER as the non-class versions of the same fund.

by: The Financial Blogger | September 4th, 2008 (6:20 pm)

CCF include all kind of funds (including bonds funds). since you are not holding a share or the mutual fund but a “stock” of a corporate structure, the source of income of the “corporation” don’t affect your tax rate.

Since you will be saving roughly 20% in taxes, what is the importance of the MER’s?

thx for these additional information!

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