Mutual fund corporate class structures – a valuable addition to your investment bag of tricks

A recent trend with Canada’s mutual fund industry is the growing availability of a class of mutual fund shares known as mutual fund corporate class structures. Interest in these funds is largely based on their ability to provide investors with the ability to "switch" between different funds without triggering tax in non-registered accounts. To fully understand the benefits that this class of investments provide, it will be instructive to begin by comparing these funds to the more ubiquitous mutual fund investment trust.

For an investor who owns shares in a mutual fund investment trust and holds them within a non-registered account, the decision to sell or transfer assets out of one mutual fund into another will be overshadowed by the fact that this could trigger a taxable gain. If an investor wants to sell his ownership position to either cash in or transfer assets held within one trust to another, Canadian tax law considers this a disposition and is therefore considered a taxable event.

A mutual fund corporate structure is different, however. A corporate class structure is established as a mutual fund corporation that issues multiple classes of shares, with each class representing a different fund. Under a corporate structure, if one class of shares earns profits from an investment – or a loss for that matter – this can be spread across, or shared, by every fund held within the mutual fund corporation. In practice, this allows the corporate structure to offset gains thereby making distributions more tax efficient. But even more importantly, because each share issued by the corporate structure represents an ownership position in the same corporation, for an investor who exchanges one class of shares for another held within the same mutual fund corporation, this transfer does not trigger a taxable event.

How does this feature benefit the average investor? The simple answer is that it allows investors to defer gains until money is redeemed out of the corporation thereby maximizing the amount invested. The idea is that investors can switch freely between different funds within the corporate structure without considering both tax and sales charges. Within corporate class funds, the only consideration is the choice of funds available within the structure.

One family of corporate class funds that provides a broad selection of funds to choose from is MIX Funds. Manulife Mutual Funds has created a class structure that provides access to 28 different funds across various investment styles and sectors. And unlike a number of other corporate class fund families that have tended to offer funds managed by their own in-house fund management teams, Manulife has brought together a number of well-respected external managers to sub-advise MIX Funds. Within MIX, investors can access such reputable investment management firms as Goldman Sachs, McLean Budden, AIM Trimark, Fidelity, Templeton and MFC Global. And because these sub-advisors have been brought together under the same corporate umbrella, MIX investors receive an additional benefit as well: the option to switch between multiple sub-advisory firms without triggering sales charges like DSC.

If you are an investor looking for ways to defer taxes in your non-registered accounts, corporate class mutual funds a definitely worth a second look.

March 2004

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.