The Case For Tax-Effective Investing
by Evelyn Jacks
First in a Series on Tax Planning Strategies using Corporate Class Funds
Tax-effective investing involves arranging investment affairs within the
framework of the law to pay the least amount of taxes when investment
income is earned and upon disposal of the underlying assets. Within that
legal framework, the government has provided Canadians with a variety
of “tax preferences” that are designed to encourage tax-assisted
savings for retirement and within the capital marketplace to meet Canada’s
social and economic goals.
The most well-known tax preference is the RRSP – an investment vehicle
that should be given top
priority because of its immediate double-digit tax savings and tax-deferred
growth. These accounts have their limitations, however, especially for
the following groups:
• High-Income Earners: Despite the February 2005 federal budget,
which proposed to increase maximum
RRSP contribution levels for higher-income earners, tax-efficient savings
be found outside the RRSP environment once those top dollar maximums are
reached – or in other
cases, when investors reach the bottom-end limitation of 18% of earned
- People with limited RRSP room: Many employees are limited in how
much they can invest in RRSPs
because of large Pension Adjustments, which stem from Registered Pension
Plan contributions made
by their employers. Some employers provide supplementary employee retirement
plans to add
to the retirement pot; however, these are often inefficient from a tax
point of view.
- Older investors: Tax deferral with RRSP savings also ends for taxpayers
who have reached age 70.
At that time, a re-evaluation of income structure is required, to minimize
tax in the absence of an
RRSP deduction and in particular to avoid high marginal tax rates that
will result in clawbacks of
social benefits like the Old Age Security.
- Corporate investors: These investors, including small business owners,
may face further
challenges in funding Individual Pension Plans or, in the case of larger
companies, in the avoidance
of capital taxes in some jurisdictions.
Corporate class funds overcome these limitations For these groups and
other investors who have
maximized their RRSP contributions, corporate class funds (offered by
CI under the name CI
Corporate Class funds) are the next logical investment product. They provide
opportunity for clients to:
- Maximize the tax-free growth of their assets over the long term.
- Benefit from the tax-deferral feature of RRSPs without being subject
to a contribution limit.
- Make investment decisions – such as rebalancing and tactical
asset allocation shifts – based on
the merits of the investments rather than on tax considerations.
- Decide when to declare capital gains.
- Convert interest income earned by the funds into tax-efficient capital
gains at redemption.
Combined with basic family tax-planning skills, corporate class funds
provide enhanced wealthcreation
opportunities for maxed-out RRSP investors on a largely unrestricted and
intergenerational basis. One could say that corporate class funds play
a starring role in the next tax-efficient frontier – non-registered
A close look at corporate class funds
Corporate class funds can help clients meet all of these goals, mainly
because of the advantageous
tax treatment extended to mutual funds that are held within a single taxable
corporation, rather than
Within a corporate class structure, each mutual fund is contained within
a separate class of shares.
What this means is that:
- Shareholders can switch from one class of shares to another without
incurring tax consequences
- Income earned by shareholders is distributed as dividends or capital
gains, which attract lower
marginal tax rates than interest earnings, or withdrawals of capital
and earnings from an RRSP or RRIF.
- Income distributions made to shareholders are reduced at source through
a Capital Gains Refund
Mechanism, which limits capital gains that flow to investors and allows
the corporation to share
the income and expenses of all share classes.
- The funds can be managed so that there are minimal or no annual distributions
income. (This has been the case, for example, with CI Corporate Class
funds since their inception.)
Remember that in a non-registered environment, the most tax-efficient
way to accumulate capital is with an income-producing asset such as a
business, property or investment that will generate capital gains on disposition.
With an investment within corporate class funds that increases in value
over time, unrealized capital gains are never taxed until redemption.
Then, only 50% of the gains are taxable. Further, capital gains realized
in the tax year can be offset by capital losses of the current year, or
any unused losses incurred from 1972 to the present.
Given these features, the astute financial advisor can in fact produce
stellar results over the long term
for clients who have maximized their RRSPs. When you choose corporate
class funds and employ basic tax-efficient investment strategies within
a non-registered account, you will be able to unleash the power of tax-deferred
Evelyn Jacks is the author of 30 best-selling books on the subject of personal income taxation, and the President of Knowledge Bureau, Inc., Canada’s leading professional education publisher in the tax and financial services industry, specializing in delivering courseware and information services to knowledge-based practices. For more information call toll free 1-866-953-4769 or visit www.knowledgebureau.com.
This article is written to be of a general nature and neither the author, her company, employees, subcontractors or others associated with The Knowledge Bureau can take responsibility for any results, positive or negative, taken by any persons. While the author received a fee to write this article, she is not in the business of providing advice on investment products and is not registered and licensed to do so, nor does the author have any compensatory relationship, or beneficial ownership
regarding the sale of investment products discussed herein