David Demoe, CFP

Financial Advisor

Income Tax Question

As Appeared in The Business Link Niagara October 1, 2007

QUESTION

Please explain “Corporate Class Mutual Funds” and why one would invest in them?

ANSWER

Most traditional mutual funds in Canada are set up as trusts. These trust mutual funds trigger capital gains and dividend income by buying, holding and ultimately selling securities at a profit. These funds can also earn interest income if it invests in fixed income vehicles. Income is offset against expenses of the fund and the difference is paid out to the fund’s unit holders as taxable income.

“Corporate Class Mutual Funds,” however, are created quite differently. They are “Corporations” with multiple share classes, with each individual class representing a different mutual fund. By crating multiple mutual funds within this “corporation,” this entitles unit holders to move freely from fund to fund, without triggering capital gains. Investors can move between money market, bond, balanced or equity funds, depending on their risk tolerance.

For example: Assume that you are invested in a Bank GIC at 3.5% interest rate. Assuming that you could invest in a corporate class money market fund at the same pre-tax yield of 3.5%, you have successfully converted interest income into capital gains. Depending on how long you remain invested in this “corporate” fund, income could be tax deferred indefinitely. Upon sale of this fund, profits would be treated as capital gains and taxed at the lower rate for Canadians.

Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus and consult your Assante Advisor before investing.

Assante Capital Management Ltd. (Member CIPF)

109 Russell Ave., St. Catharines, Ontario

E-mail: ddemoe@assante.com

Tel: 905-680-3095 ∙ Toll free: 866-434-9292