By Adrian Spitters, FCSI, CFP, FMA and Win Wachsmann
Governments everywhere are coming under increasing pressure to increase taxes and find new sources of revenue.
After years of diligent saving, it can be frustrating to watch taxes eat away at your hard earned money. It is only right that you should want to protect as much of your nest egg as possible from the taxman.
Some people have found ways to reduce their taxes and thus increase the compounding effect of their investments.
Most people have some form of registered savings plan, whether RRSP, RRIF or Tax Free Savings Account (TFSA). They can however be maxed out. Then what?
Not only are investments in non-registered funds NOT sheltered from the taxman, but any attempt at re-balancing or taking money out (fund distribution) also creates a big tax bill.
These non-registered investments also create interest income which, even if not taken out, is usually taxed annually at your marginal tax rate. (Meaning your highest tax on the next dollar earned)
Keeping investments in corporate accounts and/or non-registered investments means the investor will want to ensure that they pay the least tax possible.
How can this be achieved?
A Special Portfolio for Discriminating People
A number of Investment Firms have set up special Corporate Class mutual funds or managed portfolios structured to operate like a corporation.
Standard mutual funds are structured as trusts but Corporate Class funds are structured as corporations. This means that the Corporate Class Portfolio will hold several different funds as part of a single tax entity
If your eyes haven’t glazed over yet, please bear with me as I continue. I apologize if sometimes the language and jargon of the financial services industry is just overwhelming.
In the same way that businesses move their money among different company accounts to cover expenses and make necessary purchases, the money managers in a Corporate Class Portfolio move the invested money between the various funds to increase the value of the fund without triggering the payment of taxes and/or capital gains and losses.
The biggest advantage of a Corporate Class Portfolios is that it provides many of the benefits that can be found with tax-free savings accounts or other registered accounts, including the ability to defer tax on investment income and capital gains.
To recap: Some of the benefits of Corporate-Class include the ability to:
· SWITCH or REBALANCE: Capital gains in one fund may be offset by losses in other funds. Thus no tax is payable. The result: TAX FREE SWITCHING and the fund grows and compounds quicker.
· MINIMIZE DISTRIBUTION: Spreading the gains and/or losses over all the funds reduces the amount of money that needs to be paid out as distributions. If money must be paid out as a distribution, that money is classified as capital gains and/or dividend income. When one receives capital gains or dividend income, the taxes to be paid are substantially less than if the money was received as interest income.
Furthermore, only when assets are eventually withdrawn from the Corporate Class structure will investors be subject to capital gains tax. Until that time, the investor enjoys tax-deferred compound growth which ultimately increases the potential value of their investments.
Government regulation and attempts to extract the most out of our pockets has resulted in a tax code so big and onerous that one needs an accounting specialty to understand it. No wonder we have to keep hiring accountants and lawyers.
Who can benefit from Corporate Class?
- Incorporated businesses (holding corporate cash) and high net worth individuals who have maxed out all their registered plans (TFSA, RRSP, RRIF, etc.) will be the biggest benefactors of this portfolio class.
- Seniors, who want to stop the government from clawing back part of their OAS pension, will also benefit.
What about fees?
I must warn you however, that all Corporate Class funds are not created equal. You may find Corporate Class funds sometimes have a higher fee, while other managed portfolios do not have any additional fees.
It’s always a good idea to make sure to read the fine print about fees in any prospectus. And if in doubt ask your advisor.
Sure, the fund managers need to be paid for their services, but also remember, their fees may be fully tax deductible. This is another example of where a cost can be expensed and the impact of the cost reduced significantly.
A good Corporate Class Portfolio manager is committed to growing your portfolio through tax deferred compounding and prudent management.
Can you see how a Corporate Class Portfolio can reduce your taxes and increase the growth of your investments through tax-deferred compounding?
Adrian Spitters, FCSI, CFP, FMA, is a Senior Wealth Advisor with Assante Capital Management Ltd. He can be reached at aspitters@assante.com
Win Wachsmann
Win Wachsmann has been helping businesses improve their marketing and helping them get ready to sell their business. He doubles as an author, journalist, syndicated columnist, filmmaker and businessman who makes his home in the Fraser Valley of British Columbia. His articles and columns can be found in some of the finest offline and online magazines, journals and media properties.
He can be reached at win@wachsmanncommunications.com.