Minimizing Tax Held in Mutual Funds in a Corporation

When it comes to tax minimization, the use of Corporate Class mutual fund structures is a strategy that has significant benefits to individuals and to corporations.

Switching from one mutual fund to another triggers capital gains taxes in traditional mutual funds. However, the same switch done between the Corporate Class versions of the same mutual funds will not trigger any taxes. In addition, the gains of one corporate class mutual funds can be offset with the losses from another fund in that class. Therefore, these types of mutual funds have the key benefits of tax-deferred switches and accelerated compounded growth (because of reduced or eliminated distributions). Plus, the benefits of Corporate Class mutual funds to corporations go beyond those available to individuals. In general, the benefits are as follows:

Benefits for Individuals and Corporations

Converting interest income to capital gains – The corporate class structure minimizes the potential for distributions from fixed income vehicles allowing investors to ‘convert’ income to capital gains. For example, money market and bond funds would benefit from capital gains tax rates rather than interest income allowing you to keep more of your investments. If you are in the highest tax bracket in Ontario this means that you can convert a 46.4% tax rate on interest income to a 23.2% tax rate on capital gains income.
– Controlling when you trigger tax – In general tax is payable when interest income is received. However, with Corporate Class funds you have the ability to defer tax indefinitely, giving you control over when taxes are triggered and paid.

Benefits for Corporations

Withdrawing trapped money from the corporation tax free – Using the Capital Dividend Account (CDA) it is possible to minimize the taxes payable by the business owner by withdrawing from the CDA, the non-taxable portion of capital gains – money that would otherwise be trapped in the corporation.
Avoiding Provincial Capital Tax – Although capital tax has been removed at the federal level, provincial capital tax may still apply. Since it is a tax on assets rather than on income, the tax impact can be substantial. Corporate Class funds qualify your corporation to be exempt from the provincial Capital Tax.

As Canadian investors remain among the most heavily taxed investors in the world, Corporate Class structures provide an efficiency that should not be overlooked.

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