03/23/2016 15:03 EDT | Updated 03/24/2017 01:12 EDT

Corporate class investment funds set to lose key advantage this year

OTTAWA — A key tax advantage for corporate class investment funds is coming to an end later this year under a change announced in the federal budget.

Ottawa is ending the ability for investors to switch between funds in corporate class investments without paying tax on capital gains.

However, the new rules give corporate class fund investors a chance to make any changes under the old rules until the end of September.

"For investors, the encouragement is a call to action and a call to action prior to September of 2016 to review your portfolio to make sure you make use of your corporate class investments prior to the changes kicking in," said Tony Salgado, manager on tax and estate planning at Investors Group.

"This is going to apply to a lot of senior investors and people that wanted to make use of the corporate class structure."

Corporate class funds had been used by investors who had already maxed out their RRSP and TFSA contribution limits as a tax efficient way to invest.

That's because corporate class funds had allowed investors to defer taxes and maximize the power of compounding growth.

With conventional mutual funds, those who wanted to sell a fund and use the proceeds to buy a different fund would be faced with the prospect of having to pay tax on the capital gains of the fund they were selling.

With corporate class funds, before the change in the budget Tuesday, investors could switch between different funds within the structure without facing the capital gains tax.

However, Peter Bowen, vice-president of tax and retirement research at Fidelity Investments, says corporate class funds will still have some advantages once the changes take affect later this year.

Bowen, who estimated that there is about $100 billion invested in corporate class funds, said the taxable distributions from corporate class funds will be lower than conventionally structured funds.

"We get that because we get the benefit of having many investment funds in the same taxable entity, so we're able to offset capital losses realized by some funds against capital gains realized by other funds," he said.

"You will not see a distribution of interest income and you will not see a distribution of foreign income coming out of corporate class structure. You will only see Canadian dividends and capital gains."


Craig Wong, The Canadian Press