Corporate Class Funds

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• Corporate Class Funds
• Derrick Peterson
• D A Financial Services inc.

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Agenda

• What are Corporate Class Funds
• Tax implications
• Examples of tax savings using Corporate Class
  Funds
• Quadrus Investment Services Inc.

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The Issue Investors Wantto Reduce Taxes

• RRSPs the best option
• Contributions tax-deductible (within limits)
• No tax on income earned within the plan
• Allocation changes can be made without triggering
  taxable gains
• Withdrawals are fully taxable

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Other Popular Investments?

• Labour Sponsored Funds
• Limits on amounts
• Venture capital, highly volatile
• Locked-in for 8 years to avoid tax clawbacks
• Flow-Through Shares
• Primarily resource-based, volatile
• Lacks diversification
• Often illiquid
• Leveraged Investments
• Beneficial if properly structured, and for the
  right client
• Needs to be properly structured, and for the
  right client !

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What Else Is Out There?

• Corporate Class Mutual Funds
• Structure
• Features (Investment Income and Growth)
• Benefits
• What to watch out for

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Corporate Class Funds

• Mutual funds are incorporated rather than being
  in trust.
• This legal structure allows
• Tax-deferred rebalancing and switching. (Article
  51 of the Tax Act)
• Generally lower income distributions.
• Tax effective income.

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Potentially lower distributions

• Income and expenses are pooled for tax purposes
• Capital gains and losses are pooled for tax
  purposes
• Ability to pool these at a corporate level may
  reduce the distributions for any given year

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Mutual Fund Trusts
All investment income, capital gains and losses,
and eligible expenses, are kept separate for tax
purposes.
FUND INCOME EXPENSES Interest Dividends Realized
Gains (Losses) Eligible Fund Expenses
NET INCOME DISTRIBUTED Interest Dividends Realized
Gains Total Income on T3 TAX PAID BY UNITHOLDER
Net to investor for year 6.40 income
distributed keep 64 after-tax
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Mutual Fund Corporation
All investment income, capital gains and losses,
and eligible expenses, are pooled for tax
purposes.
FUND INCOME EXPENSES Interest Dividends Realized
Gains (Losses) Eligible Fund Expenses
NET INCOME DISTRIBUTED Interest Dividends Realized
Gains Total Income on T5 TAX PAID BY UNITHOLDER
Net to investor for year 3.00 income
distributed keep 72 after-tax
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Bond Fund Example
Corporation
Trust
Investment Fund Return Distribution
Interest Distribution Capital Gain Taxes
Payable on Distributions Proceeds From Sale of
Fund Adjusted Cost Base Capital Gain
(Loss) Taxes Payable on Capital Gain Net Return
100,000 4.6 4,497 701 (2,230) 104,600
105,198 (598) N/A 2.51
100,000 4.2 Nil Nil Nil 104,200 100,000
4,200 (966) 3.23
Assume funds are sold
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1 Capital loss assumed to offset an existing
capital gain, reducing overall taxes by 299
added back to net bond fund freturn.
Source Morningstar BellCharts, December 2005,
Bissett Canadian Bond Fund (Mutual Fund trust
Corporate Class versions)
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Targeted clients

• Business owners
• Retirees
• Professionals earning high income
• Children
• With an important non registered portfolio
• Individual
• Corporate (operation or holding)
• Trust

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Business owners and corporations

• Benefits in investing corporate money
• The 3 tax benefits mentioned previously.
• Tax preferred income and CDA.

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Mutual fund corporations and tax preferred income
to corporations

• TAFs pay out ordinary or capital dividends
• For corporations receiving this income, there is
  preferred treatment
• Capital gains dividends are 50 taxable
• The other 50 goes into the Capital Dividend
  Account (CDA)
• CDA is an account where amounts can be paid out
  to shareholders - tax-free

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Example 1 Cash in corporation

• Situation
• Construction firm. Client keeps approximately
  1,000,000 in cash for emergencies, bad payors,
  etc.
• Client is looking for security.
• Money is currently invested with CIBC in term
  deposits and cash. Average rate of return of
  1.2.
• Client is not satisfied with the high tax rate on
  the interest income.

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Example 1 Cash in corporation

• Current situation
• Income 12,000
• Tax free income
• Taxable income 12,000
• Tax 5,640
• Net after tax 6,360
• Net rate of return 0.64
• Potential Enhancement of 44 after tax
• If investments are sold and the gain
  crystallized.

• Corporate class funds
• 12,000
• 6,000
• 6,000
• 2,820
• 9,180
• 0.92
• Alberta Corp tax rate of 47.

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Example 2 Retiree

• Situation
• Retired widow, 75, needs an income of 40,000
  after tax, per year.
• At the death of her husband, all of the assets
  were transferred in her name.
• Current assets
• RRIF of 418,000
• Non-registered investments of 532,000
• Shareholder of a holding company
• She receives CPP and OAS payments.

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Example 2 Retiree

• Taxable income for 2005
• RRIF 32,800
• CPP/OAS 18,900
• Investments 19,400 (taxable interest and
  dividends)
• Hold Co 17,300 (taxable dividends)
• Total taxable income 88,400
• Average tax rate 33 gt 29,000 in taxes
• OAS claw back, 4,100. (Min. 60,806)
• Total gt 33,000 paid net income 55,000

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Example 2 Retiree

• Recommendation
• Reduce income everywhere possible
• Stop dividend payments from Hold Co.
• Invest non-registered portfolio in Corporate
  Class Funds.
• RRIF, CPP and OAS can not be reduced.

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Example 2 Retiree

• Proposed plan
• RRIF 32,800
• CPP/OAS 18,900
• Investments 0
• Hold Co 0
• Total taxable income 51,700
• Average tax rate 27 gt 14,000 in taxes
• OAS claw back, none
• Total gt 14,000 paid net income 37,700.
• The shortfall of net income will come from the
  non-registered investments, taxed at a low rate.
• Savings of 19,000 per year.

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Summary

• Benefits for clients with large non-registered
  investments personally, in Trusts or in
  Corporations.
• Benefits for individuals with high income
• Lower tax rate.
• Increase or eligibility for some tax credits.
• Avoid OAS Claw back.
• Investments for minor avoid attribution rules.

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Quadrus Investment Services

• Mutual fund brokerage firm.
• Company of Power Financial, Great West Life,
  London Life.
• Offers
• Quadrus Group of Funds mutual funds and
  corporate class funds in Canadian dollars.
• Most funds sold in Canada mutual funds and
  corporate class funds.
• In Canadian and US dollars.
• Linked notes (not in all provinces).
• F-Class series funds with negotiable advisory
  fee.

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Quadrus Investment Services

• Information available on the client quarterly
  statements
• List of assets and transactions
• Asset allocation
• Adjusted cost base per fund
• Advisory fees (if applicable)
• Other information available on the year end
  statement
• Realized capital gain per fund
• Total of advisory fees for the year.

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• Thank you !