Tax Benefits of Corporate Class Funds

Corporate class funds can be a very tax-efficient investment vehicle, particularly in Canada. Investing in these funds and holding them inside of a corporation can protect and defer you from significant tax implications.

What are Corporate Class Funds?

As the name sounds, corporate class funds are mutual funds held inside a corporation. Each class of funds has its own investment objectives, such as high growth, preserving capital, or generating income for retirement. The point is that all of the funds are under the umbrella of a single corporation. Because a corporation is a separate legal entity, corporate class funds can produce interesting tax benefits for you. Let’s take a closer look at these tax benefits.

1.  Tax Deferral

If one class of funds are sold and another bought within the same corporate class fund, there isn’t a sale for individual tax purposes, so long as the money stays inside the corporation. This allows you to defer paying tax when switching funds, making your money work for harder for you.  However, when you eventually withdraw funds from the corporation, you will end-up paying personal income tax.

2.  Tax-Efficient Distribution

Corporate class funds generate various types of income – interest, dividends, capital gains and return of capital.  As a corporation, it can decide what type of income to distribute to its shareholders. This flexibility allows the corporation to distribute, for example, low-tax capital gains and dividends to you as opposed to high-tax interest income.  Thus, corporate class funds are very tax efficient.

3.  No Withholding Taxes on U.S. Dividends

Suppose you invest in US shares directly and receive dividends from those shares.  Now when those dividends are paid to you, 15% will be held back in the form of withholding tax.  However, a corporate class fund that invests in US equities can choose to distribute US capital gains to you, which are not subject to withholding taxes like US dividends are.  As such, you can still invest in US equities through a corporate class fund without worrying about withholding taxes.

So Here’s the Tip:

Consider investing in Corporate Class Funds to pay lower taxes overall on your investments.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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