any mutual funds today are showing excellent capital gains to unit holders who purchased the funds over the past couple of years. Unless you hold your account in an RRSP, you may have substantial capital gains tax to pay when you sell or switch your fund into something different.
A limited number of mutual fund companies are now offering a subgroup of funds which permit unit holders to switch between different funds without triggering capital gains. This provides you with the opportunity to take advantage of market and industry trends by switching between different funds without the usual tax implications.
As long as your investment remains inside the special subgroup of funds, you may be able to defer capital gains indefinitely. The mutual fund companies supplying this unique investment opportunity, have many different funds with distinct investment objectives. You can establish a portfolio according to your personal risk profile.
The primary benefit of this class structure is to defer tax. You must claim the capital gain realized on your tax return in the year that you exit the special subgroup of funds. This could be years into the future. Fund distributions, which may be paid from time to time, will reduce some of the tax deferral benefits. Unlike RRSPs where there is a restriction to invest a certain percentage of your money in Canada, you can also benefit by investing allyour money internationally in any part of the world wherever you see opportunity.
In the past, investors were forced somewhat to make investment decisions that were based on tax consequences. By selling or switching a fund you had to pay tax on any gain realized, so the decision was to hold the fund. Today, you no longer have to make your investment decisions based on tax. Using this unique class of funds, you can pick, choose and switch between different industries, regions and sectors of the economy with conviction and disregard the tax implications.
There may come a time when you would like to claim the capital gain. This can occur during a year that your income and tax rate is low. You can "crystallize" your gains, which means you simply exit the class structure and trigger the capital gains that you would like to realize on your tax return. You would then pay the necessary tax at a lower rate based on your lower taxable income.
If you have non registered investments, or you are thinking of starting a non registered investment program, you should consider the benefits of the special class structure offered by a few mutual fund companies. The tax savings and deferral options could be substantial.
This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, R.F.P. with your topics of interest at 798-2421 or e-mail at rick@invested-interest.ca