CORPORATE CLASS Investment Funds

Transcription

1 CORPORATE CLASS Investment Funds PRIVATE CLIENT MANAGED PORTFOLIOS

2 How Corporate Class works Whether your clients have investments in their corporate accounts, non-registered investments or both, the tax efficiency of their investments is almost as important as the investments themselves. Our Private Client platform, offers the best of both worlds with a personalized efficient portfolio managed by award-winning managers and the power of tax efficiency through our Corporate Class structure. Your clients with portfolios of non-registered assets face distributions and dividends that are taxed as received, and may face additional tax if they rebalance regularly. It adds up to a heavy tax burden. A tax-efficient investment alternative is Corporate Class investment pools. In Canada, there are two principal ways to structure an investment pool: either as an investment pool trust, which is a stand-alone investment pool or as an investment pool corporation, which is typically a family of investment pools held within one corporate structure. Today, many investment pools are organized as corporations, with each pool representing a different class of shares. All of the Private Client pools representing 17 mandates across 11 asset classes are available as Corporate Class shares. This offers your clients the option of a fully diversified portfolio on a tax-advantaged platform.

3 0 Corporate Class Offers your clients three primary benefits: THEY CAN: SWITCH or REBALANCE among Corporate Class pools without triggering capital gains or losses; a taxable event occurs only when investors redeem from the corporation. DEFER AND MINIMIZE tax payments given the low distribution payout policy, and the ability to control the timing of capital gain/losses. RECEIVE tax-efficient capital gains or Canadian dividends from traditional income mandates and return of capital from any mandate.

4 IT ALL COMES DOWN TO ACCOUNTING Corporate Class shares create tax efficiency and other benefits for investors. All investment pools receive various types of taxable income such as interest, dividends and capital gains. Ordinarily, an investment pool attempts to offset interest and dividend income with the expenses that it generates, and attempts to offset any realized capital gains with any current or previously realized capital losses. With an investment pool structured as a trust, any remaining interest income, dividends and/or capital gains that cannot be offset within the pool are distributed to investors at the end of the year. With an investment pool structured as a corporation, only dividends and/or capital gains can be distributed to investors at year-end, so any interest income generated within the corporation must be offset or the corporation will pay tax at its corporate rate. However the benefit of Corporate Class is that all of the pools, also known as classes, within the structure can be used to offset each other. This means: interest income generated by yield classes, such as bond and high-income classes is offset by expenses from other classes, like foreign equities. Our Corporate Class Platform is structured as a mutual fund Corporation as defined in the income tax act: UNDER SECTION 131(8) OF THE INCOME TAX ACT: A corporation is a mutual fund corporation, if: It s a public corporation that is Canadian; Its only undertaking is the investing of its funds in capital property; and At least 95% of the fair market value of the shares issued is redeemable at the demand of shareholders. foreign dividends generated by equities are offset by expenses generated by other classes, like Canadian equities. capital gains realized by equity pools or sectors like REIT are offset by capital losses from other sectors, like European equities. Because of this ability to combine taxable income losses and expenses across many share classes, dividends paid by Corporate Class are either minimized or eliminated. With Private Client, your clients are assured of tax efficiency, allowing you to focus on their other matters. SWITCH OR REBALANCE among Corporate Class shares without triggering capital gains or losses Corporate Class gives your clients the flexibility to switch and rebalance non-registered investments among all Private Client mandates within the structure without triggering immediate tax consequences. Only when your clients eventually withdraw assets from the structure will they be subject to capital gains tax. But until that time, they can take advantage of tax-deferred compounding, effectively reinvesting the tax they would otherwise have paid. Corporate Class switches and rebalancing are fully supported by a long-standing provision of Canada s tax law. UNDER SECTION 51(1) OF THE INCOME TAX ACT: The investor may switch between the various classes of capital stock of a corporation without tax consequences. Income tax becomes payable only when capital stock holdings in the corporation are sold. Income Specialty Switch between shares Canadian Equity Global Equity Assets withdrawn from Corporate Class structure trigger capital gains $ No capital gains are triggered when switching to different shares

5 DEFER AND MINIMIZE taxable income with Corporate Class shares. Capital gains and losses can be timed to minimize taxes. Corporate Class seeks to minimize the annual, taxable distributions to shareholders in order to increase the rate of return on your client s investments. To accomplish this, we make use of the following tax provisions and strategies: The Capital Gains Refund Mechanism The Capital Gains Refund Mechanism (CGRM) is a provision of tax law that attempts to avoid the double taxation of capital gains. Double taxation could arise when an investment pool has realized/unrealized gains and redemptions in a year. If an investor redeems shares, those shares are generally redeemed at their fair market value, so an investor will realize a capital gain based on the value over the adjusted cost base of the shares. However, in order to come up with the cash to fund the redemption, the investment pool, theoretically at least, has to sell investments in its portfolio. The sale of the investments could trigger capital gains, which normally would need to be distributed to the remaining investors. Without CGRM, this would mean that investors would be taxed twice on the same transaction, once at the account level on their personal cost and then another on the dividend that they would receive. CGRM allows the investment pool to offset a portion of the capital gains realized and therefore reduces the amount of gains required to be distributed to investors. Offsetting capital gains with capital losses among classes Due to the ability to share losses among the different classes of the corporation, when one class realizes a gain in a taxation year, that gain may be offset with the losses realized by any other class. In the corporate structure, only one corporate tax return is filed for the entire corporation, despite the multiple classes representing multiple investment strategies. Any remaining net realized gains, across all the classes, will be distributed to the investors of the various Corporate Classes. Carry losses forward Distributions from a Corporate Class can often be lower than they would be from a trust because the corporation has the ability to carry losses forward from multiple investment classes. When Corporate Class realizes a loss in a given taxation year, it will use this loss to offset future gains, if not fully utilized. The Power of TAX-DEFERRED COMPOUNDING The compounded growth from deferring tax on your non-registered assets can result in significantly higher returns for your portfolio. The chart compares the growth of $250,000 invested in corporate class versus an investment pool trust with both compounding at 6% annual capital appreciation and subject to a marginal tax rate of 45%. Value $1,500,000 $1,200,000 $900,000 $600,000 $300,000 $0 0 Corporate Class Investment Pool Trusts $1,435, Corporate Class $1,169,051 (After Tax) Investment Pool Trusts $977,500 (After Tax) Years Assumptions An investment inside Corporate Class with annual rebalancing and when tax is paid upon redemption; and outside Corporate Class when rebalanced and taxed annually. The rate return is used only to illustrate the effects of compound growth and is not intended to reflect future values of the funds or return on investment in the Private Client Managed Portfolios. The growth assumptions do not take into consideration management fees or optional charges that would have reduced returns.

6 RECEIVE tax-efficient capital gains or Canadian dividends from traditional income mandates Clients holding Corporate Classes have the ability to redeem monthly amounts from their investments, including any of our interest income-oriented mandates. As monthly redemptions from Corporate Class trigger a disposition, this monthly cash flow is a taxable transaction. This results in a client being able to receive the monthly cash flow they need, without having the heavy taxation normally associated with interest paying investments. Expenses within the Corporate Class structure will be used to offset interest and foreign income earned to ensure tax efficiency. For any remaining Canadian dividend or capital gains income, the corporation has the discretion to allocate these amounts to any of the classes. However, it looks at various factors and focuses on fairly distributing taxable income to the applicable classes. Here is how it works: Corporate Class, including its income-oriented mandates, cannot pay dividends in the form of interest income; therefore, any interest income that s generated within the structure must be offset by expenses. If not, the structure is required to pay tax on the interest income at its corporate tax rate. Given that all types of income are either offset or minimized, the income earned is kept within the structure and reflected in an increase in the net asset value (NAV) of the applicable classes. Any redemption required to generate the monthly cash flow consists of return of capital (which attracts no tax) and tax-favoured capital gains, as the NAV increases. The following table shows the different tax treatment for the same investment a Canadian Bond mandate in a Corporate Class structure and in a trust. It compares monthly cash distributions on the trust version to setting up systematic monthly withdrawals on the Corporate Class version. Canadian Bond Corporate Class Canadian Bond Pool Trust Investment: $100,000 Investment: $100,000 SWP at 4% annually $4,000 Annual interest distribution 4% $4,000 Income tax at 45% marginal tax rate capital gains at 50% inclusion rate $135 Income tax at 45% marginal tax rate interest income at 100% inclusion rate $1,800 Net income $3,865 Net income $2,200 Difference $1,665 annually or 75% more cash flow * Assumes 85% of the income stream is return of capital, which does not attract tax, and 15% is capital gains. This amount will increase each year if growth continues.

7 T-CLASS tax-free customized monthly cash flow Our T-Class platform, which is built within our Corporate Class structure creates a stream of predictable tax-deferred cash flow without sacrificing a choice of investments. T-Class can provide more after-tax cash flow than conventional systematic withdrawal plans placed on investment pool trusts by paying monthly cash flow in the form of 100% tax-free return of capital*. No longer are your clients confined to traditional products to fill their cash flow requirement needs. By using T-Class, your clients can: Create a predictable, tax-effective stream of monthly cash flow to meet their needs without sacrificing the potential for growth. Customize their payments by selecting a fixed dollar amount per month. Clients can request a dollar amount anywhere between 0.25% and 8% of the value of the investment. The chart below shows the difference in the after-tax value of $100,000 in cash flow from interest, dividends, capital gains and return of capital. $120,000 $100,000 $90,000 $60,000 $55,000 $45,000 $74,000 $78,000 Net after tax Taxes paid $30,000 $26,000 $22,000 $0 Interest Income Dividend Income Capital Gains Return of Capital* Assumes a marginal tax rate of 45% for interest income, 26% for dividend income and 22% for capital gains. *Taxes are deferred until ROC is depleted. Return of capital distributions reduce the adjusted cost base (ACB) of the investment. Over time, the ACB may fall to zero, in which case 100% of the monthly payments from the T-Class investments will be classified as capital gains. Please speak to an Assante advisor for more information about Private Client Managed Portfolios. The program is available exclusively through Assante Wealth Management.

8 The United Financial Investment solutions used in the Private Client Managed Portfolios are managed by CI Investments Inc. an affiliate of CI Private Counsel LP. Commissions, trailing commissions, management fees and expenses may all be associated with investments in Private Client Managed Portfolios and the use of other services. Investment pools used in the portfolios are not guaranteed, their values change frequently and past performance may not be repeated. Please consult your advisor before investing. Cambridge Advisors is the business name of CI Global Holdings Inc. Signature Global Advisors is a registered trademark of CI Investments Inc. United Financial and/or United Financial and design are trademarks of CI Investments Inc _E (06/12)