Update on Corporate Class (mutual fund corporation) Ron Bowes, VP, Sales & Marketing Wilmot George, VP, Tax, Retirement and Estate Planning
History of corporate class funds CI was the first company in Canada to establish a multi-class mutual fund corporation in 1987 Today, Canadians have approximately $120 billion in corporate class, representing 10% of total mutual fund assets in Canada 1 CI Corporate Class is the largest of its kind in Canada with a choice of over 65 funds and more than $45 billion in assets 1 Source: Globe and Mail March 23, 2016
Summary of key benefits (pre-2016 federal budget) Historically, corporate class funds have been attractive to taxable investors because of the ability to: Switch between fund classes without triggering capital gains tax Minimize distributions due to the sharing of expenses across corporate class funds When required, receive tax-efficient income in the form of Canadian eligible dividends, capital gains dividends or tax-free return of capital
2016 federal budget Source Department of Finance (Canada) Note: As per proposed legislation released on July 29, 2016, the effective date will be January 1, 2017
Initial reaction Source: Investment Executive March 22/16 Source: Globe and Mail March 23/16
IFIC and IIAC statements Source: IFIC.ca (Joanne De Laurentiis, President and CEO, IFIC) March 22, 2016 Source: Investment Executive March 22, 2016
As the dust settled Source: Advisor.ca March 23, 2016 Source: Investment Executive March 23, 2016
Draft legislative proposals released On July 29, 2016, legislation to govern the change was released Very simply, tax-deferred switching between funds within the corporate class structure will not be permitted unless: The mutual fund corporation is undergoing a reorganization or amalgamation The switch is between different series of the same class Where the exceptions do not apply, switches will occur at FMV Effective date will be January 1, 2017, subject to consultation period; public can provide comments until September 27, 2016
Will corporate class funds still have value? Yes, for the following reasons: Low dividend payout policy Tax-efficient Canadian dividends and capital gains dividends (when paid) Availability of T-Class shares For switches, the change simply balances the playing field; it does not place corporate class funds in a lesser position relative to peers
What the change means to CI Corporate Class Ltd. We are reviewing the legislation and monitoring developments to determine impact on CI s corporate class structure Here is what we expect: Tax deferred switching between fund classes will cease on Jan. 1, 2017 Little to no impact to when/how distributions are paid Impact to asset allocation programs will depend on the program
Impact on asset allocation programs 1 Fund of fund? Top fund (Corporate Class or trust?) Underlying funds (Corporate Class or trust?) Portfolio Series Yes Trust Both (Corporate Class and trusts) Portfolio Select Series 4 Yes Corporate Class Trust No Impacted by change 2? Possibly, yes 3 1 For non-registered accounts; 2 On rebalancing by asset allocation team; 3 When rebalancing between fund classes; 4 Managed Portfolios;
A look at taxable distributions Until 2009, CI Corporate Class Ltd. had not paid a taxable distribution since the late 1990s Since 2009, average annual distribution has been 1.24% 0.42% Canadian eligible dividends; 0.82% capital gains dividends
A look at taxable distributions CI Corporate Class CI Corporate Class Ltd. Distribution History 1 Cdn. eligible dividends Capital gain dividends Total distribution 2009 2010 2011 2012 2013 2014 2015 2016 0.28% 0.35% 0.42% 0.45% 0.44% 0.52% 0.43% 0.46% 0% 0% 0% 0% 0% 0% 2.96% 3.59% 0.28 0.35 0.42 0.45 0.44 0.52 3.39% 4.05% 1 Average distribution across all CI Corporate Class funds
A look at taxable distributions $100K corporate class portfolio; $460 Canadian eligible dividend; $3,590 capital gains dividend Top MTR Cdn. eligible dividends Tax Cdn. eligible dividend Top MTR capital gains Tax capital gains dividend Total tax as % of total distribution BC 31.30% $144 23.85% $856 25% AB 31.71% $146 24.00% $862 25% ON 39.34% $181 26.76% $961 28% QC 39.83% $183 26.66% $957 28% NS 41.58% $191 27.00% $969 29%
Corporate class funds suitability profiles Non-registered investors In-trust accounts for minors Seniors Philanthropic clients Incorporated businesses
1) Non-registered investors Corporate class funds are best suited for non-registered accounts Low dividend payout policy Canadian eligible dividends or capital gains dividends (no interest income) Tax-efficient capital gains on sale Source: CI 2016 Personal Tax Quick Reference Card
2) In-trust accounts for minors Income from gifts to related minors are subject to attribution Taxed to related giftor Includes gifts to children, grandchildren, nieces and nephews Attribution rules do not normally apply to capital gains 1 Creates opportunity to split capital gains with minors Corporate class funds may provide reduced distributions; capital gains would be taxed to minor When capital gains are realized, the gain may or may not be taxable to minor depending on available deductions/credits 1 Assumes in-trust account is set up appropriately to avoid section 75(2) of federal Income Tax Act (ITA)
3) Seniors Canadians are living longer retirements Income/cash flow streams need to last longer In today s environment, accumulation is just as important as preservation of capital Corporate class funds can help: Grow assets tax-efficiently in retirement Access to T-class allows for lower net incomes Lower net incomes protect income-sensitive benefits (eg. OAS)
OAS facts and figures Basic Pension Covers Citizens/residents; age 65+ Maximum monthly pension (2016) Taxable? Indexed for inflation? $573 Yes Yes Earliest eligibility age 65 Clawback rate: 15% Eg: $85,000 net income =($85,000 $73,756) X 15% =$1,687 per year =$141 per month Maximum monthly payments will reduce from $573 to $432. Income reduction threshold (2016) $73,756; full elimination at $119,512
T-Class mutual funds $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $0 Capital Gain Market Value: $100,000 ACB: $20,000
T-class mutual funds are unrealized capital gains an issue? Most efficient form of taxable investment income Can trigger gains at a time of investor s choosing When in a lower tax bracket While not subject to an OAS clawback Over time to avoid potentially higher tax rates at death Can avoid tax entirely if donated to charity in-kind ZERO% capital gains inclusion rate
4) Philanthropic clients Tax credit for donations of up to 75% of net income 1 Unused donations can be carried forward for up to 5 years Donations can be shared between spouses/clps ZERO capital gains tax on in-kind donations 2 1 100% in year of death and year prior; 2 Publicly-traded securities; 3 2016 rates for donations over $200. Ignores 33% federal rate for income > $200K Province Federal/ After-tax cost : provincial credit 3 $1K donation 3 British Columbia 43.7% $563 Alberta 50.0% $500 Saskatchewan 44.0% $560 Manitoba 46.4% $536 Ontario 40.2% $598 Quebec 53.0% $470 New Brunswick 47.0% $530 Nova Scotia 50.0% $500 PEI 45.7% $543 Newfoundland 45.8% $542
Donations in-kind an example Bill, a long-time corporate class investor, has benefited from taxefficient growth for years At retirement, to supplement his income, Bill switched from his regular corporate class series to T-class (same fund) for ROC Bill has always been philanthropic; wishes to make a large donation to his local hospital, a Canadian registered charity At the time of donation, his T-class funds have an ACB of $20K and a FMV of $100K; Bill wishes to donate his T-class shares Should Bill sell and donate cash, or, donate the shares in-kind?
Donations in-kind an example Example: T-Class fund FMV $100K, ACB $20K Cash donation Market value $100,000 ACB ($20,000) Capital gain $80,000 Taxable capital gain (50% vs 0%) $40,000 Tax on capital gain (at 50%) (A) ($20,000) Tax benefit of donation 1 (at 40%) (B) $40,000 Net tax benefit (A+B) $20,000 Cost of donation $80,000 1 From donation credit 40% rate assumed
Donations in-kind an example Example: T-Class fund FMV $100K, ACB $20K Cash donation In-kind donation Market value $100,000 $100,000 ACB ($20,000) ($20,000) Capital gain $80,000 $80,000 Taxable capital gain (50% vs 0%) $40,000 $0 Tax on capital gain (at 50%) (A) ($20,000) $0 Tax benefit of donation 1 (at 40%) (B) $40,000 $40,000 Net tax benefit (A+B) $20,000 $40,000 Cost of donation $80,000 $60,000 Net savings from donating in-kind $20,000 1 From donation credit 40% rate assumed
5) Incorporated businesses In a CCPC, active business income 1 is subject to preferential tax treatment (national average is 14% vs 50% personally) Allows for rapid accumulation of corporate wealth Investment income is subject to much higher rates High tax rates require a tax-efficient investment solution Corporate class funds can help 1 ABI up to $500K for each province except Manitoba ($450K) and Nova Scotia ($350K)
Corporate tax rates by province 1 Province ABI 2 Interest Income Dividends 3 Capital Gains British Columbia 13.0% 49.7% 38.3% 24.9% Alberta 13.5% 50.7% 38.3% 25.4% Saskatchewan 12.5% 50.7% 38.3% 25.4% Manitoba 10.5% 50.7% 38.3% 25.4% Ontario 15.0% 50.2% 38.3% 25.1% Quebec 18.5% 50.6% 38.3% 25.3% New Brunswick 14.5% 50.7% 38.3% 25.4% Nova Scotia 13.5% 54.7% 38.3% 27.4% PEI 15.0% 54.7% 38.3% 27.4% Newfoundland 13.5% 52.7% 38.3% 26.4% 1 Current to Jan. 1/16; 2 ABI up to $500K except Manitoba ($450K) and Nova Scotia ($350K); 3 Canadian dividends (eligible and non-eligible)
Taxation of interest income (B.C.) Interest Income $1,000 Corporate tax = $497 (49.7%) Refundable tax = $307 (30.7%) Corporation Retained earnings = $503 (50.3%) 1 Non-eligible dividend Dividend to shareholder ($810) 1 Personal tax = $329 (40.6%) After-tax cash = $481 (59.4%)
Taxation of dividend income (B.C.) Portfolio dividends $1,000 Corporate tax = $383 (38.3%) Refundable tax = $383 (38.3%) Corporation Retained earnings = $617 (61.7%) 1 Assumes eligible dividend Dividend to shareholder ($1,000) 1 Personal tax = $313 (31.3%) After-tax cash = $687 (68.7%)
Capital dividend account (CDA) Plus: Nontaxable portion of ECP Plus: Capital dividends received Plus: Net proceeds of a life insurance policy Plus: Nontaxable portion of capital gains CDA balance Less: Capital dividends paid
Taxation of capital gains (B.C.) Taxable gain $500 (50%) Non-taxable gain $500 (50%) Corporation Corporation - CDA Corporate tax = $249 (49.7%) Refundable tax = $154 (30.7%) Retained earnings = $251 (50.3%) Tax-free amount = $500 Dividend to shareholder ($405) 1 Capital dividend to shareholder Personal tax = $164 (40.6%) 1 Non-eligible dividend After-tax cash = $241 (59.4%) After-tax cash = $500
Combined (corporate + personal) tax rates by province 1 Province Interest Income Dividends 2 Capital Gains British Columbia 51.9% 31.3% 26.0% Alberta 52.2% 31.7% 26.1% Saskatchewan 52.1% 30.3% 26.0% Manitoba 56.6% 37.8% 28.3% Ontario 56.0% 39.3% 28.0% Quebec 55.0% 39.8% 27.5% New Brunswick 61.4% 43.8% 30.7% Nova Scotia 59.7% 41.6% 29.9% PEI 57.3% 34.2% 28.7% Newfoundland 52.7% 38.5% 26.4% 1 Rates current to Jan. 1/16; 2 Assumes Canadian eligible dividends
CI Corporate Class funds CI Corporate Class Ltd. Established in 1987 Over 65 Corporate Class funds across all asset types 1 Over $45 billion in AUM 1 T-Class and $US options available 1 Equity, balanced, income/specialty; current to September 2016
Have you had a chance to explore TREP.ci.com?
Thank You Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise indicated and except for returns for periods less than one year, the indicated rates of return are the historical annual compounded total returns including changes in security value. All performance data assume reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This presentation is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. All charts and illustrations in this guide are for illustrative purposes only; they are not intended to predict or project investment results. This report may contain forward-looking statements about CI funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. CI Investments and the CI Investments design are registered trademarks of CI Investments Inc. Published September 2016. FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO CLIENTS