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 Canada1
• 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
1Source: 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
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 programs1
Fund of fund?
Top fund (Corporate Class or trust?)
Underlying funds (Corporate Class or trust?)
Impacted by change2?
Portfolio Series Yes Trust Both (Corporate Class and trusts)
Possibly, yes3
Portfolio Select Series4 Yes Corporate Class Trust No
1For non-registered accounts; 2On rebalancing by asset allocation team; 3When rebalancing between fund classes; 4Managed 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 History1
2009 2010 2011 2012 2013 2014 2015 2016
Cdn. eligible dividends
0.28% 0.35% 0.42% 0.45% 0.44% 0.52% 0.43% 0.46%
Capital gain dividends
0% 0% 0% 0% 0% 0% 2.96% 3.59%
Total distribution
0.28 0.35 0.42 0.45 0.44 0.52 3.39% 4.05%
1Average distribution across all CI Corporate Class funds
A look at taxable distributions
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%
$100K corporate class portfolio; $460 Canadian eligible dividend; $3,590 capital gains dividend
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 gains1
• 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
1Assumes 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)
$573
Taxable? Yes
Indexed for inflation? Yes
Earliest eligibility age 65
Income reduction threshold (2016)
$73,756; full elimination at $119,512
• 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.
T-Class mutual funds
$0
$25,000
$50,000
$75,000
$100,000
$125,000
$150,000
Market Value:
$100,000
ACB:
$20,000
Capital
Gain
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 income1
• 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” donations2
Province Federal/ provincial credit3
After-tax cost : $1K donation3
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
1100% in year of death and year prior; 2Publicly-traded securities; 32016 rates for donations over $200. Ignores 33% federal rate for income > $200K
Donations “in-kind” – an example…
• Bill, a long-time corporate class investor, has benefited from tax-efficient 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 donation1 (at 40%) (B) $40,000
Net tax benefit (A+B) $20,000
Cost of donation $80,000
1From 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 donation1 (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 1From donation credit – 40% rate assumed
5) Incorporated businesses
• In a CCPC, active business income1 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
1ABI up to $500K for each province except Manitoba ($450K) and Nova Scotia ($350K)
Corporate tax rates by province1
Province ABI2 Interest Income Dividends3 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% 1Current to Jan. 1/16; 2ABI up to $500K except Manitoba ($450K) and Nova Scotia ($350K); 3Canadian dividends (eligible and non-eligible)
Taxation of interest income (B.C.)
Dividend to shareholder ($810)1
Personal tax = $329 (40.6%) After-tax cash = $481 (59.4%)
Corporation Corporate tax = $497 (49.7%)
Refundable tax = $307 (30.7%) Retained earnings = $503 (50.3%)
Interest Income
$1,000
1Non-eligible dividend
Taxation of dividend income (B.C.)
Dividend to shareholder ($1,000)1
Personal tax = $313 (31.3%) After-tax cash = $687 (68.7%)
Corporation Corporate tax = $383 (38.3%)
Refundable tax = $383 (38.3%) Retained earnings = $617 (61.7%)
Portfolio dividends
$1,000
1Assumes eligible dividend
Capital dividend account (CDA)
CDA balance
Plus: Non-taxable
portion of capital gains
Plus: Non-taxable
portion of ECP
Plus: Capital dividends received
Plus: Net proceeds of a life insurance
policy
Less: Capital dividends paid
Taxation of capital gains (B.C.)
Dividend to shareholder ($405)1
Personal tax = $164 (40.6%)
After-tax cash = $241 (59.4%)
Corporation
Corporate tax = $249 (49.7%)
Refundable tax = $154 (30.7%)
Retained earnings = $251 (50.3%)
Taxable gain
$500 (50%)
Capital dividend to shareholder
After-tax cash = $500
Corporation - CDA
Tax-free amount = $500
Non-taxable gain
$500 (50%)
1Non-eligible dividend
Combined (corporate + personal) tax rates by province1
Province Interest Income Dividends2 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% 1Rates current to Jan. 1/16; 2Assumes Canadian eligible dividends
CI Corporate Class funds
• CI Corporate Class Ltd. – Established in 1987
• Over 65 Corporate Class funds across all asset types1
• Over $45 billion in AUM1
• T-Class and $US options available
1Equity, balanced, income/specialty; current to September 2016
Thank You
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