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a) Mutual Fund Corporations
Investing within a mutual fund corporation allows you to switch your shares from one Class to another without realizing a taxable capital gain at the time of the switch. The switch is not considered to be a “disposition” or a taxable event-as it would be when switching your investment between individual mutual funds outside the mutual fund corporation. The term “Class” may be used to indicate when mutual funds are held within a mutual fund corporation.
The Benefits of Tax Deferral Can be Significant
When you keep your investments inside a mutual fund corporation and shelter them from capital gains taxation, you stand to enjoy valuable benefits. Below, the benefits of a mutual fund corporation are demonstrated using a hypothetical comparison between an investment held outside a mutual fund corporation and an investment of equal value held within a mutual fund corporation. This example assumes the investment doubles every six years (annual compound rate of return 12.25 percent) and a marginal tax rate of 40 percent is applied.
.. Outside a Mutual Fund Corporation
• Taxes are triggered by switching or redeeming an investment.
1 Taxes Owed was calculated as follows:
($20,000 - $10,000) x 50% (taxable capital gains) x 40% (marginal tax rate) = $2,000
.. Within a Mutual Fund Corporation
• Taking advantage of tax deferral.
In the previous hypothetical investment, it is assumed taxes are paid from the gains of the investment before reinvesting into another investment.
It is important to understand there are advantages as well as disadvantages associated with mutual fund corporations. You may be able to use a mutual fund corporation to defer capital gains taxes on non-registered investments, however any income or capital gains generated within a mutual fund corporation may still be taxable to you when paid out as distributions.
b) Mutual Fund Annuity
GIC Investment
Strategy Summary GIC Investment
An investor can buy a GIC and receive fully taxed income while trying to preserve capital.
.. Security of Income
Security of income is obtained through regular guaranteed interest payments, but only for the term of the deposit.
.. Safety of Capital
Capital is insured up to $60,000 with CDIC of Comp-Corp. Multiple deposits are often necessary.
.. Inflation Protection
There is no inflation protection unless income is reduced and partially reinvested to compensate for inflation.
.. Diversification
There is no diversification of asset classes and no liquidity.
.. Tax Advantages
There are no tax advantages as interest income is fully taxed.
c) Mutual Fund and Annuity
Strategy Summary Mutual Fund and Annuity
An investor can buy a mutual fund and a prescribed annuity and receive tax reduced income from the annuity while the tax-deferred mutual fund grows to replace or enhance capital.
.. Security of Income
Security of income is obtained through regular guaranteed annuity payments for 10 years.
.. Safety of Capital
Safety of capital is provided through the long-term fixed interest rate of an annuity, which also buffers against interest fluctuations. Comp-Corp insures income up to $2,000 per month.
.. Inflation Protection
Inflation protection is obtained through the mutual fund portion that grows to replace the annuity over the 10-year period.
.. Diversification
Diversification is maintained by having a balance between fixed income and deferred growth. The deferred growth can be international and will allow for optional asset allocation planning with a minimum of risk due to the long-term nature of the strategy.
.. Tax Advantages
Tax advantages are achieved through the following:
• Conversion of tax-free capital to income by the prescribed annuity reduces the taxable interest portion.
• Tax Deferral is achieved through the mutual fund growth being taxed upon withdrawal at the end of the strategy.
• Tax Elimination enhances the strategy through the 50% tax-free capital gain portion.
• Total Tax Savings over the life of the strategy are projected to be $38,720 versus an interest investment.
Annual Income and Tax Comparison
This report illustrated the effect of different compound interest rates, which are not guaranteed.
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