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Budget 2017: The final nail in the corporate class coffin?

What should you do if managers start merging away their corporate class funds?

Christopher Davis 23 March, 2017 | 5:00PM
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In its 2016 federal budget, the Liberal government enacted a measure that abolished the ability for mutual fund investors to switch money tax-free from one corporate class fund to another within a fund company's corporate structure.

At the time many fund industry observers – ourselves included – believed this would sound the death knell for corporate class funds, since they would no longer have this tax benefit over mutual funds that are structured as trusts.

That didn't really happen. Most corporate class funds are still available, and in fact, Mackenzie Investments launched corporate class versions of several of its funds late last year. Despite the loss of tax-free switching among funds, corporate class funds still offer some tax advantages – notably the likelihood of reduced taxable distributions.

However, with the latest federal budget released on March 22, the government has added extra incentive for fund companies to close these funds once and for all. Until now fund companies could not merge a mutual fund corporation into a trust without triggering a taxable event. The government is now proposing to change that, and this measure may push fund companies to merge away their corporate class funds.

So what should you do if that happens? In most cases, nothing. If you hold corporate class funds keep an eye on what your fund company decides, for sure, but in all likelihood if your fund is to be merged, it will go into the trust version of the same fund. So if the mandate fits within your investment strategy, not much will change for you.

However, if you hold the fund outside of a registered plan such as an RRSP or a TFSA, and their tax-efficient distributions are central to your tax planning, you may want to look at some alternatives. Talk to your financial advisor to see what's best for you.

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About Author

Christopher Davis

Christopher Davis  Christopher Davis is Director of Manager Research at Morningstar Canada.

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