In March, the 2016 Federal Budget announced that the tax-deferred switching advantage of corporate class funds would be ending this year. Originally, the budget called for the regulation change to take effect on October 1, 2016; however, the regulation change will now take effect on January 1, 2017.
Until this year, an investor was able to use this fund structure in a non-registered account and switch from one corporate class fund to another – within the same fund company – on a tax-deferred basis. For example, an investor could switch from ABC Canadian Equity Fund Corp. Class to ABC Global Equity Fund Corp. Class without incurring a capital gain. With a regular fund structure, the investor would normally pay capital gains taxes on the profit incurred on the fund being sold.
While this is unfortunate news, corporate class funds will continue to offer the advantage of tax-efficient distributions. These funds will restructure any income distribution (including interest income) in the form of capital gains or dividends, and are taxed at a lower rate than interest income.
Since the announcement was made, we have reviewed and will continue to review all non-registered portfolios at client meetings for any changes we would like to make before the rule change takes place. If you have a non-registered account with us and would like to see if we should act on your portfolio before the end of the year, please do not hesitate to contact us.