Mutual Fund Corporations versus Mutual Fund Trusts


Most mutual funds are set up in a trust structure, but for those of you who invest in mutual funds AND have non-registered investment accounts, you may want to look into Mutual Fund Corporations because they offer some interesting tax advantages. First off, this may seem like a technical, high-brow concept – but it is not that complicated in actuality.  I’m going to give you the rundown first and then explain the how and why.

Mutual_fund.jpgA mutual fund trust and a mutual fund corporation behave and act in almost an identical fashion – each is just an investment portfolio managed on the behalf of many investors who pool their money together and give it to a mutual fund company.  In fact more and more mutual fund companies are offering the same mutual fund as both a trust and as a corporation.  The difference comes in the added tax advantages afforded by the mutual fund when setup as a mutual fund corporation.  In essence, it allows for you to switch between funds of the same mutual fund company (as long as all the fund you are switching OUT of and the fund you are switching INTO are both offered as mutual fund corporations) without triggering any capital gains.

As you may know, if you have a gain on an investment and it is held in a taxable account, when you sell it you are triggering tax in the form of capital gains.  Normally, when you switch between mutual funds the fund that you are redeeming units from is subject to capital gains.  The mutual fund corporation avoids this tax event. Before I get into the how, let me first reiterate that the deferral of tax ultimately increases your investment returns over time and the longer you can defer the payment of taxes, the faster your investments grow.

Okay, so let’s explain how this is circumvented: The mutual fund company will actually set up a corporation and instead of issuing UNITS like with a mutual fund trust, they issue shares in the corporation.  Each mutual fund that a mutual fund company operates within the mutual fund corporation has its own class of shares. You can consider mutual fund corporation shares and mutual fund trust units to look and act the same way (especially on your client statement) but the structural difference is important for tax purposes.  When you switch between funds (again, as long as the fund you are switching out of and into are both offered as mutual fund corporations) you are actually exchanging one class of shares in the corporation for another.

With the traditional mutual fund trust – each fund is set up as its own taxable entity.  With a mutual fund corporation with  different classes of shares (each representing a distinct mutual fund) the OVERALL corporation is its own taxable entity. So as long as you are switching between "shares" (funds) within the SAME mutual fund corporation, you will not trigger any capital gains!

You should note that shares in mutual fund corporations carry additional expenses to set up and maintain these structures in the neighbourhood of around 30 basis points – in other words their MER’s are higher by about 0.3% (give or take). 

One way to easily spot whether a mutual fund is set up as a mutual fund trust versus a mutual fund corporation is in the name.  A mutual fund corporation’s funds will have the word CLASS at the end of the name.  For example the Mackenzie Maxxum Dividend Fund is also available as the Mackenzie Maxxum Dividend Class.

 

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Comments
  • Money Dave

    Another great article Preet. You’ve made it very easy to understand what a corporate class mutual fund is now. Thank you so much.

    Dave