Understanding tax-advantaged funds

Are you looking for a method of reducing taxes on your non-registered investments? Are you concerned about the effect taxes have on long-term investment results?

Tax-advantaged funds offer investors a potentially tax-effective way to structure non-registered portfolios. Reducing the taxes on growth can result in greater compounding, and – over time – improve long-term performance.

These funds are based on a corporate class structure, which means all the funds in the family are classes of shares and housed within one corporation. The corporation is treated as a single legal entity for tax purposes, and investor diversification is achieved by holding the different classes of shares – each of which represents a single mandate or objective.

Understanding the tax advantages

By building a portfolio within a mutual fund corporation, investors may benefit from three potential tax advantages:

Tax-deferred switching or rebalancing

The first advantage is evident when investors rebalance their holdings. Rebalancing is a vital discipline that ensures a portfolio retains its original risk/return characteristics. When done regularly, investors tend to sell investments in asset classes that have outperformed - and acquire investments that may be at the opposite end of their valuation cycles. Using conventional trust structures, immediate taxable gains and losses result from this buying and selling activity. Rebalancing within a tax-advantaged structure means capital gains and losses to the investor are not immediately triggered.

Please note: An increase in the volume of switching activity may increase or accelerate capital gains earned in the classes, potentially increasing capital gains or ordinary dividends paid to investors.

Potentially lower distributions in any given year

One of the most obvious benefits of investing in mutual funds is the professional talent you hire to manage your account. When a fund’s investment management buys and sells positions in individual securities, the result is capital gains and losses. Mutual funds also earn interest income and incur expenses.

A corporate structure pools all gains with losses, and offsets interest income with expenses, to potentially reduce the taxable distributions to investors. This could mean lower taxable income to investors in any given year than if the same investments had been held outside of the corporate structure.

Tax-effective income

Tax-advantaged funds can help lower distributions; however, distributions still may occur. The structure of a tax-advantaged fund family ensures that any distributions that are paid come in the best way possible for taxation purposes – as capital gain or ordinary dividend distributions. This means reduced taxable income, allowing investors to keep more of what they earn.

An exciting opportunity

The benefits of tax-advantaged funds can provide a tax-preferred way to build a non-registered portfolio. If you have tax concerns, and hold a portfolio of long-term, non-registered investments, ask your financial security and investment representative if these funds are right for you. You may be surprised at the difference they can make to your long-term investment success.


This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.