Tax-efficient Solutions

Series T

Maybe you're approaching retirement. Maybe you've already left work. Or maybe you've accumulated a pool of assets and want to access a regular stream of money to help finance the "extras" in your life. When you're ready to draw a regular income from your investments, you have several choices.

Series T is a structure that is added to existing funds to provide tax-efficient cash flow from distributions paid on a monthly basis. When you invest in a Series T fund, depending on the fund itself, all or a significant portion of the distribution you receive is likely to be classified as tax-free "return of capital" payments, while the bulk of your savings can continue to grow in a diversified mutual fund.

Series T funds can provide the following features and benefits:

  • Regular monthly income – Distributions are set at the beginning of each year so you know exactly how much you'll receive each month
  • Sustainable cash flow – The target annual payout resets each year to help protect your investment and enable it to support your long-term cash flow needs
  • Tax efficiency – An attractive blend of tax-efficient income and tax-deferral benefits, as well as the potential to reduce government clawbacks
  • Potential investment growth – You remain invested in your mutual fund to provide for continued investment growth
  • Customizable cash flows – The customizable cash flow option allows you to customize your monthly cash flow up to a fund's maximum payout rate of 6 or 8 per cent

Additional Resources


Corporate Classes

Understand the basics Corporate Class and Corporate Class Distributions

Additional Resources

Two types of structures behind a Mutual Fund

Manulife Corporate Classes are similar to trust funds. They are professionally managed investments that pool the money from many different investors to invest in a diversified portfolio of stocks, bonds and other types of investments.

Mutual Fund Trust

"Traditional"

Single fund, taxed on an individual basis

Issues units to investors

Income distributions: Net interest, dividends and capital gains

Mutual Fund Corporation

"Corporate Class"

Hold different funds, taxed under the entire corporation

Issues shares to investors

Income distributions: Canadian and capital gains dividends – most tax-efficient sources of income.


Differences in trusts and Corporate Class Distributions

Mutual Fund Trust

Dividends

Return of Capital

Distribution frequency

Anywhere from monthly to Annually

Income

Capital Gains

(taxed based on which of these forms it consists of)

Mutual Fund Corporation

Canadian Dividends

The corporation can only pay out the income it receives as Canadian Dividends. Distributed on year end April 30th.

Distribution frequency

Annually

Capital Gains

These don't happen every year. These are paid out after year end on a fund by fund basis. Distributed after year end (April 30th within 60 days).


What is a mutual fund distribution?

A mutual fund distribution is the net investment income earned by a mutual fund and is distributed to investors on an annual basis.

When does it get paid to the investor?

Corporate Class Distributions are paid out on year end - April 30th annually and are allocated to investors based on the number of units they own of the fund on the day prior to the distribution date.

What can an investor do with the distribution?

Take it as a cash payment

Reinvest by purchasing additional units

Why do investors pay the tax instead of the mutual fund?

Mutual funds are generally taxed at a rate equivalent or close to an investors’ highest personal tax rate. If the mutual fund doesn’t distribute the investment income, then it will pay the highest tax rate on the lumpsum. By distributing the investment income to investors, the income is taxed at an investors’ marginal tax rate (for non-registered accounts) or none for registered accounts. Lowering the taxes paid by a mutual fund means more income for the investor and they can benefit from compound growth.

How does the mutual fund distribution impact the pricing (Net asset value) of a mutual fund?

After Distributions are paid out, the fund’s Net asset value (NAV) per share is reduced because it’s holding less assets. The value of the fund would drop by the same amount that was paid out in the distributions.*

Example: 5% distribution for a fund with a $10 NAV/unit

If the distribution is paid in cash:

Pre-distribution value of investment Distribution Cash paid to investor Post-distribution value of investment
1,000 units @ $10 = $10,000 1,000 units @ $0.50 = $500 $500 1,000 units @ $9.50 = $9,500

If the distribution is reinvested:

Pre-distribution value of investment Distribution Reinvested distribution Post-distribution value of investment
1,000 units @ $10 = $10,000 1,000 units @ $0.50 = $500 $500/$9.50 = 52.6316 units  1,052.6316 units @ $9.50 = $10,000

The investor’s portfolio is the same before and after the distribution in both examples. One has mutual fund units worth $9,500 and cash of $500 for a total value of $10,000 while other has mutual fund units worth $10,000.


Suitable investors for Corporate Class

High net worth

High income earners or high net worth.

RRSP Contribution Limitations

participation in defined benefit pension plans or maximized annual registered plan and have additional funds to invest.

Small business owners or executives

those looking for alternative to individual pension plan.

Taxable interest income

if they have a high percentage of portfolio returns that are taxed as interest income.

Seniors

corporate class combined with tax efficient Series T cash flow can help reduce or eliminate OAS clawback.

* Please note, for ETFs, a capital gain distribution does not reduce the NAV.

The payment of distributions is not guaranteed and may fluctuate. If distributions paid by the fund are greater than the performance of the fund, then your original investment will shrink. Distributions should not be confused with a fund’s performance, rate of return, or yield. You may also receive return of capital distributions from a fund. Please consult with your tax advisor regarding the tax implications of receiving distributions. See the fund facts as well as the prospectus for more information on a fund’s distributions policy.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.