Capital class funds

Q – I have recently learned about corporate class mutual funds. The advantages that these funds are described to have are: (1) they avoid taxable distributions; and (2) can be transferred between investment funds without triggering a capital disposition.

I would like to invest in mutual funds that do not have an annual distribution and am wondering if the above statements are true. If so, which corporate class mutual funds would you recommend? – N.S.

A – The idea is no means new, in fact it has been around for several years. There is a section on these funds in my 2002 Buyer’s Guide to Mutual Funds.

The concept is simple. A fund company creates an umbrella fund, within which it offers several individual pools, known variously as “classes” or “sector shares”. The pools are essentially mini-funds. Money can be moved among these classes without triggering capital gains liability because the transaction takes place under the umbrella. Only when you cash out of the parent fund do profits become taxable.

There are many cpanies that offer these “umbrella” funds under different names. They include Mackenzie, AGF, CI, Clarington, AIM, Synergy, and more.

In some cases, the “classes” co-exist with stand-alone funds with the same mandate and manager. Such funds do not share the tax protection. You may find, however, that the returns between two such similar funds vary. See how closely the “class” tracks the stand-alone fund.

These umbrella funds are not useful within a registered plan since no tax liabilities arise in such cases.

As to which to choose, that comes down to a selection of the type of funds you want. Make that decision first and then check to see which company offers the most attractive mix under an umbrella structure. – G.P.