Toronto Star Article

Fund family offers tax-deferral options

By Rudy Luukko

If there's a way to legally avoid or defer paying taxes on mutual funds, you can count on Jim Hunter – veteran accountant, fund company executive and financial engineer – to find it.   While CEO of Mackenzie Financial Corp., for instance, he led the team in the late 1990s that created RRSP clone funds, which adroitly sidestepped the former foreign content quotas for registered plans. 

Now, as the founder of the Toronto-based NexGen Financial Limited Partnership, which launched an innovative family of funds in September, the 54-year-old Hunter is at it again.  He has invented a fund structure that's designed to break new ground in tax-efficient investing. He has even applied for patent protection from Ottawa. Hunter says minimizing taxes will become increasingly important as affluent baby boomers accumulate a growing amount of their retirement nest-eggs in fully taxable accounts. While mutual funds offer various advantages such as diversification, professional management and liquidity, tax efficiency isn't necessarily one of them.

"The traditional structure was not designed to be tax-efficient," according to Hunter. "It was designed to capture the taxable income and push the problem out to individual investors."  Enter NexGen's 13 "tax-managed" funds, and a corresponding set of 13 for registered accounts. All but two of the funds will be managed externally, by one or both of two Toronto firms, J. Zechner Associates Inc. and Robert McWhirter's Selective Asset Management Inc.
   
Currently on sale in the four largest provinces, the funds are designed to place investors in registered accounts and  non-registered accounts in separate investment pools. Beyond that, the corporate-class funds also segment investors according to their tax needs.  Like other corporate-class structures offered by most major fund companies, NexGen funds allow investors to switch from one asset class to another without triggering a tax event.

What's different about NexGen is that investors can also choose what amounts to a class within a class. For each of the corporate-class funds other than the money-market class, investors have a choice of four tax-class options. Another neat feature is that investors can switch from one tax class to another as their situations change.

There's a capital-gains class whose annual distributions consist primarily of capital gains. Among investors for whom this class is suitable are retirees who want to minimize the impact of investment income on Old Age Security clawbacks. Parents who wish to split income could buy a capital-gains oriented fund for their children, which would be tax effective because capital gains would not be attributable back to the parent. Also, a fund distributing capital gains would work well for an investor who has allowable capital losses that haven't been used.

A second NexGen class is the return-of-capital class, which is designed to pay non-taxable monthly distributions. This class is suitable for investors who need regular cash flow but want to defer income taxes or stay within a lower tax bracket. 

Thirdly, NexGen's dividend-tax-credit class seeks to pay monthly distributions, but in the form of Canadian dividends. This class is a good fit for investors who want to take advantage of dividend-tax credits which, in Ontario, render the first $46,000 in dividends tax-free if the investor has no other income.

Finally, NexGen's compound-growth class is designed to minimize and defer all distributions. It's the best choice for long-term investors who require no current income.

Though I've heard NexGen described as a fund family that only an accountant could love, individual investors also have reason to show affection for tax-saving initiatives such as NexGen's. After all, it's not ultimately what you make that counts. It's what you are able to keep after taxes take their toll. 

"Taxes are as big an issue as MERs (management expense ratios) in terms of percentage of total return," Hunter says. "Tax deferral is going to be critical in terms of how long assets last during retirement."

Rudy Luukko is investment funds editor of Morningstar Canada. He can be reached at rudy.luukko @ morningstar.com by email.