As the RRSP season approaches I start scooping new stuff about Mutual Funds and other investments .
T-series funds made me inquisitive. Little research revealed that these are tax efficient income generating funds which distribute a percentage of annualized distribution. Sometimes but often they also return part of capital which is not immidiately taxed . Tax is deferred until units are sold. However, the Adjusted cost base ( ACB ) is reduced by such return of capital (ROC)
Here is useful commentary on T -series in an article published in Toronto Star by Rudy Luukko of Morning Star Canada.
The problem: You're a long-term investor who likes the higher growth potential of equity and balanced funds, but you need cash every month, more than the fund can pay out in income and capital gains. The solution: T-series funds.
They're designed for non-registered accounts and are becoming an increasingly common purchase option.
The "T" is shorthand for "tax," but has the extended meaning of "tax efficiency."
When funds distribute interest, dividends, capital gains or other forms of income at year-end or during the course of a year, the payouts are taxable in the year they are received.
What sets T-series funds apart is that they also make regular distributions, usually monthly, of return of capital. In other words, you are getting back some of your original investment each month.
This type of distribution is not usually taxable in the current year. Tax does eventually become payable, because each return of capital payout reduces the adjusted cost base of your fund holding.
Once the adjusted cost base of your fund reaches zero, any further distributions will be taxed. Even then, they'll be treated as capital gains, which are taxed at lower rates than fully taxable interest.
Because T-series distributions generally aren't immediately taxable, and are treated favourably when they eventually are, they are said to be tax-efficient. That's a plus for investors of any age.
"You're never too young to think about tax efficiency," says Jennifer Ball, senior vice-president of marketing at Franklin Templeton. "The more the deferral you can do early on, the better."
Franklin Templeton, for one, has offered T-series funds since 2002. This month, the fund company upped the ante, launching T-series versions of 14 corporate-class funds.
Creating T-series funds as part of a corporate-class structure has the added benefit of enabling investors to switch between one asset class and another without triggering a capital gain.
Payout rates vary for T-series funds. Take, for example, the new tax-class mutual funds that will go on sale on Nov. 1 at Sarbit Asset Management Inc. Investors will have a choice of payout rates, either 4 per cent, 6 per cent or 8 per cent of the funds' initial net asset value per unit, paid monthly. Most of these payouts will consist of return of capital.
Depending on the payout rate of a T-series fund, the return of capital distributions could take up all or most of the expected returns of the fund. That's by design at Franklin Templeton. The payout rates – 8 per cent for equity funds and 6 per cent for most balanced funds – are intended to enable the investor to maintain the original dollar amount invested.
There's no assurance that the original investment in a T-series fund won't be depleted, especially if the new fund starts off with a losing year. The payout rates are subject to change.
Investors should also bear in mind that a T-series mutual fund still must make sense as an investment. If the funds' returns are poor, this will result in smaller monthly payouts.
But, assuming the underlying investment is competently managed and reasonably priced in terms of fees and expenses, T-series funds have something to offer in flexibility and convenience to meet changing needs.
For instance, if your need for monthly cash flow is only temporary, you can switch back later to the version of the fund that doesn't make return of capital payouts.
Rudy Luukko, rudy.luukko@morningstar.com, is investment funds editor of Morningstar Canada.
T-series funds made me inquisitive. Little research revealed that these are tax efficient income generating funds which distribute a percentage of annualized distribution. Sometimes but often they also return part of capital which is not immidiately taxed . Tax is deferred until units are sold. However, the Adjusted cost base ( ACB ) is reduced by such return of capital (ROC)
Here is useful commentary on T -series in an article published in Toronto Star by Rudy Luukko of Morning Star Canada.
The problem: You're a long-term investor who likes the higher growth potential of equity and balanced funds, but you need cash every month, more than the fund can pay out in income and capital gains. The solution: T-series funds.
They're designed for non-registered accounts and are becoming an increasingly common purchase option.
The "T" is shorthand for "tax," but has the extended meaning of "tax efficiency."
When funds distribute interest, dividends, capital gains or other forms of income at year-end or during the course of a year, the payouts are taxable in the year they are received.
What sets T-series funds apart is that they also make regular distributions, usually monthly, of return of capital. In other words, you are getting back some of your original investment each month.
This type of distribution is not usually taxable in the current year. Tax does eventually become payable, because each return of capital payout reduces the adjusted cost base of your fund holding.
Once the adjusted cost base of your fund reaches zero, any further distributions will be taxed. Even then, they'll be treated as capital gains, which are taxed at lower rates than fully taxable interest.
Because T-series distributions generally aren't immediately taxable, and are treated favourably when they eventually are, they are said to be tax-efficient. That's a plus for investors of any age.
"You're never too young to think about tax efficiency," says Jennifer Ball, senior vice-president of marketing at Franklin Templeton. "The more the deferral you can do early on, the better."
Franklin Templeton, for one, has offered T-series funds since 2002. This month, the fund company upped the ante, launching T-series versions of 14 corporate-class funds.
Creating T-series funds as part of a corporate-class structure has the added benefit of enabling investors to switch between one asset class and another without triggering a capital gain.
Payout rates vary for T-series funds. Take, for example, the new tax-class mutual funds that will go on sale on Nov. 1 at Sarbit Asset Management Inc. Investors will have a choice of payout rates, either 4 per cent, 6 per cent or 8 per cent of the funds' initial net asset value per unit, paid monthly. Most of these payouts will consist of return of capital.
Depending on the payout rate of a T-series fund, the return of capital distributions could take up all or most of the expected returns of the fund. That's by design at Franklin Templeton. The payout rates – 8 per cent for equity funds and 6 per cent for most balanced funds – are intended to enable the investor to maintain the original dollar amount invested.
There's no assurance that the original investment in a T-series fund won't be depleted, especially if the new fund starts off with a losing year. The payout rates are subject to change.
Investors should also bear in mind that a T-series mutual fund still must make sense as an investment. If the funds' returns are poor, this will result in smaller monthly payouts.
But, assuming the underlying investment is competently managed and reasonably priced in terms of fees and expenses, T-series funds have something to offer in flexibility and convenience to meet changing needs.
For instance, if your need for monthly cash flow is only temporary, you can switch back later to the version of the fund that doesn't make return of capital payouts.
Rudy Luukko, rudy.luukko@morningstar.com, is investment funds editor of Morningstar Canada.
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