Series T mutual funds provide significant tax benefits.
Many people are looking for ways to generate tax-efficient income in retirement. Some also want to create a charitable legacy by donating a substantial gift to a favourite cause. Series T mutual funds can help achieve both goals through a single investment solution.
What sets Series T mutual funds apart is that they distribute mostly return of capital (ROC) for as long as they can, keeping almost all investment growth within the fund. ROC is the principal you originally invested, which means you receive it tax-free. In addition, because ROC doesn’t count as taxable income, it doesn’t affect income-tested benefits such as Old Age Security (OAS) and the Age Credit.
After all the original investment has been distributed, the other ROC distributions from a Series T mutual fund are taxed as capital gains. That’s still attractive from a tax perspective, because only 50 per cent of the capital gains you earn are taxable at your marginal tax rate. However, when you begin to receive it, this income may start to affect money received from OAS.
One option to avoid tax on the money that remains in the Series T mutual fund is to donate some of it to charity. No capital gains tax is due when securities are donated directly to a registered charity while the donor is alive, and the resulting charitable donation receipt can offset the capital gains tax that results from cashing out the rest of the investment.
This strategy provides both a period of tax-efficient income and the opportunity to make a sizeable donation to charity that reduces or eliminates taxes that would otherwise have to be paid.
Speak with your advisor
Your advisor can help you decide whether this strategy makes sense for you. In general, it’s worth considering if you need a source of tax-efficient income from investments in a non-registered account and are interested in minimizing taxes so you can maximize a philanthropic donation. Ask your advisor to explain the pros and cons of incorporating Series T mutual funds into your financial plan.