Tax-efficient and stable investment income options
Reviewing the merits of Series T mutual funds.
In this era of low interest rates and rising inflation, it can be challenging for investors who expect a steady stream of income from their investments. With limited returns from GIC’s and other fixed income vehicles, another option to consider may be Series T mutual funds.
Series T mutual funds are designed to provide monthly cash flow and can play an important role in a diversified portfolio where investors are looking for stability and tax efficiencies.
Benefits of Series T
- The investor knows how much money they will receive each month.
- The annual payout is reviewed each year to help support long-term cashflow needs.
Offers an attractive blend of tax strategies to help achieve investment goals, including retirement and philanthropy.
Most of the monthly distributions are paid out as a return of capital, and because they are classed as part of the investor’s principal, they are tax free. When the full amount of the initial investment has been paid out tax free, the remainder is taxed as capital gains. This is still a tax efficient form of income, with only 50 per cent of capital gains taxed, whereas interest income is taxed at a 100 per cent inclusion rate.
An example
An investor puts $200,000 into a Series T fund designed to offer a six per cent annual cashflow and a six per cent annual return. The number of units purchased is 20,000, with a net asset value of $10 per unit. From the predetermined six percent annual cashflow, $12,000 is generated and split into monthly payments of $1,000.
Assuming a 40 per cent marginal tax rate, an investor could expect to receive approximately $11,400 annually in after-tax income for 19 years – an amount of $216,000 after-tax.1 At this point, the $200,000 investment market value is subject to tax considerations.
Tax strategies
If the investor was to cash out the full $200,000 investment, that would trigger capital gains tax of approximately $40,000 based on a 40 per cent marginal tax bracket. However, there are three other tax friendly options to consider:
- Continue with a reduced cashflow: The $1,000 monthly income payments continue but they will be taxed for capital gains. The additional taxes on the $12,000 annual payout would be about $2,100.
- Move the Series-T fund assets to a different class of the same fund: The cash flow will stop, but taxes will be deferred until fund units are sold triggering a capital gain. Ultimately, the assets will face a deemed disposition when the holder passes away.
- Make a charitable donation: By donating $67,000, the investor would receive a charitable donation credit in the amount of approximately $26,800 (depending on the province). The remaining $133,000 could be cashed out of the fund and the tax credit would offset the approximately $26,600 in capital gains tax owing on the sale.
Manulife Investment Management Series T funds are carefully selected for their strong track record of providing a stable income stream, giving investors the opportunity to draw income for a significant period of time. For more information about Series T, check out this online brochure, or watch these videos:
[1] Assumes a marginal tax rate of 40 per cent, and taxable distributions of $1,500 per year and Return of Capital (ROC) distributions of $10,500 per year.