They say in life, there are two sure things: death and taxes. If there is
one thing that Canadian governments are particularly astute at, it is
raising taxes. This holds true whether you are talking about employment
income or investment income. In recent years, the federal government has
taken many steps to reduce the ability of investors to reduce their taxes
by making changes to corporate class mutual funds. But some fund companies
are still fighting the good tax fight, including global investment manager
Natixis Investment Management
which has an innovative structure to help lower taxes for Canadian
Changes to the class structure of mutual funds in 2018 included eliminating
the ability to use derivative or other instruments to change the tax
characteristics of investment income, and the elimination of the ability to
switch on a tax-deferred basis within mutual funds in the same corporate
structure. The result was the same, meaning higher taxes for investors.
Natixis Investment Management, a global investment manager, with offices in more than 30 offices around
the world and nearly a trillion dollars in assets under management, offers
tax-weary investors some help with its unique process. The process was
created by the late Jim Hunter, the highly regarded mutual fund pioneer
known for many innovations in the Canadian mutual fund business, including
the creation of “clone funds,” and was behind the first income-conversion
In 2005, Mr. Hunter left his position as chairman of Mackenzie Investments
to launch NexGen Funds, which was acquired by Natixis in 2014. At NexGen,
Mr. Hunter created a structure that allowed investors to choose the type of
investment income they would like to receive, with the choices being
regular income, dividends, capital gain, or return of capital. Within the
corporate structure at Natixis, there are four different tax classes:
Registered; Return of Capital; Compound Growth; and Dividend.
All income earned by all the funds in the structure are pooled and then
separated by tax treatment. The income that is taxed at the highest level
is directed towards the Registered class. Examples include interest income
and foreign income. Because the Registered class is designed to be held in
a tax-deferred plan, the type of income and its tax rate is irrelevant, as
investors do not pay any tax on income earned until it is removed from the
plan upon withdrawal.
Dividend income is funneled to the Dividend class of units, and investors
receive a fixed monthly distribution that is designed to be treated as
eligible Canadian dividends.
The Compound Growth class is not expected to receive any distributions, and
all gains will be treated as capital gains when sold.
The Return of Capital class will pay out a regular monthly distribution
that will be treated as return of capital. A return of capital distribution
is not taxed in the year it is received. Instead, it reduces the adjusted
cost base of the investment, and any difference between the sale price and
adjusted cost base will be treated as a capital gain when the investment is
The difference in tax rates is not unimportant. For example, in 2018 the
highest marginal tax rate for investment income in Ontario was 53.53%
compared with 26.77% for capital gains. Clearly, for an investor, it is
more beneficial to have more income in the form of capital gains than from
regular income. The table below highlights the combined tax rates for
various types of income from a few provinces in Canada.
It really is an innovative approach, and so far, it has not been copied by
any of its competitors. The main reason is that the firm has applied for a
patent, which has not yet been approved. However, while the patent is
pending, no one can copy the process. Whether or not the patent will be
approved is still up for debate, and it is expected that if it is not
awarded, competitors will step in to copy the structure. Until then,
Natixis can try to benefit from its first-mover advantage
Before Natixis took over NexGen, I really wasn’t really a fan of the funds,
to be honest. The main reason was that in my opinion, the relatively poor
investment quality of most of the NexGen funds did not make up for the
better tax treatment. However, since the takeover, many new managers have
been brought into the program, and the investment quality has improved
Under Natixis, high-quality managers like J. Zechner Associates, Ziegler
Capital, Loomis Sayles, and JP Morgan Asset Management are now available in
this more favourable tax structure. This means that you don’t necessarily
have to sacrifice investment quality for a more favourable tax treatment.
For investors looking to reduce their tax burden, it may be worth taking a
look at the Natixis Class Funds.
Dave Paterson, CFA, is the Director of Research, Investment Funds for
D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due
diligence on a variety of investment products.
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