Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA, CFP

Associate Portfolio Manager
  • T613.237.5544 x 313
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1

The Cost of “Tax-Free” Corporate Class Fund Switches

A mutual fund can be structured as a trust or as a corporation. While most mutual funds in Canada are structured as trusts, it is common for financial advisors to pitch their clients on the merits of corporate class funds. When mutual funds are structured as trusts, each fund is its own separate entity. When mutual fund families are structured as corporations, each fund in the family is a class of shares within a single corporation. The pitch for corporate class funds is that within a fund family the investor is free to move their capital across the various mutual funds without triggering a taxable disposition. The disposition will only occur when the investor eventually sells shares of the corporation, leaving the fund family altogether. Although the idea of tax-deferred switching between funds is a good sales pitch, the wise investor will look deeper.

Mutual fund investors realize capital gains in two ways:

When the fund manager sells a security held by the fund at a gain, it is distributed to unit holders as a capital gains distribution at the end of the year (type 1 gains);

When a mutual fund investor sells units in a mutual fund for more than they originally bought them for, they realize a capital gain (type 2 gain).

Mutual funds use something called the capital gain refund mechanism to reduce the potential for double taxation of unit holders. It has the intention of reducing capital gains distributions (type 1 gains) by the amount of gains realized by the investors who sold their holdings of the fund (type 2 gains). Under the trust structure, any time a unit holder moves out of a fund, their realized gains (type 2 gains) will reduce the amount of capital gains distributed to remaining unit holders (type 1 gains); in a mutual fund trust type 2 gains reduce type 1 gains. Under the corporate class structure, unit holders can switch between funds without having to sell, eliminating much of the type 2 gains. Reduced type 2 gains increases the amount of type 1 gains that must be distributed to unit holders at year end.

The ability to switch between funds without incurring taxes sounds good, but it is ultimately just a gimmick shifting how and to who capital gains will flow. Corporate class funds create an environment where type 2 gains are being deferred at the cost of higher type 1 gains.

This blog post is based on a white paper from Dimensional Fund Advisors, download the full paper here.

By: Ben Felix | 0 comments

Investing with the Big Canadian Bank Brokerages

As an independent wealth management firm, there is no question that some of PWL Capital’s most aggressive competition comes from the Big Bank brokerage houses: TD Waterhouse, BMO Nesbitt Burns, CIBC Woodgundy, Scotia McLeod, and RBC Dominion Securities. This competition has become increasingly noticeable as the bank brokerages strategically advance their offering into the realm of wealth management. With their established brands and elitist feel, it is obvious why high net worth investors can be attracted to the perceived prestige and safety of dealing with the big name institutions. There may be some very good people giving wealth management advice within the bank owned brokerages, but there are inherent problems with their structure which is to the detriment of their clients.

One of the most obvious issues is conflicts of interest. Conflicts arise due to the integrated nature of the banks’ operations; if the institution decides that there is a product or stock that needs to be moved, one of the most accessible sales conduits is the clients of the bank-owned brokerage. Sales pressure from within the organizations has the potential to result in investment recommendations that may not be in the best interest of the clients. The core function of the bank-owned brokerages is not wealth management; they are sales channels and profitability centers serving the shareholders of the banks.

Beyond the conflicts of interest, the bank brokerages are hindered by their lack of a unified investment philosophy. At any of the bank brokerages there will be a large number of portfolio managers and investment advisors each implementing their own strategies. Some may use the bank’s proprietary mutual funds, some may pick individual stocks, while others may use the bank’s wrap account program. There may even be portfolio managers within the bank brokerages that use low-cost index funds, but without a unified philosophy guiding their investment decisions, advisors at the bank brokerages are more likely to recommend the flavour of the month mutual fund or the latest hot stock issue to their clients.

Dealing with an independent advisor-owned firm eliminates these issues. A firm like PWL Capital is designed to avoid conflicts of interest. We are paid by our clients, and there is no pressure to push any stock, mutual fund, or ETF at any given time to any given party. Under our structure, our only goals are to grow the assets of our clients while providing the ongoing financial planning advice that helps us maintain lasting relationships. With a unified, science-based, firm-wide investment philosophy, there is never a question of whether or not we should be using the latest financial innovation or buying the most exciting new stock in our client portfolios. Our disciplined approach is guided by academic research and evidence from the history of markets.

Despite PWL Capital’s intellectual integrity and dedication to doing what is right for clients, and the reasonably obvious profit-seeking nature of our competitors, some high net worth investors are inevitably swept off their feet by the Big Bank brokerages.

By: Ben Felix | 1 comments

The Journey to PWL

When the average Canadian sets out to find a financial advisor, a firm like PWL is probably not what they have in mind. This should not come as a surprise. With the vast majority of Canadians’ invested assets continuing to be invested in expensive actively managed mutual funds, it is clear that we have not collectively caught up with the evidence. The evidence shows that there is one right way to invest, and it is documented in volumes of peer reviewed academic journals. Evidence-based investing is not promoted by most financial institutions and financial advisors because evidence-based investing does not generate lucrative commissions and trailing fees.

The financial services industry wants people to believe that investment advice involves smart people researching undervalued companies, picking hot stocks, and timing the market. People often seek financial advice because the hyped up world of investing can seem intimidating. In most cases, a person sets out not knowing what to look for in a financial advisor, so they end up settling on the one with the most compelling story about how their money will be invested. Compelling stories are detrimental to long term investing success, and in many cases it will take an investment lifetime of bouncing from one advisor’s compelling story to the next for an investor to realize that there must be a better way.

Many investors find PWL after taking years of unfounded advice based on the intuition of their past advisors. They may have read a book like Playing the Winner’s Game, The Smartest Investment Book You’ll Ever Read, or A Random Walk Down Wall Street, or they may have heard about evidence-based investing from a trusted friend or relative. We have grown accustomed to welcoming the weary who have come to understand, or decided to trust, that evidence-based investing is the only right way to invest. We do not sell, and we do not tell a compelling story about our superior predictive abilities and quantitative models. We build portfolios based on the science of capital markets, and consistently offer objective financial advice to those fortunate enough to have made the journey to our firm.

By: Ben Felix | 0 comments

Changes to the RRIF Minimum Payment Schedule

RRSPs and RRIFs are major vehicles for Canadian retirement and the recent federal budget has improved their structure for retirees. An owner of an RRSP can transfer the account into a RRIF once they have stopped contributing and wish to withdraw the funds for retirement. They can do so at any point after they turn 55, but they must do so in the year that they turn 71. In the year after the RRSP has been transferred into a RRIF, the owner must start to make their annual withdrawals. There is a schedule that dictates a minimum amount to be withdrawn each year based on the age of the owner or their spouse. These mandatory withdrawals are considered income and are fully taxed at the owner’s marginal rate, which is a concern for those with sizeable retirement savings in registered accounts. 

The 2015 federal budget, yet to be passed at the time of this publication, has provided some relief to Canadian retirees by dampening the impact of the minimum payments each year. Under the previous schedule, retirees were forced to withdraw 7.38% of their RRIF at age 71. This amount increased each year up to 20% at age 94. The new changes start the mandatory payment amount at 5.28% of their RRIF at age 71, which is about 28% less than the previous schedule. The schedule continues to grow the minimum incrementally to 20% until age 95, up from 94.  Now retirees can keep more of their savings in their RRIF to grow tax deferred and decrease their taxable income when compared to previous years.

You can find the new schedule for the annual minimum payments below:

PWL Capital - Changes to the RRIF Minimum Payment Schedule

*If you have already received your RRIF payment in 2015, you will be able to make a RRIF contribution for the difference between the two schedules.

Download the PDF version: Annual Minimum RRIF Payment Schedule

By: Max Lane | 0 comments