Investing retained assets

By Rosemary McCracken | May 04 2015 09:00AM

Assets that are retained and invested in the company are subject to high tax rates, and advisors need to provide their small-and-medium-size business clients with tax-effective investment solutions for these retained assets.“Too often, these assets are sitting in cash, which is not appropriate for funding the client’s retirement,” said Peter Bowen, Toronto-based vice-president, tax research and solutions, at Fidelity Investments Canada. “They require a broader asset allocation, and a way of mitigating the tax hit.”

The solution he favours is corporate class mutual funds. The corporate class structure allows investors to switch from one fund class to another without triggering immediate capital gains or losses. And the funds only incur a tax hit when the holdings are sold.

“There is also the potential for reduced taxable income,” Bowen added. “When distributions are made, they are distributed as capital gains and/or dividend income, both of which offer preferential tax treatment over interest income, which is taxed at the investor’s marginal tax rate.

“They will never produce interest income or foreign income, which are taxed heavily.”

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