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STANDUP Advice: Tax Effective Investment Planning

John J. De Goey, CFP
0 Comments|September 21, 2007

Funds that serve the professional practice niche.
Funds that serve the professional practice niche.

A little over a year ago, former Mackenzie Financial executive Jim Hunter set up his own mutual fund company called NexGen. As the name implies, the product offerings are deemed to be the 'next generation' of mutual funds in Canada. To the people at NexGen, the phrase 'tax efficiency' means individuals should attempt to minimize tax rates in order to maximize after-tax returns. Government tax laws aim for uniform treatment irrespective of whether an individual or corporation earns that money. As a result, NexGen set to work in building products that dovetail investment and tax needs.

It turns out that there are a number of planning opportunities available to those entities that incorporate for business purposes (professionals like doctors and dentists, for instance). According to NexGen, no matter what your situation and objectives, there are still opportunities available to either improve after tax return or withdraw money from the business more effectively- perhaps both. In taking advantage of current rules regarding incorporation, a number of objectives can be pursued.

The basic idea is to have a tax-deferred investment strategy. By keeping the money taxed at lower rates, professionals can put off paying the tax. Anyone who doesn't actually need to take income from their corporation can leave the money in the corporation for tax-deferred compounding using a special class of units. Using this corporate class structure, NexGen allows professional corporations to convert income that attracts considerable tax (e.g. interest income and foreign dividends) into a more tax-friendly income stream (e.g. dividends and capital gains).

What is more, eligible dividends and capital gains can retain their tax-efficient character and be flowed through to underlying shareholders. This is something that can't be done effectively using a return of capital format, which is what many others do in this situation. As a result of this option, there are further applications for holistic financial planning at the household level, such as the payment of dividends to a shareholding spouse or adult children. The NexGen funds ( also allow for tax-free capital dividends for shareholders in the highest tax brackets and taxable dividends to lower income family members. This obviously allows for more purposeful planning.

In essence, the idea here is to offer maximum flexibility for people in general (but incorporated professionals in particular) so they can choose who gets the type of income that is best suited to their investment and tax planning objectives. If taking income from a corporate account, the ability to choose exactly how that income will be taxed can be hugely beneficial in terms of tax planning and overall wealth management.

As most people know, the financial services industry is more or less saturated with a large number of "me too" companies and a similar number of new entrant companies with nebulous value propositions. I personally believe the world would be a much better place if there were no hedge funds and no principal-protected notes, for instance. This product is different. The mutual funds offered by NexGen are among the few new ideas that have come out in the recent past that have a legitimate niche to fill.

If you or someone you know has a corporation or professional practice with business income that can be invested in a diversified portfolio, it only stands to reason that this option be considered.

John J. De Goey, CFP is a Senior Financial Advisor with Burgeonvest Securities Limited (BSL) and author of The Professional Financial Advisor II. The views expressed are not necessarily shared by BSL.

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