Thursday, July 29th, 2021

Mackenzie fund mergers 2021

This only affects those who own Mackenzie Investments Capital Class funds, in particular those held in non-registered accounts. Affected clients will have just received an explanatory letter from Mackenzie but I wanted to provide some additional comments. First, here is a timeline to provide context.

  1. Mutual funds in Canada are offered in two legal structures: a Trust or a Corporation. In particular, corporate structures were innovated in the late 1980’s and created multiple classes of shares, each of which was a separate investment fund. Several advantages were possible:
    1. Since they were shares of the same corporation, investors in non-registered accounts could switch between share classes without realizing capital gains, thus allowing for rebalancing or changes to asset allocation without having to first worry about income tax.
    2. Funds structured as a corporation only pay out eligible Canadian dividends and capital gains, meaning their income is more tax efficient than interest or foreign dividends.
    3. The corporations could use losses in one class of shares to offset gains in another class.
  2. Many fund companies created corporate fund structures and Mackenzie had one of the best structures at the time of its creation in 2000, including a unique structure that allowed for international funds to be qualified as Canadian content for purposes of the RRSP foreign content restriction rule. 
  3. The RRSP foreign content rule was increased from 20% to 30% and then in 2005 was eliminated completely. 
  4. In 2013 a federal tax change eliminated the ability of funds to use derivative instruments to re-characterize interest income as dividends, increasing the tax on many corporate structures.
  5. In 2016 the federal government changed the tax law to prevent tax-deferred switches between classes of shares, again increasing the taxation of corporate fund structures.
  6. In the last few years there has been a shift by investors towards global investments and thus foreign dividends, decreasing the tax efficiency of corporate structures.
  7. Market competition has been driving down mutual fund management fees, reducing the expenses the funds can use to deduct against investment income.

When a mutual fund corporation has income from foreign dividends or interest that is higher than its deductible expenses the fund itself becomes taxable, and since it is a large entity it pays tax at the very highest rate. This is contrary to the best interest of investors, many of whom are not taxed at the highest rate and of course if held in registered accounts like a RRSP, RRIF or TFSA (as is the case for many clients) are not taxed at all as the investment grows.

In summary, after many years of positive returns, falling expenses and tax increases, Mackenzie has recently announced the wind-up of their entire corporate class structure effective July 30, 2021 when investors will see the relevant switches in their accounts. To do this, Mackenzie Investments will be merging all its assets in corporate class funds into corresponding Trust fund equivalents. The merger will be on a tax-deferred basis and you do not have to take any actions. Your funds will be managed by the same portfolio managers with virtually identical investments and the same or lower management fees.

As always, just ask me if you have any questions.

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