A Message from Som

Corporate Class Structure Remains Strong Despite Government Intervention

As many of you have already heard, in their most recent budget, the federal government announced plans to alter the structure of the corporate class model. Starting in September, switching between corporate class series funds will become a taxable event ̶ just like that of a traditional mutual fund trust. While this decision will affect retail investors’ ability to compound wealth over the long term and will likely result in some mutual fund manufacturers electing to abandon the corporate class structure, it has very little impact on its true benefit or our continual use of the structure in our products at Purpose.

Even though the ability to switch between funds without paying tax on capital gains has traditionally been an added bonus of the corporate class structure, in our opinion, its true benefit lies within its capability to consolidate the expenses, income, gains and losses of multiple funds into a single entity. This helps to create tax-efficient distribution yields that are far superior to traditional income from a tax rate perspective and ultimately provides compounding benefits for the funds.

When launching Purpose, we fundamentally decided to use the corporate class structure for its tax efficient distributions ̶ not for its switching ability. In fact, at the time, we were planning to only launch our funds as ETFs. It wasn’t until further in our product development that we started to think through the idea, ultimately innovating and offering our funds under a merged mutual fund and exchange traded fund structure. We initially assumed that investors would not even be able to switch between ETFs under the corporate class structure, with it inevitably becoming a positive enhancement of our products. Instead, the core for us has always been the overall tax-efficiency of the structure, and since the series’ inception, we have witnessed very few investors actually exercising their right to switch between funds.

As a firm, we place a great amount of consideration on maximizing investor experience, reducing taxes and minimizing the distributions flowed to investors when developing each of our investment funds. The changes proposed by the federal government will have very little impact on how we think and innovate at Purpose. As we manage and create new products, we will continue to focus on maximizing tax-efficiency to optimize client outcomes, and such thinking will continue to include the corporate class structure. We believe in the model, and it will remain core to our business.

As an aside, like many of you, we are confused by the federal government’s decision to eliminate the corporate class switching benefit. We believe that this option was highly aligned with the long-term goal of the government to help investors save and compound their savings over time. Between the RSP, TFSA, RESP and other tax-efficient investment accounts, Canada has historically been committed to a very strong investment savings model. The proposal to eliminate the compounding benefit of switching investments on a tax-deferred basis within the corporate class structure seems counter-intuitive to the overall model.

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