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A tax-efficient series

05 January 2022 by National Bank Investments
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The T Series is specifically designed for investors who want to receive a stable monthly income that is also tax-efficient.

T Series and its advantages

A stable source of income

The monthly amount paid is predictable, as it remains the same throughout the year. At the beginning of each year, this monthly amount is revised, up or down, to preserve the capital in the fund.

Tax-efficient income

Taxes vary depending on the type of income generated by the investments. Receiving distributions from a T Series can defer or reduce tax payable when some or all of the amount is paid in the form of a return of capital (ROC). Returns of capital are not taxable in the year in which they are received, unlike interest, dividends and capital gains.

Growth potential

If the fund's return is greater than the amount of monthly distributions paid, your initial investment may grow.

A smooth transition

When you’re ready to receive regular cash inflows from your non-registered savings, whether you’ve begun the transition to retirement or are already there, the T Series can meet your needs. At any time, it is possible, without tax implications, to exchange units from another fund series for T Series units, according to your particular needs.

What is a return of capital?

Since investors receive part of their own capital with each distribution, there is no tax payable on that portion. That portion is called a return of capital. There are no capital gains or losses until the investment is sold or the ROC is exhausted. These gains are taxed less than other types of investment income. In addition, deferring capital gains could reduce your taxation on these gains if your withdrawals occur when your tax bracket is lower as is often the case in retirement.

Taxation of investment income of $100 according to the various distributions*

 

Interest
($)

Dividends
($)

Capital gains
($)

ROC
($)

Tax paid

53 40 27 0

Net return

47 60 73 100

Tax paid

Interest
($)

53

Dividends
($)

40

Capital gains
($)

27

ROC
($)

0

Net return

Interest
($)

47

Dividends
($)

60

Capital gains
($)

73

ROC
($)

100

*Illustration based on the highest combined marginal tax rates in Quebec applicable as follows:

  • Regular income and interest: 53.31%
  • Capital gains: 26.65%
  • Eligible dividends: 40.11%

Who should consider T Series funds?

T Series funds are suitable for a variety of investor profiles at various stages in life, such as when you:

  • are ready to start withdrawing your non-registered investments
  • want a stable source of monthly income
  • want to enjoy a more comfortable retirement
  • are already receiving benefits from government programs such as Old Age Security, the Guaranteed Income Supplement or spousal and medical expense tax credits and want to continue to do so.

Scenario

For example, consider a client who wants to use their non-registered investments to receive regular monthly payments. He opted for a T Series balanced fund and invested $250,000 for a period of ten years. He achieves an annual return of 7%. It should be noted that the distribution level is around 5% of the fund’s net asset value as at December 31. The investor therefore receives part of his own capital with each distribution, he has no tax to pay on this portion. In addition, at the end of the period, the client recovers all of his initially invested capital as well as the income generated by the fund during this period.

Key Features of the T Series and SWPs

 

T Series
Fixed distributions

SWPs
Systematic withdrawal plans

How it works

  • Fixed and predetermined monthly distributions 
  • The amount is reviewed annually.
  • Frequency and amount of withdrawals to be
  • Automatic periodic sale of units in one or more mutual funds.

Flexibility

  • Available for the majority of funds. 
  • Possibility of reducing or eliminating any tax impact in the event of a transfer from one series to another of the same fund.
  • Possible to keep the same series of mutual funds held before retirement.
  • Flexible amount determined by the client.

Taxation

  • Tax deferral maximized.
  • No capital gains or losses until the investment is sold or ROC is exhausted.
  • Periodic sale of mutual fund units. 
  • Each sale may result in a capital gain or loss.

Adjustments

The amount of the monthly distribution is adjusted according to:

  • Rate of payment of the fund
  • Net asset value per unit at the end of the previous calendar year
  • Number of units of the fund held at the time of distribution
  • In order not to exhaust the capital too quickly, the amount of withdrawals must be managed by the client.

How it works

T Series
Fixed distributions

  • Fixed and predetermined monthly distributions 
  • The amount is reviewed annually.

SWPs
Systematic withdrawal plans

  • Frequency and amount of withdrawals to be
  • Automatic periodic sale of units in one or more mutual funds.

Flexibility

T Series
Fixed distributions

  • Available for the majority of funds. 
  • Possibility of reducing or eliminating any tax impact in the event of a transfer from one series to another of the same fund.

SWPs
Systematic withdrawal plans

  • Possible to keep the same series of mutual funds held before retirement.
  • Flexible amount determined by the client.

Taxation

T Series
Fixed distributions

  • Tax deferral maximized.
  • No capital gains or losses until the investment is sold or ROC is exhausted.

SWPs
Systematic withdrawal plans

  • Periodic sale of mutual fund units. 
  • Each sale may result in a capital gain or loss.

Adjustments

T Series
Fixed distributions

The amount of the monthly distribution is adjusted according to:

  • Rate of payment of the fund
  • Net asset value per unit at the end of the previous calendar year
  • Number of units of the fund held at the time of distribution

SWPs
Systematic withdrawal plans

  • In order not to exhaust the capital too quickly, the amount of withdrawals must be managed by the client.

The profile and overall situation of each investor will determine the appropriate approach.
 

For more information, see the section on Advisor, T & T5 Series.

Legal notes

The information and opinions herein are provided for information purposes only and are subject to change. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken
the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee
that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

© 2021 National Bank Investments Inc. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank
Investments Inc.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under license by National Bank Investments Inc.

National Bank Investments is a member of Canada’s Responsible Investment Association and a signatory of the United Nations-supported Principles for Responsible
Investment.

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