Layering the Benefits of ETFs with the Tax-Deferral Advantages Available within Corporate Class Structure

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FAQ about corporate class structure.

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What is First Asset Corporate Class?
What are the main differences between ETFs in corporate class and those that are not?
What benefits are available to a shareholder of First Asset Corporate Class ETFs?
What is the process for switching classes within First Asset Corporate Class ETFs
What is the impact of tax deferral on the growth of the investment?
How does the corporation shelter income?
Examples of Potential Personal Financial Benefits for the shareholder

What is First Asset Corporate Class?

A corporate class structure is a single legal entity with a number of classes within the one corporation. Each First Asset ETF is a class of shares within First Asset Fund Corp. and together they make up First Asset Corporate Class. It is an alternative to a trust structure, which is the common structure for individual ETFs.

First Asset Corporate Class layers the well-known benefits of ETFs, such as low cost and transparency, with the tax-efficient benefits of a corporate class structure. The First Asset ETFs in First Asset Corporate Class offer low cost, transparency, active management, diversification, and a range of asset classes combined with tax-deferral opportunities resulting in an investment advantage for Canadians.

For tax purposes all the share classes within the corporation are treated as a single entity. Capital losses, non-capital losses, management fees and other expenses are available to be shared among all First Asset Corporate Class ETFs, to offset certain taxable items, resulting in potential tax deferral and greater tax efficiency for shareholders. There is no limit to the number of classes that can be in a corporate class structure and First Asset looks forward to continuing to grow this opportunity with additional ETFs.

What are the main differences between ETFs in corporate class and those that are not?

Each First Asset Corporate Class ETF has its own investment objectives and strategy, just as an ETF that is structured as a trust would have.

The differences are inherent to the structure under which the ETFs are governed, with corporate class structure affording tax-deferred switching between ETFs and, strictly for tax purposes, the sharing of income and expenses.

What benefits are available to a shareholder of First Asset Corporate Class ETFs?

Tax Deferred Switching
Each ETF in the corporate class is considered its own class of shares. A conversion, or exchange (switch), of one class of shares of the corporate class to another is considered a tax-deferred rollover and not a deemed disposition for tax purposes because shareholders remain invested within the same corporation throughout. Accordingly, taxable capital gains or losses are deferred until such time as the shareholder redeems or disposes of his or her shares in the market. There are no restrictions on switch frequency, nor are there requirements for the length of time any ETF under corporate class must be held.

First Asset Corporate Class ETFs currently include fixed income, global equity, Canadian equity, and anticipate a growing list of asset categories, creating switching and rebalancing opportunities that are tax-deferred.

Choosing when to generate a taxable event translates into control. With First Asset Corporate Class ETFs, shareholders control the timing of taxable events within their portfolio and potentially benefit from tax deferred growth.

What is the process for switching classes within First Asset Corporate Class ETFs

Switches are a type of reorg. As a result, the switch within the First Asset Corporate Class needs to be done through the facilities of CDS.

Shares may be switched in any week on Wednesday (or the next business day if Wednesday is not a business day) by delivering notice to the Registrar and Transfer agent and surrendering the shares through the facilities of CDS by 4:00 p.m. (Toronto time) at least one business day prior to the Wednesday ETF Switch Date. Shareholders should provide notice to their advisor or Dealer firm in advance of the deadline.

Tax-Deferred Growth

As there is no taxable event at the time of switching, more of a shareholder's investment stays invested and less goes towards tax liabilities along the way. First Asset Corporate Class ETFs take advantage of the power of compounding afforded by tax-deferred growth. With Canadian marginal tax rates as high as 59% in 2016, deferring tax can translate into a substantial increase in investment returns over time.

Shareholders can also elect to reinvest any dividends in order to maximize the compounding benefits of tax deferral. When the shareholder is ready to redeem out of the corporation any gain that will be realized as a result of the compounding of the income will be a taxable capital gain.

What is the impact of tax deferral on the growth of the investment?

Without the ongoing tax burden, First Asset Corporate Class ETFs take advantage of the power of compound growth, with more of a shareholder's investment staying invested and less going towards tax liabilities along the way. Over time, this can result in substantially better net returns for the shareholder.

Tax Efficient Distributions

Distributions to shareholders of the First Asset Corporate Class ETFs will only be in the form of Canadian dividends, capital gains dividends or returns of capital (ROC) - all of which are taxed at lower rates than ordinary Canadian or foreign source income. The corporate structure minimizes, and in some cases eliminates, taxation of ordinary and interest income. Typically, the corporation will look to shelter income with losses and expenses shared amongst all classes in the corporation.

This means, for example, that shareholders can invest in a traditional bond ETF within the corporate class and expect that they will not receive a distribution of highly taxed interest income but rather ordinary dividends, ROC dividends or potentially no dividends.

How does the corporation shelter income?

Capital losses, non-capital losses, management fees and other expenses are available to be shared among all First Asset Corporate Class ETFs, which can be used to shelter income and provide greater tax efficiency for shareholders. In addition, expense and income sharing minimizes the need for distributions. This sharing of fees and expenses for tax purposes among classes does not have an impact on NAV.

For example, interest income generated by yield classes, such as bond and high-income classes, may be offset by expenses from other classes, like those that invest in equities.

Foreign dividends generated by global equities can be offset by expenses generated by other classes. Capital gains realized by one equity or sector fund can be offset by capital losses from another equity or sector fund.

Because of this ability to combine taxable income, losses and expenses across many share classes, dividends paid by corporate class can be minimized or potentially eliminated.

Examples of Potential Personal Financial Benefits for the shareholder

Lower Tax Bracket
Corporate class structure could offer the opportunity to defer amounts considered for taxation, and allow the shareholder to remain in a lower tax bracket at that time compared to receiving investment income.

ROC (Return of Capital)
The corporation can provide dividends comprised of return of capital (ROC). ROC is not taxable when it is received, although it does lower the adjusted cost base (ACB) of the investment. This is particularly relevant for fixed income ETFs. The shareholder may benefit from deferred capital gains which is taxed preferentially to interest income.

Old Age Security (OAS) claw-back (Also known as OAS recovery or OAS pension repayment)
The government claws back (or recovers) OAS benefits when a couple's income exceeds $71, 592. A corporate-class ETF can minimize declared income by deferring income. Rather than increasing a shareholders taxable income such that the OAS claw back mechanism would come into effect, the deferral of taxable income and capital gains provided by the corporate class ETFs could help decrease the likelihood of OAS claw back.

The complete list of First Asset Corporate Class ETFs

First Asset CanBanc Income Class ETF - CIC
First Asset Core Canadian Equity Income Class ETF - CSY
First Asset MSCI Canada Quality Index Class ETF - FQC
First Asset Short Term Government Bond Index Class ETF - FGB

For details, including a list of other First Asset ETFs within corporate class, please visit http://www.firstasset.com/corporate_class


Important information about each First Asset ETF Fund is contained in its respective prospectus. Individuals should seek the advice of professionals, as appropriate, prior to investing. This investment may not be suitable for all investors. Some conditions apply. Copies of the prospectus may be obtained from your investment advisor, First Asset or at www.sedar.com. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

The commentaries presented are prepared as a general source of information. They are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. The opinions contained in this document are solely those of First Asset and are subject to change without notice. First Asset assumes no responsibility for any losses or damages, whether direct or indirect, which arise from the use of this information and expressly disclaims liability for any errors or omissions in this information. First Asset is under no obligation to update the information contained herein.