Note : Les descriptions sont présentées dans la langue officielle dans laquelle elles ont été soumises.
CA 02531308 2005-12-22
A METHOD AND SYSTEM FOR DISTRIBUTING MUTUAL FUND INCOME
FIELD OF THE INVENTION
[0001] This invention relates to the field of distributing mutual fund income
to investors, and more
specifically, to a method and system for optimizing investors' after-tax
returns from investments in
mutual funds.
BACKGROUND OF THE INVENTION
[0002] A mutual fund is an investment vehicle which invests monies it receives
from investors in an
"investment portfolio" or pool of various securities. Each mutual fund has a
different investment
objective and, as a result, has different securities in its investment
portfolio. For example, the
investment portfolio of a Canadian balanced fund will typically contain
Canadian equity and fixed
income securities, while a foreign equity fund will contain primarily foreign
equity securities.
[0003] An investor's interest in the mutual fund is represented by "units" if
the mutual fund
purchased is a trust or "shares" if the mutual fund purchased is a
corporation. The number of shares
or units an investor owns in comparison to the total number issued by the
mutual fund determines his
or her ownership interest in the fund.
[0004] The value of the securities in the investment portfolio goes up and
down with market
conditions. As a result, the value of the investor's investment also goes up
and down. The investor
will make money if he or she sells their units or shares and their value
(caused by changes in the
value of the investment portfolio) is greater than their value at the date of
purchase.
[0005] The key advantages of investing in a mutual fund include the following:
professional
management, diversification, liquidity, record keeping (i.e., receipt of
financial reports, tax slips,
investment statements, etc.), and, convenience (i.e., relatively small amounts
of money may be
invested).
[0006] However, one disadvantage of present mutual funds, and methods and
systems for investing
in such funds, is their inadequacy with respect to tax efficiently
distributing income to investors.
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[0007] A need therefore exists for an improved method and system for
distributing income from
mutual funds. Accordingly, a solution that addresses, at least in part, the
above and other
shortcomings is desired.
SUMMARY OF THE INVENTION
[0008] According to one aspect of the invention, there is provided a method
for distributing one or
more of dividend income, capital gains income, and capital from a portfolio of
assets to investors,
the one or more of dividend income, capital gains income, and capital
including one or more taxable
income types, the method comprising: establishing a mutual fund corporation
for holding the
portfolio of assets; establishing at least two classes of securities for the
mutual fund corporation,
each of the classes of securities having respective rights to receive
preference of distribution in
respect of the one or more taxable income types; and, distributing the income
among the classes of
securities according to the respective rights to receive preference of
distribution in respect of the one
or more taxable income types.
[0009] According to another aspect of the invention, there is provided a
method in a data processing
system for distributing one or more of dividend income, capital gains income,
and capital from a
portfolio of assets to investors, the one or more of dividend income, capital
gains income, and capital
including one or more taxable income types, the method comprising: receiving a
model of a mutual
fund corporation for holding the portfolio of assets, the model having at
least two classes of
securities for the mutual fund corporation, each of the classes of securities
having respective rights to
receive preference of distribution in respect of the one or more taxable
income types; receiving a
signal indicative of the one or more of dividend income, capital gains income,
and capital;
calculating a distribution of the one or more of dividend income, capital
gains income, and capital
among the classes of securities according to the respective rights to receive
preference of distribution
in respect of the one or more taxable income types; and, sending a signal
indicative of the
distribution.
[0010] In accordance with further aspects of the present invention there is
provided an apparatus
such as a data processing system, a method for adapting this system, as well
as articles of
manufacture such as a computer readable medium having program instructions
recorded therein for
practising the method of the invention.
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BRIEF DESCRIPTION OF THE DRAWINGS
[0011] Further features and advantages of the embodiments of the present
invention will become
apparent from the following detailed description, taken in combination with
the appended drawings,
in which:
[0012] FIG. 1 is a block diagram illustrating a financial structure for a
mutual fund corporation in
accordance with an embodiment of the invention;
[0013] FIG. 2 is a flow chart illustrating operations of a method for
distributing one or more of
dividend income, capital gains income, and capital from a portfolio of assets
to investors, the one or
more of dividend income, capital gains income, and capital including one or
more taxable income
types, in accordance with an embodiment of the invention;
[0014] FIG. 3 is a block diagram illustrating a data processing system adapted
to implement an
embodiment of the invention; and,
[0015] FIG. 4 is a flow chart illustrating operations of software modules
within the memory of a data
processing system for distributing one or more of dividend income, capital
gains income, and capital
from a portfolio of assets to investors, the one or more of dividend income,
capital gains income, and
capital including one or more taxable income types, in accordance with an
embodiment of the
invention.
[0016] It will be noted that throughout the appended drawings, like features
are identified by like
reference numerals.
DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS
[0017] In the following description, details are set forth to provide an
understanding of the
invention. In some instances, certain structures and techniques have not been
described or shown in
detail in order not to obscure the invention.
[0018] FIG. I is a block diagram illustrating an mutual fund corporation 100
in accordance with an
embodiment of the invention. The mutual fund corporation 100 includes a
corporate fund 120 (e.g.,
"Corporate Fund A") for each investment mandate or portfolio of assets 150.
The mutual fund
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corporation 100 may include a number of corporate funds 120 (only one
corporate fund 120 is
shown in FIG. 1), each being a mutual fund having a distinct investment
objective. Each corporate
fund 120 has one or more tax classes (e.g., capital gains class 132, return of
capital class 133,
dividend tax credit class 134, compound growth class 135). Each corporate fund
120 also has one or
more corresponding series of shares for each tax class. According to one
embodiment, some
corporate funds 120 may not have a tax class.
[0019] The mutual fund corporation 100 is a "mutual fund corporation" as
defined in the Income
Tax Act (Canada). Each corporate fund 120 is a "mutual fund" as defined in
National Instrument
81-102 under the Ontario Securities Act (or equivalent provincial securities
legislation). The mutual
fund corporation 100 is a tax-efficient investment structure that allows
taxable investors to switch
between investment classes, series or funds without triggering a taxable
disposition. The mutual fund
corporation 100 houses the corporate funds 120 and allows for transfers
between funds 120 as the
corporation 100 is recognized as the taxable entity rather than the corporate
funds 120. Hence, the
multi-class structure facilitates investment by a taxable investor whose goal
is to optimize the after-
tax value of their investment portfolio and its distributions.
[0020] In prior mutual fund corporations, numerous classes could be created,
each constituting a
corporate mutual fund, and each having a separate investment objective and
investment portfolio.
Each class or corporate mutual fund could offer different series of
securities. The mutual fund
corporation 100 of the present invention differs in structure from that of
prior mutual fund
corporations. While the mutual fund corporation 100 includes classes 132, 133,
134, 135, unlike
prior mutual fund corporations those classes do not represent individual
corporate mutual funds,
rather, they represent tax classes (for which there are preferences) within
each corporate fund 120.
Each corporate fund 120 is housed in and forms a part of the mutual fund
corporation 100.
[0021] To reiterate, the multiple classes 132, 133, 134, 135 included in each
corporate fund 120
allow different types of income to be streamed out among investors in the
corporate fund 120 more
efficiently than through prior structures. This improved efficiency is due to
the structure of the
mutual fund corporation 100 and the resulting segregation of different types
of investors. Each
corporate fund 120 and its classes are a separate portfolio within the mutual
fund corporation 100. In
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contrast, prior structures have provided separate mutual funds within a
separate class of the mutual
fund corporation (i.e., a separate class for each corporate fund).
[0022] According to one embodiment, each corporate fund 120 has four (4)
publicly offered tax
classes (i.e., capital gains class 132, return of capital class 133, dividend
tax credit class 134, and
compound growth class 135). Each corporate fund 120 also has one or more
corresponding series of
shares for each class. All of the tax classes share a single investment
portfolio 150 and comprise a
single mutual fund. Each of these classes ranks equally in terms of the total
return they are allocated
from the corporate fund 120 from which they are issued (i.e., effectively pro-
rata based upon the
respective assets). However, each of the classes has a different set of
preference rights to the variety
of taxable distributions that the mutual fund corporation 100 may make to
reduce its taxable income.
Thus, each tax class 132, 133, 134, 135 provides for a distinct tax planning
objective. As a result,
taxable investors may integrate their investment and tax objectives by
purchasing specific shares
which fit their tax profile. This feature simplifies individual investor tax
planning strategies. The tax
classes and the distribution strategies embedded in each corporate fund 120
are illustrated in Table A
as follows:
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Taxable Income Type
Foreign Interest Income Canadian Capital Gains
Dividend Income Trust Taxable
Income Income Dividends
Return of Capital Class N/A N/A N/A Third Third
133 Preference Preference
Compound Growth N/A N/A N/A Fourth Fourth
Class 135 Preference Preference
Capital Gains Class N/A N/A N/A Fifth First
132 Preference Preference
Dividend Tax Credit N/A N/A N/A First Sixth
Class Preference Preference
134
Inter-Fund Class N/A N/A N/A Second Second
131 Preference Preference
Inter-Fund Class Applied First Applied Applied Losses Applied Losses
Limited Recourse Debt Second Second to DIV's Last Applied First
Interest Expenses
Fund Expenses Applied First Applied Applied Losses Applied Losses
Second Second to DIV's Last Applied First
Table A: Tax Class, Taxable Dividend, and Expense Application Preference
Matrix
[0023] Referring to Table A, the capital gains ("CG") class 132 has a first
preference for annual
capital gains dividends. The capital gains class 132 also has a fifth
preference for Canadian taxable
dividends. These shares are suitable for investors with current or carry
forward capital losses from
other sources who wish to utilize those losses in the current or future tax
years. The shares of this
class are also suitable investments for the portfolios of minor children who
have received capital
from adults, as capital gains dividends are taxed in the hands of minors and
are not attributable back
to the adult. The shares of the capital gains class 132 may be used to
segregate specific investors
who benefit from receiving capital gains distributions annually. These
investors help higher income
investors who from a tax viewpoint would prefer to compound their investments
tax-free or
otherwise receive their distributions primarily as more efficient return of
capital.
[0024] The return of capital ("ROC") class '133 has a third preference for
Canadian taxable
dividends and a third preference for capital gains. The objective of this
class is to provide a
distribution consisting primarily of a return of investor capital. The per
security distribution may
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include capital gains dividends and Canadian taxable dividends to the extent
that the mutual fund
corporation 100 is required to declare capital gains dividends and Canadian
taxable dividends to
eliminate the overall tax liability of the corporation. The shares of this
class are suitable investments
for higher-income investors seeking tax efficient cash flow from an equity,
balanced, or fixed
income portfolio.
[0025] The dividend tax credit ("DTC") class 134 has a first preference for
Canadian taxable
dividends and a sixth preference for capital gains. The objective of this
class is to provide a dividend
per security, consisting primarily of taxable Canadian dividends. The per
security dividend may
include capital gains dividends to the extent that the mutual fund corporation
100 is required to
declare capital gains dividends to eliminate the overall tax liability of the
vehicle. The initial
distribution rate is based upon a net asset value per security and may be
adjusted annually based
upon the net asset value per security at the date of adjustment. At present,
approximately the first
$30,000 of Canadian dividend income may be received on a tax free basis for
individual investors
with no other sources of income. The $30,000 threshold may vary significantly
depending upon the
investor's province of residence. The shares of this class are suitable
investments for investors
seeking to increase the amount of Canadian dividend income to take advantage
of the preferential tax
treatment of Canadian dividends. These shares are appropriate investments for
shareholders looking
to receive monthly dividend income and for individuals in the lowest tax
brackets who wish to
receive regular income to maximize the utilization of their personal tax
exemptions. The shares of
the dividend tax credit class 134 may be used to segregate specific investors
who benefit from
receiving taxable Canadian dividends tax-free or at very low rates of tax.
These investors help higher
income investors who would, from a tax viewpoint, prefer to defer taxes or
receive capital gains
distributions by taking taxable dividend distribution allocations that in a
conventional mutual fund
structure would be allocated to all investors.
[0026] The compound growth ("CGR") class 135 has a fourth preference for
Canadian taxable
dividends and a fourth preference for capital gains. This class only receives
taxable distributions
after the preference rights of the other classes have been satisfied. The
objective of this class is to
maximize the after-tax value of an investor's portfolio, by minimizing, to the
extent possible, the
amount and frequency of taxable dividends distributed to an investor. This
share class is unique in
that it is the beneficiary of the nested class preference and inter-fund note
structure (see below) of
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the present invention. The shares of this class are suitable for investors who
wish to focus on capital
growth while paying tax in respect of the investment only on a disposition of
the investment in the
corporate funds. The compound growth class 135 may be used to segregate
taxable investors who
would benefit from deferring all taxable distributions until such time as they
leave the fund family.
[0027] According to one embodiment, to further improve the efficiency of the
mutual fund
corporation 100, a separate mutual fund trust 110 (e.g., "Trust A") may be
associated with each
corporate fund 120. Of course, not all corporate funds 120 may require an
associated mutual fund
trust 110. The mutual fund trust 110 is a "mutual fund trust" as defined in
the Income Tax Act
(Canada). Note that only one mutual fund trust 110 is shown in FIG. 1. This
structure may be
referred to as a "fund-on-fund" arrangement. According to this embodiment,
each corporate fund
120 has four (4) publicly offered tax classes (i.e., capital gains class 132,
return of capital class 133,
dividend tax credit class 134, and compound growth class 135) and a single non-
publicly offered
class (i.e., an inter-fund class 131).
[0028] Referring to Table A, the inter-fund ("IF") class 131 has a second
preference for Canadian
taxable dividends and a second preference for capital gains. The inter-fund
class 131 is a non-tax and
non-publicly offered class created to facilitate the investment by the trust
fund 110 in the
corresponding corporate fund 120. This class has second preference rights to
taxable distributions
after the first preference rights of other tax classes have been satisfied.
[0029] According to this embodiment, the tax classes 132, 133, 134, 135 and
the inter-fund class
131 share a single investment portfolio 150 and comprise a single mutual fund.
Thus, each corporate
fund 120 is subdivided into five (5) distribution preference classes of
shares. Each of these classes
ranks equally in terms of the total return they are allocated from the
corporate fund 120 from which
they are issued (i.e., effectively pro-rata based upon the respective assets)
and each of the classes has
a different set of preference rights.
[0030] In general, taxable investors may be precluded from purchasing units of
the mutual fund trust
110 and non-taxable or registered investors are precluded from purchasing
securities of the various
corporate classes 131, 132, 133, 134, 135 (i.e., except for the trust funds in
respect of the purchase
of the inter-fund class). Proceeds of sales of trust securities to non-taxable
or registered investors are
invested in a combination of inter-fund class limited recourse debt 142 and
inter-fund class shares
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141 of the relevant corporate fund 120 where they are invested in the
corporate fund's portfolio 150.
Proceeds of sales of the various tax class shares to taxable investors are
also invested in the corporate
fund's portfolio 150. The inter-fund class limited recourse debt structure has
a related interest rate.
This debt 142 is an advantageous feature of the present invention and is
designed to apply a high rate
deduction interest expense against three types of high tax-rate investment
income potentially
received from the portfolio 150, namely, foreign dividend income, interest
income, and income trust
income (see Table A).
[0031 ] The debt 142 consists of limited recourse notes which are redeemable
on demand by the trust
fund 110 and pay, according to one embodiment, interest at a floating rate
equal to the prime rate of
interest plus 1%. The debt 142 is secured by, and the recourse will be limited
to, the assets of the
applicable inter-fund class 131. The value of the aggregate debt of the inter-
fund class 131
(represented by the limited recourse notes or debt 142 issued to the trust
fund 110) to the value of the
aggregate equity of the inter-fund class 131 (represented by the shares 141 of
the inter-fund class
131 issued to the trust fund 110) is maintained at a ratio of one-to-one
within prescribed tolerance
levels, according to one embodiment, of plus or minus 5%. As a result, for
example, if the value of
the aggregate equity of the inter-fund declines to 45% of the aggregate value
of the combined debt
and equity of the class or increases to 55% of such value, an equivalent
portion of the existing debt
will be sold or purchased to ensure that the debt to equity ratio of the inter-
fund class 131 will
always be maintained within the prescribed tolerance levels and returned to a
ratio of one-to-one.
The mutual fund manager or the board of directors may rebalance this inter-
fund capital structure
based on daily movements in the net asset value ("NAV") of the inter-fund
class shares 141 and
limited recourse notes 142. The daily rebalancing of this capital structure is
advantageous and results
in an improvement in the Canada Revenue Agency's ("CRA") capital gains refund
mechanism
which shelters actual capital gains in the corporation 100. The inter-fund
class limited recourse debt
142 is also advantageous. In typical Canadian 81-102 mutual funds, issuing
debt is precluded except
in limited circumstances to fund redemptions.
[0032] The fund-on-fund arrangement and the investment in the inter-fund class
131 facilitates the
deduction of interest expenses on the debt in the corporate fund 120 against a
variety of types of
investment income (see Table A) that could not otherwise be distributed from a
Canadian mutual
fund corporation. The interest expense in the corporate fund 120 is received
as interest income in the
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trust 110. If taxable investors were to purchase trust units this income would
have to be distributed
and taxed at punitive personal rates. However, the trust's only investors are
non-taxable, in general,
and accordingly these investors are indifferent to high tax-rate income
distributions. The shares of
the inter-fund class 131 also facilitate the movement of unwanted excess
taxable dividend and
capital gain distributions up to indifferent non-taxable registered investors.
[0033] As shown in Table A, taxable distribution preference and expense tax
allocation rules are
established for each of the classes 131, 132, 133, 134, 135. Typically, a
mutual fund manager or the
board of directors establishes rules relating to the allocation of Canadian
taxable dividends, capital
gains dividends, fund expenses and inter-fund class limited recourse debt
interest expenses among
the classes 131, 132, 133, 134, 135 of the corporate fund 120, including the
inter-fund class 131.
These rules are structured to increase the likelihood that all of the tax
classes will attain their
respective objectives, in a manner believed to be equitable by the mutual fund
manager. The taxable
preferences and expense allocations by class and by type of taxable
distribution or income source are
as shown in Table A.
[0034] On a regular (e.g., daily) basis, the gross return or loss (i.e.,
income) of the portfolio 150,
after expenses (e.g., inter-fund class limited recourse debt interest
expenses, fund expenses, etc.), is
allocated to the net asset value ("NAV") of the five tax classes 131, 132,
133, 134, 135. On an
regular (e.g., daily, annually, etc.) basis, using the above preference and
expense allocation table, the
taxable distributions required to be made by the mutual fund corporation 100,
if any, are allocated
first to the corporate fund 120 and then to the various classes 131, 132, 133,
134, 135 within the fund
in accordance with the distribution preferences listed in Table A.
[0035] The present invention has several advantages over prior mutual fund
structures as follows:
= Allows for optimizing taxable investors' after-tax returns from mutual
funds.
= Provides for managing the tax consequences of different types of investors
in a mutual fund in
order to optimize their respective after-tax rates of return.
= Provides for allocating taxable distributions from a single investment
portfolio using preference
classes or series to minimize the tax consequences of those distributions on
specific types of
individual taxable investors.
CA 02531308 2005-12-22
= Allows an investor to select an investment unit or share which optimizes the
investment return
tax attribute that is most beneficial to his or her personal or family
circumstances.
[0036] While the above method is described in the context of the Canadian tax
regime, it will be
understood to those of skill in the art that the method is also applicable to
other tax regimes having
comparable features.
[0037] According to one embodiment, the mutual fund corporation 100 may be a
corporation under
corporate legislation. According to another embodiment, the mutual fund
corporation 100 may be a
corporate fund 120. According to another embodiment, the mutual fund
corporation 100 may be a
corporate mutual fund not subject to National Instrument 81-102. According to
another embodiment,
the mutual fund corporation 100 may be a mutual fund trust. According to
another embodiment, the
mutual fund corporation 100 may be a non-redeemable investment fund. According
to another
embodiment, the mutual fund corporation 100 may include one or more corporate
funds 120.
[0038] The above described method (i.e., with respect to FIG. 1 and Table A)
may be summarized
with the aid of a flowchart. FIG. 2 is a flow chart illustrating operations
200 of a method for
distributing one or more of dividend income, capital gains income, and capital
from a portfolio of
assets 150 to investors, the one or more of dividend income, capital gains
income, and capital
including one or more taxable income types, in accordance with an embodiment
of the invention.
[0039] At step 201, the operations 200 start.
[0040] At step 202, a mutual fund corporation 100 for holding the portfolio of
assets 150 is
established.
[0041] At step 203, at least two classes 132, 133, 134, 135 of securities for
the mutual fund
corporation 100 are established, each of the classes 132, 133, 134, 135 of
securities having
respective rights to receive preference of distribution in respect of the one
or more taxable income
types.
[0042] At step 204, the income is distributed among the classes 132, 133, 134,
135 of securities
according to the respective rights to receive preference of distribution in
respect of the one or more
taxable income types.
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[0043] At step 205, the operations 200 end.
[0044] The taxable income types may include one or more of foreign dividend
income, interest
income, income trust income, taxable dividends, and capital gains (see Table
A). The classes 132,
133, 134, 135 of securities may include an inter-fund class 131 of securities
and the step of
establishing may further include establishing a mutual fund trust 110 and
exchanging debt 142 of the
mutual fund corporation 100 and securities 141 of the inter-fund class 131 of
securities for assets of
the mutual fund trust 110. The mutual fund corporation 100 may be one of a
corporation, a corporate
fund 120, a mutual fund corporation not subject to National Instrument 81-102,
a mutual fund trust, a
non-redeemable investment fund, and a mutual fund corporation 100 having one
or more corporate
funds 120. The method may further include applying one or more of the foreign
dividend income,
the interest income, and the income trust income to interest on the debt 142
and to fund expenses.
The rights to receive preference of distribution in respect of the one or more
taxable income types
may be ranked (see Table A). And, the classes of securities may be series of
securities.
[0045] According to one embodiment of the invention, aspects of the above
described method may
be implemented in a data processing system. The term "data processing system"
is used herein to
refer to any machine for processing data, including the communication systems,
computer systems,
and network arrangements described herein. The present invention may be
implemented in any
computer programming language provided that the operating system of the data
processing system
provides the facilities that may support the requirements of the present
invention. Any limitations
presented would be a result of a particular type of operating system or
computer programming
language and would not be a limitation of the present invention.
[0046] FIG. 3 is a block diagram illustrating a data processing system 300
adapted to implement an
embodiment of the invention. The data processing system 300 includes a central
processing unit
("CPU") 320 and memory 330. The data processing system 300 may also include an
input device
310, a display 340, and an interface device 350. The CPU 320 may include
dedicated coprocessors
and memory devices. The memory 330 may include RAM, ROM, disk devices, and
databases. The
interface device 350 may include a network connection including an Internet
network connection.
The input device 310 may include a keyboard, a mouse, a trackball, or a
similar device. And, the
display 340 may include a computer screen, terminal device, or a hardcopy
producing output device
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such as a printer or plotter. The data processing system 300 is adapted for
communicating with other
data processing systems (not shown) over a network (not shown) via the
interface device 350. The
data processing system 300 may include a database system 332 for storing and
accessing investment
and programming information. The database system 332 may include a database
management
system ("DBMS") and a database and is stored in the memory 330 of the data
processing system
300. The data processing system 300 has stored therein data representing
sequences of instructions
which when executed cause the method described herein to be performed. Of
course, the data
processing system 300 may contain additional software and hardware a
description of which is not
necessary for understanding the invention.
[0047] Thus, the data processing system 300 includes computer executable
programmed instructions
for directing the system 300 to implement the embodiments of the present
invention. The
programmed instructions may be embodied in one or more software modules 331
resident in the
memory 330 of the data processing system 300. Alternatively, the programmed
instructions may be
embodied on a computer readable medium (such as a CD disk or floppy disk)
which may be used for
transporting the programmed instructions to the memory 330 of the data
processing system 300.
Alternatively, the programmed instructions may be embedded in a computer
readable signal or
signal-bearing medium which may be uploaded to a network by a vendor or
supplier of the
programmed instructions, and this signal or signal-bearing medium may be
downloaded through an
interface (e.g., 350) to the data processing system 300 from the network by
end users or potential
buyers.
[0048] FIG. 4 is a flow chart illustrating operations 400 of software modules
331 within the memory
330 of a data processing system 300 for distributing one or more of dividend
income, capital gains
income, and capital from a portfolio of assets 150 to investors, the one or
more of dividend income,
capital gains income, and capital including one or more taxable income types,
in accordance with an
embodiment of the invention.
[0049] At step 401, the operations 400 start.
[0050] At step 402, a model of a mutual fund corporation 100 for holding the
portfolio of assets 150
is received, the model having at least two classes 132, 133, 134, 135 of
securities for the mutual fund
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corporation 100, each of the classes 132, 133, 134, 135 of securities having
respective rights to
receive preference of distribution in respect of the one or more taxable
income types.
[0051] At step 403, a signal indicative of the one or more of dividend income,
capital gains income,
and capital is received.
[0052] At step 404, a distribution of the one or more of dividend income,
capital gains income, and
capital among the classes 132, 133, 134, 135 of securities is calculated
according to the respective
rights to receive preference of distribution in respect of the one or more
taxable income types.
[0053] At step 405, a signal indicative of the distribution is sent.
[0054] At step 406, the operations 400 end.
[0055] The taxable income types may include one or more of foreign dividend
income, interest
income, income trust income, taxable dividends, and capital gains (see Table
A). The classes 132,
133, 134, 135 of securities may include an inter-fund class 131 of securities
and the model may
further include a mutual fund trust I 10 and an exchange of debt 142 of the
mutual fund corporation
100 and securities 141 of the inter-fund class 131 of securities for assets of
the mutual fund trust 110.
The mutual fund corporation 100 may be one of a corporation, corporate fund
120, a corporate
mutual fund not subject to National Instrument 81-102, a mutual fund trust, a
non-redeemable
investment fund, and a mutual fund corporation 100 having one or more
corporate funds 120. The
method may further include applying one or more of the foreign dividend
income, the interest
income, and the income trust income to interest on the debt 142 and to fund
expenses. The rights to
receive preference of distribution in respect of the one or more taxable
income types may be ranked
(see Table A). And, the classes of securities may be series of securities.
[0056] At least one of the model and the signal indicative of the one or more
of dividend income,
capital gains income, and capital may be received from a second data
processing system, the second
data processing system being coupled to the data processing system 300 by a
network. At least one
of the model and the signal indicative of the one or more of dividend income,
capital gains income,
and capital may be received from an input device 310, the input device 310
being manipulated by a
user. At least one of the model and the signal indicative of the one or more
of dividend income,
capital gains income, and capital may be received from memory 330 of the data
processing system
14
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300. The signal indicative of the distribution may be sent to a second data
processing system, the
second data processing system being coupled to the data processing system 300
by a network. The
signal indicative of the distribution may be sent to a display for
presentation to a user. And, the
signal indicative of the distribution may be sent to memory 330 of the data
processing system 300
for storage.
[0057] With respect to step 403, the signal may be generated by a second data
processing system.
This second data processing system, typically maintained by an external
service provider, includes a
fund general ledger system. The signal is generated by extracting accounting
data and the market
value of the securities for each fund from the general ledger system,
typically on December 15 th of
each year.
[0058] With respect to step 404, the data processing system 300 calculates the
distribution as
follows. First, a module 331 in the system 300 converts accounting income to
taxable income by
adjusting for trade dates, taxation treatment of various items, etc. Second,
the capital gains retained
allowance for the corporation 100 is calculated. The system 300 includes a
module 331 to calculate
the allowable capital gains redemption amount which is based on tax rules and
accounting and
marketing value data. The capital gains redemption is defined in the Canadian
Income Tax Act.
Proforma tax returns are then prepared for the corporation 100. A module 331
in the system 300
generates proforma tax returns for the corporation 100 as a first step in
determining taxable income
available for distribution.
[0059] Second, taxable income is calculated for distribution. The database
system 332 contains
accounting and taxable income on a class 131, 132, 133, 134, 135, fund 120,
and consolidated
corporation 100 basis. A module 331 in the system 300 performs an iterative
tax optimization
process which involves matching taxable income with class asset and class
preference data for each
fund 120 and for the total corporation 100 to arrive at optimal distribution
amounts and types (i.e.,
dividend income, capital gains income, and return of capital). In particular,
assets as a percentage of
total corporation assets are calculated first on a fund basis and then on a
class/fund basis (i.e., all
classes (DTC 134, CG 132, IF 131, CGR 135, ROC 133); taxable distribution
classes (DTC, CG,
IF) - all classes except CGR and ROC classes). The taxable income of the
corporation 100 is then
allocated to the taxable distribution classes (DTC, CG, IF) on a fund/class
prorata basis. If the
CA 02531308 2005-12-22
taxable income allocated to the DTC class for any fund exceeds a stated fund
yield percentage, it
will be necessary to allocated the surplus taxable income to the ROC and/or CG
classes. The per
share distribution for each fund/class is then determined.
[0060] Third, the ROC class distribution for each fund equal to the specified
yield is determined.
[0061] With respect to step 405, dividend distributions in the fund general
ledger are accrued.
Noting that the records of the transfer agent and fund registrar are
maintained in the second external
data processing system (or systems), fund/class distributions (amount, record,
payment dates, income
type) are transferred electronically to the external transfer agent's system
for processing. The
transfer agent processes dividend and/or return of capital payments against
specific funds/classes and
either generates a cheque for the amount distributed or reinvests in
additional shares as directed by
the investor. The transfer agent then sends an electronic record to the fund
accounting agent of
dividend and return of capital activity for each fund/class, which is then
posted to the funds' general
ledger.
[0062] Although not shown in FIG. 4, financial data from the funds' December
31 St financials
consisting of general ledger amounts and the market value of securities is
electronically transferred
to a module 331 in the system 300. Provincial and federal tax returns are then
generated. In
particular, on January 1S', the general ledger is reconciled at fund/class and
consolidated levels and
year end financials are generated. The transfer agent reconciles December 31
S' shareholder
accounting records at a fund and class level and generates year end client
statements as appropriate.
[0063] While this invention is primarily discussed as a method, a person of
ordinary skill in the art
will understand that the apparatus discussed above with reference to a data
processing system 300,
may be programmed to enable the practice of the method of the invention.
Moreover, an article of
manufacture for use with a data processing system 300, such as a pre-recorded
storage device,
signal, signal-bearing medium or other similar computer readable medium
including program
instructions recorded therein, may direct the data processing system 300 to
facilitate the practice of
the method of the invention. It is understood that such apparatus, articles of
manufacture, signals,
and signal-bearing media also come within the scope of the invention.
16
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[0064] In particular, the sequences of instructions which when executed cause
the method described
herein to be performed by the data processing system 300 of FIG. 3 can be
contained in a data carrier
product, signal, or signal-bearing medium according to one embodiment of the
invention. This data
carrier product, signal, or signal-bearing medium can be loaded into and run
by the data processing
system 300 of FIG. 3. In addition, the sequences of instructions which when
executed cause the
method described herein to be performed by the data processing system 300 of
FIG. 3 can be
contained in a computer software product according to one embodiment of the
invention. This
computer software product can be loaded into and run by the data processing
system 300 of FIG. 3.
Moreover, the sequences of instructions which when executed cause the method
described herein to
be performed by the data processing system 300 of FIG. 3 can be contained in
an integrated circuit
product including a coprocessor or memory according to one embodiment of the
invention. This
integrated circuit product can be installed in the data processing system 300
of FIG. 3.
[0065] The embodiments of the invention described above are intended to be
exemplary only. Those
skilled in this art will understand that various modifications of detail may
be made to these
embodiments, all of which come within the scope of the invention.
17
