Ask MoneySense: T-series funds

By MoneySense Staff on November 13, 2012
Estimated reading time: 1 minute

T-series funds primarily come in handy when you've owned a fund for a long time, you’re sitting on a bunch of paper gains, and you want to start generating cash flow.

My mother needs to optimize her income to qualify for the Guaranteed Income Supplement (GIS). Her adviser recommended moving her money into a T-series fund. Is this a good strategy?

— Brian Larmour, Kemptville, Ont.

T-series mutual funds pay out a steady cash flow, most of which is return of capital (ROC) and is not immediately taxable. They can be appealing in situations like your mother’s: since ROC is not income, it will not affect her eligibility for the GIS. But according to Dan Hallett, a vice-president and director at HighView Financial Group, these advantages are somewhat overstated. “T-series funds primarily come in handy when you’ve owned a fund for a long time, you’re sitting on a bunch of paper gains, and you want to start generating cash flow.”

If your mother can simply transfer her money into a T-Series fund without triggering a taxable gain, that may be a good option. In Hallett’s view, this is the only instance where T-series funds provide a real tax benefit. But if she were forced to sell her existing fund all at once, that could result in a big tax hit: she may be better off simply creating cash flow by selling it off gradually.

If your mother does opt for a T-series fund, make sure the payout is sustainable: 6% or lower is reasonable, says Hallett.

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