Series T mutual funds offer a smart, tax-efficient way to generate steady cash flow from your investments, especially in retirement.
Key messages:
- Predictable cash flow: Series T mutual funds provide consistent monthly distributions that can help cover your income needs.
- Tax efficiency: Series T distributions often include return of capital, which is generally more tax efficient than other forms of income.
- Stay invested: With Series T, you remain invested in the fund, so your portfolio can potentially keep growing tax-deferred until you sell.
When the time comes to shift your investment strategy from saving to spending, you want income that’s consistent, predictable and tax efficient. That’s where Series T mutual funds can help.
What is Series T?
Series T mutual funds are designed for non-registered accounts and provide regular monthly distributions at a fixed annual target rate, such as 3%, 4%, or 5%. While the actual distribution amounts may vary, you’ll have a good idea of how much cash flow you can expect from your investment each month based on the fund’s target distribution rate.
Who should consider Series T?
- Investors in non-registered accounts
- Those looking for steady, tax-efficient income
- People transitioning into retirement, already retired, or investors looking to supplement other income sources
What’s in a Series T distribution?
When it comes to cash flow, it’s not just about how much your investments earn—it’s about how much you keep. That’s where tax-efficient Series T options come in. Each monthly distribution may include a combination of interest, dividends, capitals gains, and/or return of capital (ROC) —a portion of your original investment.
ROC helps top up income generated by the fund and is generally not immediately taxable, making Series T potentially more tax-efficient compared to redeeming your investments or using an automatic withdrawal plan.
In this hypothetical example, the 4% Series T distribution is half return of capital and half interest, dividends and capital gains.
Stay invested while receiving income
Series T funds pay a regular distribution that consists of ROC and other income sources generated by the fund without requiring you to sell your investments.
Unlike redeeming your mutual funds or using an automatic withdrawal plan (AWP)—which can trigger capital gains or losses—Series T provides income without having to sell your investments, making it generally more tax efficient.
Consider a hypothetical $100,000 Series T fund investment with a 4% target distribution rate that also generates 4% growth each year. While you stay invested in the Series T fund, it will distribute about $333.33 (4% X $100,000/12 months) of monthly cash flow over 25 years, cumulating to $100,000 over 25 years. This cash flow is completely made up of tax-free return of capital (ROC).
While this is happening, the amount you originally invested, the principal, will be reduced as the distributions are paid out—this is also known as the adjusted cost base (ACB). Once the ACB reaches zero (after year 25 in this example), future distributions are treated as capital gains for tax purposes. Over the life of the investment, you remain invested in the Series T fund and your capital grows tax-deferred until you decide to sell the fund.
Plan your cash flow and find the right investment for you
Income planning isn’t just making sure you'll have enough cash flow when you need it—it’s also about drawing income efficiently. As part of your personal cash flow strategy, we can help recommend an approach that works for you.
For example, if you already own a Series A of a Scotia Portfolio Solution in your non-registered account, you can switch to Series T of the same portfolio—also known as a reclassification—without tax implications. This conversion may be particularly beneficial when transitioning from saving to spending, like when you enter retirement.
ScotiaFunds offers Series T options with annual payout rates of 3%, 4%, or 5% in a variety of portfolio options to suit your unique investing preferences. To learn more about investment solutions that can meet your income needs, try using the Series T cash flow calculator.
This publication is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this document, including information relating to interest rates, market conditions, tax rules, and other investment factors, are subject to change without notice, and The Bank of Nova Scotia is not responsible to update this information. All third-party sources are believed to be accurate and reliable as of the date of publication, and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly, and action is taken based on the latest available information. This publication may contain forward-looking statements based on current expectations and projections about future general economic factors. Forward-looking statements are subject to inherent risks and uncertainties which may be unforeseeable and such expectations and projections may be incorrect in the future. Forward-looking statements are not guarantees of future performance and you should avoid placing undue reliance upon them. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of The Bank of Nova Scotia.
Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed or insured by the Canada Deposit Insurance Corporation or any other government deposit insurer; their values change frequently, and past performance may not be repeated.
Investors holding funds in a non-registered account should be aware that distributions are taxable. The amount and the tax characteristics of distributions made to non-registered accounts will be reported on tax slips that will be sent to investors. Distributions made to registered accounts such as an RSP or RIF are not taxable.
Target distributions are not guaranteed and may change at any time at the discretion of the fund’s Manager. If distributions paid by the fund are greater than the net income and net capital gains of the fund, distributions paid may include a return of capital. A return of capital is not taxable to the investor but will generally reduce the adjusted cost base of the securities held for tax purposes. If the adjusted cost base falls below zero, investors will realize capital gains equal to the amount below zero. Distributions are automatically reinvested unless an investor elects to receive them in cash. Investors should not confuse a fund’s distribution rate with its performance, rate of return or yield. Distributions may consist of net income, and/or dividends, and/or net realized capital gains and are taxable in the hands of the investor. Target monthly distributions are determined based on the target payout rate for the indicated series of the fund. Monthly distributions are made by the last business day of each month, or the last business day of each calendar quarter for quarterly paying fund series, other than in December. The final distribution in respect of each taxation year will be paid or payable by December 31 of each year or at such other times as may be determined by the fund’s Manager.
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