Last Updated on October 24, 2023 by Heather McDowell
What is a Mutual Fund Trust
A Mutual Fund Trust, or MFT, is a private structure that functions like a Limited Partnership (LP) whereby MFT units are issued to investors in accordance with investment terms offered by the MFT. Like a General Partner (GP), the Trustee invests the funds on behalf of the unitholders into real estate projects.
We at Canadian Real Estate Wealth like to connect our readers with the “doers.” In that vein, we turned to the experts in Mutual Funds Trusts, the financial management firm Axiom Advisors Inc. This west-coast-based organization brings a wealth of financial management expertise cultivated from years of collective experience. We asked Dwight Martin, the President of Axiom Advisors, to leverage his over 25 years of financial management experience to offer insights into what differentiates a Mutual Fund Trust from a limited partnership. Here’s what Mr. Martin had to say,
“While an MFT and an LP function similarly, unlike a Limited Partnership, a Mutual Fund Trust can accept funds from registered accounts like Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA). This makes MFTs a very tax-efficient way to flow income and capital gains to investors. Unitholders only risk their original investment amount.”
The MFT is widely used for real estate and similar situations where capital gains are anticipated.
Mutual Fund Trust Governance
A Mutual Fund Trust is a unit trust that resides in Canada. All MFTs must comply with the Regulations of the Income Tax Act and are governed by the Canada Revenue Agency.
Mutual Fund Trusts are also subject to oversight by the Canadian Securities Administrators at the national level, and on a provincial level by each province’s securities commission. An example is the Ontario Securities Commission (OSC) or the British Columbia Securities Commission (BCSC).
How Mutual Fund Trusts Raise Capital
A Mutual Fund Trust is an ideal way to attract seed money or equity capital for real estate projects. A developer wanting to purchase/build a project costing $10 to $20 million can use an MFT to raise the seed capital to purchase the land, start the project, and bring in bank financing to complete the project.
To attract the maximum amount of seed capital available from investors, the developer will want to access investors’ registered funds, like RRSPs or TFSAs. This is achieved through the MFT structure.
Why Investors Should Consider a Mutual Fund Trust
Multi-residential real estate projects are expensive and usually beyond an individual’s financial reach. The Mutual Fund Trust structure allows for the pooling of investor funds so that each investor can participate in the profitability and operations of a real estate project. The developer still manages the day-to-day operations, thus removing the risks and responsibility of operating a multi-residential project.
For developers, a Mutual Fund Trust allows them to facilitate multiple offerings for multiple projects using only one MFT structure. Each unit class is legally insulated in a silo effect, isolating one class from another. Each class of units in a Mutual Fund Trust will continue to be eligible to receive registered funds – RRSPs or TFSAs – from investors and will provide tax-efficient, flow-through features for each project.
Each project is legally separated from other projects. Likewise, investors in one project are legally separated from investors in other projects, all in the same MFT. This scenario is much more cost-efficient for developers.
In summary, the developer only needs one MFT structure for multiple projects.
The Financial Management Organization’s Role in Mutual Fund Trusts
We again leaned on Mr. Martin for his vast knowledge of all things financial to explain the organization’s role in an MFT. Here are his thoughts,
“Axiom Advisors structures a turnkey, expanded Mutual Fund Trust that offers more flexibility to investors and developers while also preserving their peace of mind that all tax and legal issues have been dealt with. The Axiom MFT structure is fully compliant with requirements of the Canada Revenue Agency and the Securities Commission.”
The Mutual Fund Trust structure assists in raising seed capital, producing investment opportunities, and providing highly secure, dependable tax savings for both investors and developers.
Companies such as Axiom can also provide all the necessary housekeeping work that allows the developer or investor to focus singularly on the task at hand. Although there may be different service models, there are essentially two choices. Mr. Martin explains the differences,
“The first service that a financial services group such as Axiom charges is a fixed price, or flat fee to set up and structure the Mutual Fund Trust. With the second service, the company charges a monthly fee to manage the administration of the MFT and investors’ accounting, tax reporting, subscription agreements, security filings, cash distributions, and communications/reporting; a sort of one-stop shop.”
How Real Estate Investment Trusts and Mutual Fund Trusts Differ
One thing both Real Estate Investment Trusts and MFTs have in common is they are both tax-efficient structures that allow investors to use their registered funds (RRSP/TFSA). Both structures allow all types of income and capital gains to retain their characteristics and be passed through to the investor. Tax treatment will be at the investor level.
Ways that Real Estate Investment Trusts and Mutual Fund Trusts differ are:
- REITs have loan-to-value (LTV) limitations, whereas an MFT is not limited to LTV ratios.
- REITs require monthly or quarterly Net Asset Value (NAV), which are reported to unitholders. MFTs are not required to do NAV calculations.
- REITs require audited financial statements, while MFTs do not unless an Offering Memorandum has been issued.
In Conclusion
There are a great many financial products out there to assist investors with meeting their goals. Some considerations are objective, such as the funds an investor has available or in what vehicle their money grows. These vehicles, or financial service products, determine the availability and liquidity, which may preclude certain growth options from being available to the investor. However, there are other, less binary considerations for the investor to turn their mind to, the primary one being the level of hands-on that an investor/client would like to undertake. The answer to this question can seriously change the trajectory of the financial services product offerings.
For assistance navigating the world of Mutual Fund Trust, or if you want to explore other investment products, check out Axiom Advisors Inc.’s website here, or email Dwight Martin directly at dwight@axiomadvisors.ca.
Heather McDowell is a mother and a REALTOR®. Heather has spent most of her real estate career selling residential real estate, and its leasing and has dealt with the additional complexities of the cottage, timeshare and rural properties, and condominiums. She has dabbled in new construction and is expanding her portfolio to include commercial sales and leasing. Heather is also a dedicated volunteer for both the local women’s shelter and a national hospice organization and is an emerging playwright.
Heather describes her focus as diversifying real estate content that not only addresses national matters but explores those issues unique to each province and territory.
You can contact Heather at heather@crewmedia.ca or find her on socials at:
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