Investment Services

Segregated Funds and Account Types

What Are Segregated Funds?

Segregated funds are investment products offered by insurance companies that function similarly to mutual funds by pooling investor money into a portfolio of stocks, bonds, or other securities, but with additional insurance-based guarantees built in. They carry a distinct set of benefits since they are structured as insurance contracts instead of pure investment products.

Key advantages of segregated funds:

Bypass of probate: With a named beneficiary, segregated fund proceeds pass directly to that beneficiary on death, avoiding the probate process. This can mean faster access to funds, reduced legal and executor fees, as well as greater privacy since the payout doesn’t become part of the public probate record.
Maturity and death benefit guarantees: Most segregated funds guarantee that 75–100% of your original deposits will be returned at maturity (typically after a set holding period, often 10 years) or upon death, regardless of how the underlying investments have performed. This protects against market downturns at the moments that matter most.
Potential Creditor Protection: Since segregated funds are insurance contracts with a named beneficiary (other than the estate), they may be protected from creditors in the event of bankruptcy or legal action. Business owners and professionals in liability-exposed occupations may greatly benefit from this feature.
Reset Options: Many contracts allow you to “lock in” investment gains periodically by resetting the guaranteed amount to the current market value, extending the guarantee period in exchange for securing growth.
Estate Planning: Because the death benefit guarantee is protected from market downturns, segregated funds can be a useful tool for estate and legacy planning where certainty of an amount passed to heirs is a priority.

Segregated funds may have a higher management expense ratio (MER) than a comparable mutual fund, reflecting the cost of the insurance guarantees. That cost, however, has been significantly reduced in the past decade due to the competitive nature of fee-efficient portfolios. Whether that cost is worth it depends on an individual’s need for creditor protection, estate efficiency, and downside protection.

Account Types: TFSA, RRSP, and Non-Registered Accounts

Segregated funds and mutual funds alike can be held in different account types, each with distinct tax treatments. Choosing the right account depends on your income level, time horizon, and goals.

Tax-Free Savings Account (TFSA)

Contributions are made with after-tax dollars. There is no tax deduction upon contributing.
All growth (interest, dividends, capital gains) accumulates completely tax-free. Withdrawals are also tax-free.
The annual contribution limit for 2026 is $7,000. Unused room carries forward indefinitely, and any amount withdrawn is added back to your contribution room the following calendar year.
For someone who has been eligible since the TFSA’s introduction in 2009 and has never contributed, the total available room in 2026 is $109,000.
Best suited for: short- to medium-term goals, tax-free growth on top of maximized RRSP contributions, and flexible access to funds without tax consequences.

Registered Retirement Savings Plan (RRSP)

Contributions are tax-deductible, reducing your taxable income in the year you contribute.
Growth inside the RRSP is tax-deferred, no tax is paid until funds are withdrawn.
Withdrawals are taxed as regular income in the year they’re taken, ideally in retirement when your marginal tax rate may be lower.
The 2026 contribution limit is the lesser of 18% of your 2025 earned income or $33,810, plus any unused room carried forward from prior years.
Best suited for: retirement savings, particularly for individuals in higher tax brackets today who expect to be in a lower bracket in retirement, and for those who want to defer tax on investment growth over a long horizon.

Non-Registered (Open) Investment Accounts

No contribution limits and no restrictions on deposits or withdrawals.
No tax deduction on contributions, and investment income is taxed annually as earned:
- Interest income is taxed at your full marginal rate.
- Canadian dividends benefit from the dividend tax credit, generally taxed more favorably than interest.
- Capital gains are taxed on 50% of the gain at your marginal rate, and only when realized (i.e., when the investment is sold).
Best suited for: investors who have maximized their TFSA and RRSP room, need liquidity without withdrawal restrictions, or want flexibility for larger, less tax-sheltered pools of capital.

A well-structured financial plan often uses all three account types together, sequencing contributions and withdrawals to minimize lifetime tax paid while keeping funds accessible if needed.

Portfolio Management and Actively Managed Funds

How Portfolio Management Works

Portfolio management is the continued process of building and adjusting a group of investments to meet an individual’s financial goals, time horizon, and risk tolerance. A portfolio manager (or a fund’s management team) is responsible for:

Asset allocation: deciding the mix between asset classes such as equities, fixed income, and cash, based on the investor’s objectives and risk profile.
Security selection: choosing the specific stocks, bonds, or other holdings within each asset class.
Diversification: spreading investments across sectors, geographies, and asset types to reduce the impact of any single holding or market event.
Ongoing monitoring and rebalancing: periodically adjusting the portfolio back toward its target allocation as markets move and responding to changes in the economic environment or the fund’s mandate.
Risk management: using tools and analysis to manage volatility and downside exposure relative to the fund’s objectives.

How Management Fees Are Charged

Portfolio management comes at a price: the ongoing analysis, trading, research, and administration are paid for through fees, also expressed as the Management Expense Ratio (MER).

The MER is charged as a percentage of the total assets in the fund annually (for example, an MER of 2% means $20 is deducted per $1,000 invested per year).
It is deducted directly from the fund’s returns before the return is reported to you — you won’t see a separate bill, but it’s reflected in the fund’s net performance.
The MER typically bundles together several components: the investment management fee itself, fund administration and operating costs, and a trailing commission paid to your advisor or advisory firm for ongoing service and advice, if applicable.
Segregated funds sometimes carry a somewhat higher MER than comparable mutual funds because part of the fee also pays for the insurance guarantees described above (maturity/death benefit guarantees, potential creditor protection).
Fees can vary between funds, so it’s worth understanding what you’re paying for: passive index-tracking, active management, the level of ongoing advice included, and/or any guaranteed features.

The Benefits of an Actively Managed Fund

An actively managed fund is one where a portfolio manager (or team) makes ongoing decisions about which securities to hold, in what proportions, and when to buy or sell, as opposed to a passive fund that simply tracks a market index.

Potential advantages of active management:

Downside risk management. Active managers can shift allocations, for example, increasing cash or defensive positions, in response to changing market conditions, rather than being fully exposed to a declining index.
Opportunity to outperform. Skilled managers aim to identify undervalued securities or sectors with strong prospects, offering the potential for returns above the broader market. That said, greater returns are never guaranteed, and not all active managers succeed in outperforming their benchmark after fees.
Flexibility across market cycles. Active funds are not bound to hold every security in an index, allowing managers to avoid areas of the market they view as overvalued or high-risk, or to concentrate on higher-conviction opportunities.
Access to specialized expertise. Active management gives investors access to professional research, macroeconomic analysis, and security selection expertise that would be time-consuming and difficult to replicate independently.
Alignment with specific goals. Active mandates can be tailored, for example, income-focused, conservative, or sector-specific strategies to align more closely with an investor’s objectives than a broad index would.

The trade-off is cost: active management commands a higher MER than passive index investing, and outperformance is never guaranteed. Active management is generally advantageous to investors as they typically provide downside capture, which is the mitigation of market losses during periods of large-scale market selloffs. Whether active management is worthwhile for a given investor, however, depends on their goals, risk tolerance, and the fund’s track record relative to its fees and benchmark.

With the changes to small business taxation that took effect in 2019, let’s look at how corporations can reduce the impact of those changes on their bottom lines.

Strategies to address the new rules

Strategies can fall into one of three buckets. Here are some tips for our business clients.

Reduce active business income

If your current year’s passive income can be reasonably forecast, then so can your small business deduction (SBD). As a result, if your active business income (ABI) can be reduced to at or below your anticipated SBD, then you can avoid the higher general corporate tax rate. Here are some ideas for doing so:

Revisit your compensation mix. Salaries and bonuses are employment income reported on a T4. They’re also deducted from ABI.
Pay salaries to your spouse and children. If the salary is reasonable for the job, this income-splitting strategy is still viable.

Reduce passive income

Directly reducing passive income or passive investment assets within a corporation can also reduce the impact of the changes. There are several ways to do this:

Realize capital losses in the current year. Capital loss carry-forward amounts won’t help, as any used are added back as part of the adjusted aggregate investment income (AAII) calculation for determining passive income levels. That said, capital losses realized in the current year can offset capital gains also realized in the current year. This can be beneficial if you’re rebalancing current passive assets to reduce passive income in future years.
Invest in low-taxable income and low-distribution assets. Investments that generate little or no taxable income, such as corporate class mutual funds, will result in less passive income now and possibly in future years. Some mutual fund trusts also follow investment strategies that minimize taxable distributions.
Consider T-series mutual funds. T-series provide an income stream consisting primarily of return of capital (ROC), which isn’t taxable. Using passive assets within the corporation in conjunction with T-series to provide liquidity can be tax-efficient and won’t impact passive income for AAII purposes.
Don’t forget expenses. Expenses incurred to generate passive income, such as interest expenses or investment counsel fees, can be used to reduce passive income.
Repay shareholder loans. Using passive assets to repay outstanding shareholder loans can reduce passive investment income.
Pay dividends from the capital dividend account (CDA). Funding capital dividends with funds from passive assets can reduce such balances, which in turn can reduce passive income. The shareholders receive the capital dividends tax free, which doesn’t impact their personal tax position.
Combine multiple years’ transactions. When considering rebalancing passive assets, funding dividends to corporate shareholders with passive assets, or expanding operations, you can combine multiple years’ transactions into one. This may allow the negative impact of realized capital gains on the SBD to occur only once.
Purchase corporate-owned life insurance. Investments in life insurance policies are generally tax sheltered. This can reduce passive investment asset balances while addressing a planning need for you and your corporation.

A combination of both

There may be opportunities to combine items from the lists above to lower active business income and passive income. There are also these options:

Review investment options outside your corporation. Investment plans such as RRSPs, individual pension plans, or retirement compensation arrangements can create a deduction against ABI for employer contributions. If such contributions come from passive assets, they’ll be reduced. If they’re earmarked for future personal use, it may be beneficial to hold them outside your corporation, especially when your personal marginal tax rate is lower than your corporate tax rate on investments.
Make a corporate donation. A corporate donation creates a deduction against income and may reduce passive investments, as it’s funded with corporate money. Further, in-kind donations of publicly traded securities attract a 0% capital gains inclusion rate and, therefore, don’t increase the current year’s passive income. Finally, since 100% of the capital gain is tax free, the entire gain is added to the CDA, which could be paid to the shareholders tax-free.

Starting in 2019, passive income earned inside a corporation can lower a corporation’s small business deduction (SBD). This reduction begins when a corporation (or a group of associated corporations) earns $50,000 of passive income in a year. The SBD will be fully eliminated when passive income reaches $150,000. For each dollar of passive income over $50,000, the SBD will be reduced by $5.

Conclusion

The small business tax changes are another round in the game of tax change and adaptation. Rules change, new strategies emerge, and the process repeats.