Investment fund distribution
Investment fund distributions consist of net capital gains made from the profitable sale of portfolio assets, along with dividend income, interest earned by those assets and can also have a return of capital component. These distributions are made from mutual funds and exchange-traded funds (ETFs).
Once distributions are made, the fund’s share price declines by the total of the per-share distribution to the fund’s shareholders. The price falls because the distribution is withdrawn from the fund’s assets, which decreases the net asset value (NAV).
Why do funds make distributions?
Distributing income earned by fund holdings benefits unitholders by minimizing overall taxes paid by the fund. Since fund trusts are taxed at a rate equivalent to the highest personal tax rate, any income retained by a fund is typically subject to more tax than if it were taxed in the hands of individual investors.
Tax treatment
If you hold mutual funds or ETFs in a non-registered account then you are taxed on the distributions of income that are flowed out to you. If you own units of a mutual fund trust, the trust will give you a T3 slip,[1] Statement of Trust Income Allocations and Designations. If you own shares of a mutual fund corporation, the corporation will give you a T5 slip,[2] Statement of Investment Income.[3] A return of capital will reduce the adjusted cost base (ACB) of your units or shares.
See also
References
- ^ "Trust information returns - slips and summaries". Canada Revenue Agency. 2022-03-25. Retrieved February 21, 2023.
- ^ "T5 slip". Canada Revenue Agency. 2023-02-17. Retrieved February 21, 2023.
- ^ "Tax Treatment of Mutual Funds for Individuals". Canada Revenue Agency. 2023-02-21. Retrieved February 21, 2023.
External links
*Tax Treatment of Income From Investments in Mutual Funds, TaxTips.ca