Mutual funds investment distributions - Canada.ca (2024)

FAQs

How are mutual fund distributions taxed in Canada? ›

In most situations, income from mutual funds is taxed in two ways: While you own the shares or units, 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, Statement of Trust Income Allocations and Designations.

When you withdraw money from the plan, it will be taxed as regular income (same as interest) regardless of the different types of income earned in the registered plan. You may want to talk to a qualified tax expert about any taxes you may have to pay on your investment in mutual funds.

These capital gain distributions are usually paid to you or credited to your mutual fund account, and are considered income to you. Form 1099-DIV, Dividends and Distributions distinguishes capital gain distributions from other types of income, such as ordinary dividends.

Some of the mutual fund net outflows have been substantial. Investors pulled a net $10.4 billion out of mutual funds in June 2022, $9 billion in Sept. 2022 and $12.5 billion in October 2023, IFIC data show.

The investor must pay capital gains taxes on distributions whether they're taken as cash or reinvested in the fund. The taxes on distributions are due in that tax year unless the fund is part of a tax-deferred retirement account.

If you move between mutual funds at the same company, it may not feel like you received your money back and then reinvested it; however, the transactions are treated like any other sales and purchases, and so you must report them and pay taxes on any gains.

Mutual funds in Canada are notorious for their layers of fees, such as management fees, administrative costs, and others that can significantly reduce your investment returns over time.

How to withdraw money from mutual fund. To withdraw money from mutual funds, you can either complete and submit a withdrawal request form for offline processing, which your broker will forward to the Asset Management Company (AMC), or you can redeem your funds online.

Profits on shares held a year or less are taxed at the rate for short-term capital gains, which is the same as the rate on your other income and might be as high as 37%. For shares held longer than a year, the rate will be 0%, 15%, or 20%.

Is it better to sell mutual funds before or after distributions? ›

If you sell before the fund's ex-dividend date, you won't receive the upcoming dividend distribution, and your entire profit will be a lower-taxed long-term capital gain, as long as you've held the shares for more than a year.

When a shareholder receives a dividend, they must include it in their tax return. Dividends are federal and provincial taxes. The tax component of qualified dividends is taxed at 15.0198 percent, while the tax portion of non-eligible dividends is taxed at 9.031%.

When you sell or redeem (or cash in) the units or shares, you are taxed on the gain, if any. This is usually a capital gain because your mutual fund investment is usually considered capital property for tax purposes.

Canadian mutual funds and ETFs may be subject to the PFIC rules. U.S. citizens who own shares of a Canadian investment holding company that is not considered a CFC (see consideration #6 above) may also be subject to the PFIC rules. The PFIC rules are punitive and may involve significant reporting requirements.

Mutual funds are still a good option for investors who have very small amounts to invest, who feel comfortable with bank staff or advisers who sell them funds or who have found funds that consistently give them strong returns.

If you receive a distribution from a fund that results from the sale of a security the fund held for only six months, that distribution is taxed at your ordinary-income tax rate. If the fund held the security for several years, however, then those funds are subject to the capital gains tax instead.

Statements made by the IRS suggest that U.S. investments held through Canadian mutual funds will not be considered U.S. assets for U.S. estate tax purposes. Therefore, investing in the U.S. market through Canadian mutual funds can be a viable U.S. estate tax planning strategy.