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Here we provide an overview of the tax considerations of mutual fund investments registered and non-registered accounts.
How does my non-registered mutual fund investment get taxed?
If you hold units of a fund in a non-registered account, you must include your share of the fund's distributions of net income and net capital gains (including any management fee distributions) in your income. This rule applies whether you receive the distributions in cash or in additional units of the fund.
Distributions, including management fee distributions, may include a return of capital. When a fund earns less income and capital gains than the amount distributed, the difference is a return of capital. A return of capital is not taxable, but will reduce the adjusted cost base of your units of the fund.
The unit price of a fund may include income and/or capital gains that the fund has earned but not yet realized and/or distributed. If you buy units of a fund just before it makes a distribution, you'll be taxed on that distribution, even though the fund earned the amount before you owned it.
For example, many funds make their only, or most significant, distribution of income and capital gains in December. If you buy units late in the year, you may have to pay tax on the income and capital gains the fund earned for the whole year.
You'll receive a tax slip each year that shows you how much of each type of income the fund distributed to you. You can claim any tax credits that apply to those earnings.
You should consult with a tax professional for detailed tax information on your investments..
How does my registered mutual fund investment get taxed?
If you hold units of a fund in an RRSP, RRIF, RESP or other registered plan, you generally pay no tax on distributions from a fund on those units or on any capital gains that you receive from selling or switching units. When you withdraw money upon retirement from a registered plan, it will generally be subject to tax at your marginal tax rate. You should consult with a tax professional about the special rules that apply to RESPs.
If you withdraw money from your RRSP prior to retirement, then the amount of the withdrawal will usually be subject to a witholding tax, which is paid on your behalf to Canada Revenue Agency (CRA). The amount of tax charged is based on the amount of the withdrawal.
You should consult with a tax professional for detailed tax information on your investments.
How do I know if I have to pay taxes on capital gains?
In general, you must also include in computing your income one half of any capital gains you realize from selling or switching your units. You'll have a capital gain if your sale proceeds, less any cost of the sale, are more than the adjusted cost base of your units. You'll have a capital loss if your sale proceeds, less any costs of the sale, are less than the adjusted cost base of your units. You may use realized capital losses to offset capital gains.
In general, the adjusted cost base (ACB) of your units is calculated as follows:
- Initial investment
- + additional investments
- + reinvested distributions
- - any return of capital distributions
- - any previous redemptions
You should consult with a tax professional for detailed tax information on your investments.
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