Most individuals may be aware that income from qualified investments, such as Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP), are treated differently from investments held in non-qualified accounts, such as a Tax Free Savings Account (TFSA) or any other non-qualified investment. This is regardless of whether or not the accounts are invested in stocks, shares, or mutual funds.
As RRSPs are a common form of investment, it is clear that the money invested in an RRSP is pre-tax, and the principal along with the income is subject to taxes only on withdrawal during retirement, while TFSAs (being an equally encouraged saving medium) has after-tax money invested in it, and any income earned is tax-free (regardless of the income generated). But when it comes to other non-qualified investments, the taxation picture is not so clear.
To clarify some of this doubt, in this article, A.G. Tax analysts have summarized the treatment of income from mutual funds held in non-registered/non-qualified accounts by the CRA. Just remember, it is always recommended to consult your tax practitioner for advice based on your personal tax situation.
What is considered as Income from a Mutual Fund?
Dividends, capital gains, reinvested distributions, and any other return over capital contributed from mutual funds are considered as income but the taxation may vary depending on the type of income.
Taxpayers should understand that any reinvested distributions are also considered to be taxable distributions from the mutual fund.
Taxation of Mutual Fund Distributions
Dividends from Canadian mutual funds are subject to tax, but the tax will be offset by the dividend tax credit. Capital gains from the sale of these mutual funds are partially taxable. Reinvestments and any foreign income are 100% taxable.
Return of capital is not taxable, but it does reduce the adjusted cost base of the mutual fund. Therefore, it is important for Canadian resident taxpayers to keep an eye on the adjusted cost base (ACB). ACB is the initial cost of the mutual fund increased by any commissions paid, and any reinvested income or dividend. ACB is reduced by any return on capital (the initial cost as described above) of any sold unit(s).
Income from foreign mutual funds held by a Canadian taxpayer are subject to Canadian taxes and are fully taxable. However, tax rates may vary if any tax treaty clauses apply.
Every Canadian mutual fund company is required by the CRA to issue a T3 slip (Statement of Trust Income Allocations and Designations) stating the income received by the taxpayer from the mutual fund for the given tax year. This income is reportable on Form T1 (Canadian Individual Income tax return). If a taxpayer has invested in more than one mutual fund they would expect to receive a T3 slip from each individual fund.
That being said, it is important that taxpayers retain a copy of their T3 slips to substantiate the income reported on their tax return.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws, and can provide you with the right guidance to handle your unique tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
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