Mutual fund companies pass on all income to unitholders annually, after deducting expenses.

This means unitholders must pay the taxes due on all income earned on mutual funds held outside of a RRSP.

This includes all interest, dividends, and capital gains. The fund company pays taxes on the management fees charged, loads, and any other fees they receive as income. While switching from one fund to another within a bunch of funds has become quite commonplace, loads of investors don’t realize the tax implications. You are selling units in one fund and buying units in another, when you move money between funds. Eventually, suppose you buy units on December 12 and the fund makes a distribution at year’s end. You will still have to pay tax on them Whether receive a cheque in the mail,, or you reinvest all distributions. This is where it starts getting very serious. If And so it’s near the end of the year and you are thinking of buying units of a fund, it’s crucial to ask when the next distribution will take place.

Many investors have the mistaken notion that by reinvesting distributions they avoid paying tax. Revenue Canada will expect you to pay taxes on any gains. Interest income received from mutual funds is subject to tax at your marginal rate and receives no preferential tax treatment. For tax purposes, it’s especially important to keep accurate records. It will give you some idea of what taxes you gonna be paying if your funds were not in a tax shelter. Now pay attention please. Having your money in a RRSP doesn’t make it fairly easy for you to off the tax hook for ever. Now look. It may also give you additional incentive to put as much as possible into your RRSP while you can. It’s a good idea to read this section, even if you are strictly a RRSP investor.

Capital gains can be made either by selling units in a fund, and getting back more money than you originally paid, or by receiving a capital gains distribution from the fund itself.

Otherwise, 75 of your capital gains are added to your base income and taxed accordingly.

This means that out of almost any $ 1000 in capital gains earned, you get to keep $ 250 tax free. With that said, the amount subject to tax can be reduced by adding any charges, like a ‘front end’ load, to your purchase price and subtracting any expenses incurred, like redemption fees, from the sale price before calculating the percentage of tax owed.

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