First, an important rule: for registered accounts, there’s NO tax payable.* But for non-registered accounts, taxes apply.
How much tax? Well, it depends on the type of distribution.
Let’s take a closer look…
Interest from treasury bills, bonds and GICs…
Along with dividends from foreign sources, like U.S. or emerging market stocks, are taxed at the same rate as employment income. Whereas, dividends from Canadian stocks and any capital gains you might receive from selling securities, are taxed at a lower rate. Some distributions may be classified as ‘return of capital.’ Return of capital is not typically taxable in the year you receive it.
But, it does reduce the fund’s book value, also known as the adjusted cost base, or ACB. When you sell the fund, you may have a larger capital gain or smaller capital loss as a result of the reduced ACB.
Here’s an example of how taxes can impact your investment income, depending on the type of distribution.
To sum up:
Distributions are paid to eliminate the tax a fund must pay on its income and increase your after-tax returns. If you invest outside an RRSP or other registered plan, distributions may be taxable in the year you receive them.
To learn more, please talk to your advisor or a qualified tax specialist.