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Email this7:27 pm
August 28, 2013
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If one buys some mutual funds and have them as NON-registered, when he/she has to pay taxes on capital gain?
Example: One has full TFSA and RRSP but has extra $50K in cash. He/she buys some great mutual funds and keeps them as non-registered. At the end of year those $50K become $60K due to fantastic fund performance. Does one has to declare capital gain at tax time OR only when he/she sales mutual fund (or portion of it)? I get confusing answers from bankers as nobody has a clue. It looks like they never met a person who has extra cash...
9:45 pm
April 6, 2013
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That depends on how the great mutual funds went from $50K to $60K.
If the increase was entirely from a 20% increase in the value of each mutual fund unit or share (unrealized capital gain), then the capital gain will become taxable when actually realized when the units/shares are actually sold or deemed to be sold.
If the increase was from a 20% increase in the value of each unit/share that the fund internally realized during the year and distributed at the end of the year, then the capital gains becomes taxable in year they were distributed.
6:21 pm
August 28, 2013
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Thank you, Norman1!
Uh. Let me try to understand...
- If unit/share price increased from let say $20 to $30 from Jan 1 to Dec 31 and there was no dividend distribution then capital gain is not taxed until units are sold? How many units sold triggers tax? 1 unit or all units?
- If there is dividend distribution during the year or at the end of the year (for example CIBC shares have dividend distribution every 3 months) then tax has to be paid on dividend ONLY and not on capital gain if CIBC share went from $90/share to $200/share in a course of 1 year?
Did I understand your explanation correctly Norman1?
7:57 pm
October 27, 2013
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Assuming a non-registered account, capital gains is NOT paid on 'unrealized' capital appreciation where unrealized means the capital gain is on paper only (not received as a distribution, or in a sale of units). Thus if the price of the units changes just due to their value in the market, there is no capital appreciation (or loss) for that year and any subsequent year until 1 or more units is sold. Every unit ultimately sold will trigger a capital gain (or loss) for that unit based on the capital appreciation of that unit.
Example: You have 100 units that you bought for $20 each (which is the adjusted cost base = ACB). At some point in time you sell 50 units for $30 each. You will pay capital gains on the difference between sales value and ACB for the number of units sold. Capital gains = (30-20)x50= $500. The remaining 50 units retain their ACB of $20 each until such time 1 or more units of them are sold at a future date.
Distributions (whether taken in cash or reinvested into more units on a monthly/quarterly/annual basis) in any given year is income, e.g. $100. You will receive a T3 tax slip in March 2015 for the $100 of income received in 2014 which you declare on your 2014 tax return. The T3 slip will break out how much of that $100 in income is eligible dividends, how much is other income, how much is capital gains. You will input those numbers into your tax return and pay tax on that income according to the tax treatment for each of these types of income.
If these distributions are automatically reinvested into more units of the mutual fund, your ACB will change accordingly. Example: You originally had 100 units that you bought at $20 = ACB of $20/unit or a total of $2000. In April 2014, you received a distribution of $100 which was re-invested back into 4 more units of the mutual fund at a price of $25. Your mutual fund now has an ACB of $2100, or $20.192/unit (2100/104). You will pay income tax on that $100 of income via the T3 I mentioned earlier.
If you receive your distributions in cash, your ACB remains at $20/unit because you did not buy any additional units and you will pay tax on the same $100 of income via the T3 I mentioned earlier.
10:17 am
January 4, 2014
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@Justme - it depends on the type of fund that you have, and you won't know what those distributions consist of (interest income, dividends, capital gains, and sometimes return of capital) until year end.
For CIBC funds, visit this page to get an idea: https://www.cibc.com/ca/pdf/mutual-funds/2013-total-distributions-cibc-funds-mps-en.pdf
"- If there is dividend distribution during the year or at the end of the year (for example CIBC shares have dividend distribution every 3 months) then tax has to be paid on dividend ONLY and not on capital gain if CIBC share went from $90/share to $200/share in a course of 1 year?"
This depends - realized capital gains within the fund must be paid out and taxed in the current tax year (ex. portfolio manager sold XYZ stock at a profit), but if your mutual fund rises from $90 to $200 per unit and you haven't sold the units, your tax liability is deferred until you decide to trigger the gains.
As you are holding funds in a non-registered account, be sure to pay close attention to the Adjusted Cost Base (ACB) as AltaRed pointed out, otherwise, you may be paying more tax than you need to (for example, you've paid tax on the distributions already, so increase your ACB accordingly to reduce your capital gains liability).
NB:
- this isn't a blanket statement, but traditional mutual funds may not be most "tax efficient" plan for you depending on how the plan is structured
- you can potentially lower your tax liability by identifying any tax-loss selling opportunities at year end to offset the all or part of your tax liabilities
- if you are planning to eventually trigger the capital gains around year end, it may be more advantageous to do this before the "year end distribution" so part of the gains are taxed as capital gains as opposed to dividend or interest income
- bear in mind that return of capital distributions, while not taxable, can reduce your ACB, which can increase your tax liability if you are not re-investing this part of the distribution
I hope this helps - good luck 
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