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When I
sell my mutual fund investment I will earn a capital gain. Am I
being double taxed?
Many mutual fund investors worry that
they are being double taxed on the income, since they will also
realize a capital gain when they eventually sell their units of the
mutual fund.
The reinvestment income distribution
increases the adjusted cost base of the investment, however,
reducing the taxable capital gain when an investor eventually
disposes of his holdings in the fund. For example, if an individual
invests $1,000 and receives a $215 capital gains distribution, the
adjusted cost base of the investment, after the capital gain
distribution is $1,215. If the investor were to sell his units the
day after the capital gain distribution at a fair market value of
$1,215, he would realize neither a capital gain, nor a capital loss
for tax purposes. The taxable capital gain distribution has reduced
the capital gain he would normally have earned upon the sale of his
investment.
How are capital gains taxed and
reported?
Half of a capital gain on the
redemption or transfer of mutual fund shares or units is taxable at
the regular rates. For taxpayers in the top tax bracket, a $100
capital gain will result in about $25 of tax.
The redemption amount is reported by
the mutual fund in a variety of ways, depending on the policy of the
mutual fund company.
What about
capital losses?
When an investor redeems or transfers
his mutual fund shares or units for less than their ACB, a capital
loss will generally be incurred. Capital losses are usually
deductible only against capital gains.
Capital losses that cannot be used in
the year can be carried back for application against capital gains
in the three years before the loss and can be carried forward
indefinitely.
What are
the tax implications of a transfer of mutual fund shares or units to
another person?
A transfer is fundamentally different
from redemption, although in both cases a disposition results for
tax purposes. Redemption involves the purchase of an investor’s
units by the mutual fund itself, while a transfer to another person
is essentially a sale or a gift to that person. Although transfers
are considered dispositions for tax purposes, certain transfers,
such as those to a spouse or closely held corporation, can generally
be achieved without a capital gain being realized on the
transaction. The capital gain is deferred until such time as the
spouse or corporation redeems or sells the shares or units.
Tammy Osborne is a financial
consultant with MD Management’s Newfoundland and Labrador regional
office. |
