Mutual Fund Income Solutions
Strategies to Meet Long-Term Investment Goals
Mutual Fund Tax Management
A mutual fund can be set up as a trust or a corporation. The main difference between an investment in a trust and a corporation is in how the entity and your investment in the entity are taxed. This is generally more important if you are investing outside of a registered plan.
A mutual fund that is a trust will, each year, distribute enough of its net income and net realized capital gains so that the fund will not be subject to normal income tax. The fund will flow its taxable income through to investors in the form of distributions. Investors are generally taxed on this income as if they earned it directly.
A mutual fund that is a corporation will generally flow its Canadian source dividend income through to investors in the form of ordinary dividends and its net realized capital gains through to investors in the form of capital gains dividends. The fund will pay tax on other types of income (such as interest or foreign source dividends) if that income is more than its deductible expenses and investment losses.
|Types of Distribution||Description||Tax Treatment||Examples|
|Interest||Income that’s earned from investments such as GICs and bonds||Generally treated as ordinary income and taxed at the investor’s marginal tax rate||BMO Core Bond Fund
BMO Core Plus Bond Fund
|Canadian Dividends||Income that’s earned from dividends paid by Canadian companies||The investor can treat the distribution as if it were a dividend from a Canadian company, which may qualify for a lower effective tax rate||BMO Dividend Fund
BMO Monthly High Income Fund II
|Capital Gains||Realized when an underlying investment within the fund is sold for more than its purchase price||The investor can usually treat the distribution as if it were a capital gain realized by him or her. Half of such a capital gain distribution has to be included in the investor’s income.||BMO Canadian Lg Cap Equity Fund
BMO U.S. Equity Fund
|Foreign Non-business Income||Income that’s earned from foreign investments, such as shares of U.S. companies.||The investor may be able to claim a foreign tax credit for foreign tax paid by the mutual fund.||BMO U.S. Dividend Fund
BMO Global Dividend Fund
|Return of Capital||When a fund distributes more than its net income and net realized capital gains, which may occur if the fund has a stated fixed distribution amount.||Not taxable in the year received, but reduces the adjusted cost base (ACB), which generally results in a larger capital gain (or smaller capital loss) when the investment is sold||BMO Monthly Income Fund
BMO Balanced Yield Plus ETF Pt
Note: Investments held in registered accounts (such as RRSPs and RRIFs) are generally tax deferred until the investments are withdrawn.
What you need to know about tax consequences when redeeming or switching your mutual fund
The redemption of mutual fund securities is a disposition. If securities are held in your non-registered account, you will generally realize a capital gain or capital loss when you redeem or otherwise dispose of your securities. The capital gain or loss is the difference between the proceeds you receive and the ACB of your redeemed securities, less any cost of disposition.
If you switch your securities of a fund for securities of another series of the same fund, or if you switch between mutual funds within a corporate class structure (i.e., BMO Global Tax Advantage Funds), the switch is made either as a redesignation or a conversion of your securities, depending on the situation. In other words, the switch should occur on a tax-deferred basis so that you do not realize a capital gain or capital loss on your switched securities. Any other type of switch involves the redemption of your securities, which is a disposition for income tax purposes.
Capital gains must be reported for tax purposes in the same year they are realized. Because only 50% of the gain is taxable, capital gains are taxed more favorably than other types of income. Most capital losses can be used to offset capital gains to reduce an investor’s tax liability. If, however, an investor does not have any realized capital gains in the same year that a capital loss is realized, the loss can be carried back and applied against realized capital gains from any of the previous 3 years. Investors are also allowed to carry the loss forward indefinitely to offset gains in future years.
Depending on your investment goals, it may make sense to consider investment strategies within your portfolio that are tax efficient. Speak to your advisor or tax specialist to get details on tax-efficient strategies for your portfolio.