Taxes & investing in mutual funds

Taxes & investing in mutual funds

Overview
Why is understanding taxes important?
This guide provides general tax information related to the 
purchase and sale of mutual fund investments in a non-

registered account, with a specific focus on how mutual fund 
distributions are taxed. The goal is to help you gain a better 
understanding of tax considerations related to your mutual 
fund investments.
What is a mutual fund?
The majority of mutual funds in Canada are mutual fund 
trusts. Investors in mutual fund trusts receive units of the 
trust and are referred to as unitholders.
At a basic level, mutual funds use money received from 
unitholders to buy securities. The securities purchased 
depend on the fund’s investment objective, but generally 
include cash, bonds and stocks. These investments may 
generate income in the form of interest, foreign income 
or dividends. In addition, capital gains or losses may be 
realized when securities held in the fund 
are sold.
Income earned within a fund is first used to pay its 
management and administration fees. When added 
together, the management fee and the administration fee 
(plus applicable taxes) make up the Management Expense 
Ratio (MER). The taxable income that is left over is 
distributed to unitholders.
Mutual funds can also be set-up as corporations. Commonly 
referred to as corporate class mutual funds, these 
structures are set up with multiple share classes. Each 
share class, often referred to as a “corporate class fund,” 
represents a different mutual fund. This guide does not 
cover taxation of corporate class mutual funds.

What events trigger taxes on my mutual fund 
investments?
Generally, the taxable events on your mutual fund 
investments fall into two categories:
§ When you sell or switch a fund
§ When you receive income from a fund through a 
distribution
Principles related to taxes and investing
Structure your overall portfolio to be tax-efficient
Placing different types of investments in different 
types of accounts (e.g. inside or outside of registered 
plans) can reduce your tax costs and increase the 
tax-effectiveness of your overall portfolio.
Maximize cash flow in retirement with a taxefficient portfolio
In retirement, the after-tax cash flow that you receive 
from your taxable, non-registered investments 
becomes increasingly important. Choosing 
investments that benefit from favourable tax 
treatment can help you generate more income in 
retirement. 
Work with an advisor
Working with a knowledgeable investment 
professional can help you learn about how different 
types of investments are taxed and how you can 
build a tax-efficient portfolio.

This guide discusses the impact of taxation on mutual funds in non-registered accounts.
Mutual funds held within tax-sheltered plans, such as TFSAs, RRSPs, RRIFs and RESPs, 
are not covered in this guide.

Taxes associated with selling or switching your mutual fund

Capital gain (or capital loss) 
As with any investment, there are tax considerations 
related to the purchase and sale of mutual funds. Here is 
what you need to know: 
§ If you sell a mutual fund investment and the proceeds 
exceed your adjusted cost base (ACB), you realize a 
capital gain. Realized capital gains must be reported for 
tax purposes in the year of sale. Capital gains are taxed 
more favourably than interest and foreign income, and 
sometimes dividends as well. Under current tax rules, 
only 50% of a capital gain is taxable.
1
 
§ If you sell a mutual fund investment and the proceeds 
are less than your ACB, you realize a capital loss.
Most capital losses can be applied against capital 
gains to reduce the amount of taxes payable. If your 
realized capital gains in a given tax year are less than 
your realized capital losses, the net capital loss1
 can 
be carried back and applied against taxable capital 
gains from any of the previous three years. You are also 
allowed to carry the net capital loss forward indefinitely to 
offset taxable capital gains in future years.
In general, you can calculate your capital gain or capital 
loss using the following formula:
Capital gain
(or capital loss) =Proceeds from sale of an investment– ACB

Switching between mutual funds
If you switch between mutual fund trusts in a non-registered 
account, you have actually sold units of one fund and 
purchased units in another. If the units you sold are worth 
more than your ACB, the switch will generate a capital 
gain. If the units you sold are worth less than your ACB, the 
switch will generate a capital loss.
When switching between funds, keep in mind that you are 
required to keep track of your capital gain and include 
its taxable portion in your taxable income in the year of 
sale. Speak to your financial advisor to understand the 
implications before switching your investments.
HELPFUL TIPS
In order to assist in your annual tax reporting 
for these transactions, your fund company or 
investment dealer will issue a statement of your 
mutual fund securities transactions (also known as 
T5008/Relevé 18). This tax slip lists any mutual fund 
units which were disposed of, or redeemed during 
the calendar year. See page 15 of this guide to view 
an example of a T5008 slip.

Taxes & investing in mutual funds