Comments on: Investor Advisory Alert – Year End Tax Distributions

By: Couch Potato Basics, Part 5: Tax Efficiency « Canadian Couch Potato

Couch Potato Basics, Part 5: Tax Efficiency « Canadian Couch Potato — Fri, 22 Jan 2010 14:02:53 +0000

[...] Investors who unwittingly buy a mutual fund late in the year may also get a nasty surprise from the taxman. If the fund pays a capital gains distribution at year end, a new investor must pay tax on it even if the actual gain was incurred long before she bought into the fund. How fair is that? (For more, see this post at Where Does All My Money Go?) [...]

By: dj

dj — Fri, 11 Dec 2009 00:22:20 +0000

On crap,this is me!!! but it’s $6 per unit cap gain…anyone known a good CGA? My CFP said:”don’t worry about the tax,I’ll look after the profits”…I’m selling everything an going Formula Ford racing.

By: Preet

Preet — Tue, 01 Dec 2009 02:02:54 +0000

@lxf: you are correct. The $1,000 capital gain distribution means the investor must pay his/her marginal tax rate on 50% (the capital gains inclusion rate) of the $1,000. Even if he/she reinvests. You are correct in that he/she will have to find the extra money out of pocket to pay this tax liability (or buy less units).

By: lxf

lxf — Sat, 28 Nov 2009 04:41:20 +0000

Preet,

Thanks for the calrification!! So does he need to pay tax on the $1,000 as soon as the distribution is made even if he choses to REINVEST? Does this mean he need to make up the tax charge (through additional funds out of his pockets) in order to purchase the 1,111.111 units at $9 each?

Thanks a lot!

By: Preet

Preet — Sat, 28 Nov 2009 01:12:09 +0000

@lxf: your formula determines market value. Book value is the sum of all the purchase transactions. He initially bought $100,000 worth of units. Then he bought another $10,000 so his total outlay is $110,000 (I think the post is incorrect in that it states a new ACB of $111,111.11, I’ll verify with Ken to make sure we are both on the same page). The total number of units he owns is 11,111.11 after taking the $10,000 distribution to buy new units at $9 which when multiplied by $9/unit = $100,000. His average cost per share is $9.90 for calculating capital gains later upon disposition of units.

@Pat: thank you for your eagle eye, I noticed the same thing. I’ll amend the post as well.

By: Pat

Pat — Sat, 28 Nov 2009 01:08:53 +0000

Shouldn’t the ACB be $110,000 (the initial 100,000 plus the 10,000 distribution that was re-invested)? The market value will still be 100,000 (11,111.11 units * $9/unit = 99,999.99 = 100,000.00)

By: This and That: Lessons from the Crash and more… | Canadian Capitalist

This and That: Lessons from the Crash and more… | Canadian Capitalist — Fri, 27 Nov 2009 03:59:27 +0000

[...] In a guest post on Where Does All My Money Go? mutual fund industry critic Ken Kivenko points out yet another downside of active funds in taxable a… [...]

By: lxf

lxf — Fri, 27 Nov 2009 01:32:26 +0000

Preet,

Could you further explain these two sentences?
“The Adjusted Cost Base for income tax purposes will be $111,111.11 so that he or his estate will realize that much smaller a capital gain upon disposition.”

Why the cost base is not the current price of the unit ($9) multiplied by the total units (11,111). To me it should still be $100,000.

“The bottom line is that John must pay income taxes now in exchange for reduced capital gain and tax liability downstream.”

Since you mentioned that he can reinvest the $10,000 he got to purchase 11,111 more units, does he still need to pay tax? Shouldn’t he pay tax once he sell his units? I’m not familiar with how the tax is calculated

By: Patrick

Patrick — Thu, 26 Nov 2009 21:50:57 +0000

I’m with Michael on this one. You have now officially scared me away from ever owning a mutual fund.

By: Richard

Richard — Thu, 26 Nov 2009 14:43:28 +0000

That makes a lot more sense :) I’ll be sure to keep in my for any non-registered investments.