Tax treatment of mutual funds

Kate has mutual fund investments in XYZ Mutual Fund Trust and STU Mutual Fund Corporation. Over the years, she bought units in XYZ Mutual Fund Trust and reinvested her distributions from the trust to buy more units.

On June 30, 2023, Kate redeemed 200 units from XYZ Mutual Fund Trust at a price of $17.42 per unit, for a total of $3,484. Her redemption fees were $70. Kate records her redemption and her reinvested distributions, and she recalculates her adjusted cost base (ACB) for XYZ Mutual Fund Trust as shown in Chart 1.

For the 2023 tax year, Kate received the following information slips:

• a T3 slip from XYZ Mutual Fund Trust showing capital gains (reinvested distributions) of $750 in box 21 and a return of capital of $500 in box 42
• a T5 slip from STU Mutual Fund Corporation showing capital gains dividends of $330 in box 18 and a taxable amount of eligible dividends of $200 in box 25

Step 1 – Capital gains resulting from the redemption

The first step Kate takes is to calculate her ACB. Chart 1 shows how she does this. The average cost of the units at the time of redemption is $15.20 per unit. She calculates the ACB for the redeemed units by multiplying the number of units redeemed by the average cost per unit (200 x $15.20 = $3,040). To calculate her proceeds of disposition, Kate multiplies the number of redeemed units by the redemption price (200 x $17.42 = $3,484).

Step 2 – Completing schedule 3

When she completes her 2023 income tax and benefit return, Kate records her ACB ($3,040), proceeds of disposition ($3,484), and redemption fee of $70 on Schedule 3, under the heading "Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares and other shares." To determine her capital gain (or loss) on this transaction, she subtracts the ACB and redemption fee from the proceeds of disposition [$3,484 - ($3,040 + $70)]. In this example, her gain is $374.

Kate also reports the capital gain of $750 from the T3 slip on line 17600 of Schedule 3 and the capital gains dividend of $330 from her T5 slip on line 17400 of Schedule 3. Kate does not report the amount of $500 from box 42 of the T3 slip on Schedule 3 or as income on her income tax and benefit return. This box 42 amount does result in an adjustment to her ACB as shown in Chart 1.

Kate's total capital gains on line 19700 are $1,454 (as $374 + $750 + $330). To calculate her total taxable capital gains, she multiplies this amount by 50%, for a result of $727. This is the amount she will enter on line 19900 of Schedule 3 and line 12700 of her return.

Consult this reproduction of the appropriate areas of Schedule 3 as Kate would have completed them. Kate records her redemption and any future buys or reinvested distributions, and she recalculates her ACB as shown in Chart 1.

If, instead of a capital gain, Kate had a capital loss of $1,454 on line 19700, 50% or $727 would be her net capital loss. Kate would file Schedule 3 with her return to register her loss. She can use this net capital loss to reduce taxable capital gains in any of the three previous years or in any future year.

Step 3 – Completing the Federal Worksheet

Kate completes "Line 22100 – Carrying charges, interest expenses, and other expenses" of the Federal Worksheet, and includes the $200 from box 25 of the T5 slip on line 8 under "Lines 12000 and 12010 – Taxable amount of dividends from taxable Canadian corporations."