Tax treatment of mutual funds

This section contains general information on the tax treatment of income received from Canadian mutual funds. It explains what a mutual fund is, how to report income, and how to report the sale of mutual fund units or shares.

What is a mutual fund

A mutual fund is an arrangement under which shares or units are sold to raise capital. Investors buy units if the mutual fund is a trust, or shares if the fund is a corporation. When you invest in a mutual fund, your money is pooled with the money of other investors and invested on your behalf by the fund manager.

Note

This section does not apply to certain investments in mutual fund trusts that are acquired through a securities option agreement, mutual fund investments held in a tax-free savings account (TFSA), or mutual fund investments that are held in tax deferred plans. For more information, see guides T4040, RRSPs and Other Registered Plans for Retirement, and RC4092, Registered Education Savings Plans (RESP) and RC4466, Tax-Free Savings Account (TFSA), Guide for Individuals, or go to First Home Savings Account (FHSA).

How income from mutual funds is taxed

In most situations, income from mutual funds is taxed in two ways:

While you own the shares or units, you are taxed on the distributions of income that are paid to you. If you own units of a mutual fund trust, the trust will give you a T3 slip, Statement of Trust Income Allocations and Designations. If you own units of a mutual fund trust, the trust will give you a T5 slip, Statement of Investment Income. The distributions can be capital gains, capital gains dividends, dividends, foreign income, interest, other income, return of capital, or a combination of these amounts. A return of capital will reduce the adjusted cost base (ACB) of your units or shares
When you sell or redeem (or cash in) the units or shares, you are taxed on the gain, if any. This is usually a capital gain because your mutual fund investment is usually considered capital property for tax purposes. You will receive a T5008 slip, Statement of Securities Transactions, or an account statement from the mutual fund

How to report the income from tax slips

The back of the tax slip explains where to report the income shown in each box and it refers you to the appropriate section of Federal income tax and benefit information when necessary. The reporting requirements for the most common types of income are included on the chart below.

If you choose to reinvest any distributions by buying more units or shares, you may not actually receive the income shown on your tax slips. However, you must still report the amounts shown on your slips. This is because the CRA considers you to have received these amounts before reinvesting them.

Reporting instructions for T3 slips and T5 slips

Table provides instructions for reporting income from tax slips
Type of income	Slip	Box	Instructions
Capital gains	T3 slip	Box 21	Box 21 may include amounts from one or more of the following boxes: 30, 52, 53, 54, 55, 56, and 57. If there is an amount in any of these boxes, refer to the instructions below for the applicable box. All or part of the amount in box 21 may be foreign non-business income, which will be footnoted. Include any footnoted amount for foreign non-business income on line 43300 of Form T2209, Federal Foreign Tax Credits.
	T3 slip	Box 30	Box 30 includes amounts from boxes 54, 55, 56, 57, and amounts related to a capital gains reserve claimed by the trust in a prior tax year. If there is an amount in any of these boxes, refer to the instructions for the applicable box. If the amount in box 30 relates to a capital gain reserve, the footnotes will provide the information on the nature of the property disposed of (QSBCS and/or QFFP), the amount(s) in Box 30 related to each disposition, and the year in which each disposition occurred. For more information on where to report the footnoted amounts, see the instructions on the back of your slip.
Capital gains from dispositions before June 25, 2024	T3 slip	Box 52	Subtract any amount in boxes 54 and 56 from the amount in box 52. Include the difference on line 17599 of Schedule 3.
Capital gains from dispositions after June 24, 2024	T3 slip	Box 53	Subtract any amount in boxes 55 and 57 from the amount in box 53. Include the difference on line 17600 of Schedule 3.
Capital gains eligible for deduction from dispositions of QFFP before June 25, 2024	T3 slip	Box 54	Include this amount in the total reported on line 10686 of Schedule 3.
Capital gains eligible for deduction from dispositions of QFFP after June 24, 2024	T3 slip	Box 55	Include this amount in the total reported on line 11000 of Schedule 3.
Capital gains eligible for deduction from dispositions of QSBCS before June 25, 2024	T3 slip	Box 56	Include this amount in the total reported on line 10684 of Schedule 3.
Capital gains eligible for deduction from dispositions of QSBCS after June 24, 2024	T3 slip	Box 57	Include this amount in the total reported on line 10700 of Schedule 3.
Capital gains dividends Period 2, after June 24, 2024	T5 slip	Box 18	Include this amount on line 17400 of Schedule 3.
Capital gains dividends Period 1, before June 25, 2024	T5 slip	Box 34	Include this amount on line 17399 of Schedule 3.
Dividends – Taxable amount of dividends	T3 slip	Box 32 Box 50	Include these amounts in the section called "Lines 12000 and 12010 – Taxable amount of dividends from taxable Canadian corporations" of the Federal Worksheet.
Dividends – Taxable amount of dividends	T5 slip	Box 11 Box 25	Include these amounts in the section called "Lines 12000 and 12010 – Taxable amount of dividends from taxable Canadian corporations" of the Federal Worksheet.
Dividends – Federal dividend tax credit	T3 slip	Box 39 Box 51	Include these amounts on line 40425 of your return. See note^{Footnote 1}.
Dividends – Federal dividend tax credit	T5 slip	Box 12 Box 26	Include these amounts on line 40425 of your return. See note^{Footnote 1}.
Dividends – Actual amount of dividends	T3 slip	Box 23 Box 49	Do not report these amounts.
Dividends – Actual amount of dividends	T5 slip	Box 10 Box 24	Do not report these amounts.
Interest income – Interest from Canadian sources	T5 slip	Box 13	Include these amounts in the section called "Line 12100 – Interest and other investment income" of the Federal Worksheet.
Interest income – Other income from Canadian sources	T5 slip	Box 14	Include these amounts in the section called "Line 12100 – Interest and other investment income" of the Federal Worksheet.
Foreign income – Foreign non-business income	T3 slip	Box 25	Include these amounts in the section called "Line 12100 – Interest and other investment income" of the Federal Worksheet and on line 43300 of Form T2209, Federal Foreign Tax Credits.
Foreign income	T5 slip	Box 15	Include these amounts in the section called "Line 12100 – Interest and other investment income" of the Federal Worksheet and on line 43300 of Form T2209, Federal Foreign Tax Credits.
Foreign income – Foreign non-business income tax paid	T3 slip	Box 34	Include these amounts on line 43100 of Form T2209, Federal Foreign Tax Credits. See note^{Footnote 1}.
Foreign income – Foreign tax paid	T5 slip	Box 16	Include these amounts on line 43100 of Form T2209, Federal Foreign Tax Credits. See note^{Footnote 1}.
Other income	T3 slip	Box 26	Subtract the amount in box 31 from the amount in box 26. Include the difference on line 13000 of your return.
Footnotes Note If you qualify for the federal dividend tax credit or federal foreign tax credit, you may also qualify for similar provincial or territorial credits. Return to footnote 1 referrer

Reporting capital gains or losses when you sell or redeem units or shares

When you sell or redeem your mutual fund units or shares, you may have a capital gain or a capital loss. Generally, only a portion of your capital gain or capital loss becomes the taxable capital gain or allowable capital loss. This is referred to as the capital gains inclusion rate. Capital gains and losses are reported on Schedule 3, Capital Gains or Losses.

For 2024, there are two periods:

Period 1: January 1 to June 24, 2024
Period 2: June 25 to December 31, 2024

Throughout this page, dispositions before June 25, 2024, are referred to as "Period 1", and dispositions after June 24, 2024 are referred to as "Period 2".

To calculate your capital gain or your capital loss, you need to know the following three amounts:

the proceeds of disposition, which is the amount you received or will receive for your units or shares
the ACB, which is the cost of your units or shares, plus any expenses you incurred to acquire them, such as commissions and legal fees and minus any returns of capital on your units or shares
the outlays and expenses you incurred when selling your units or shares, such as redemption fees and commissions

Multiple redemptions from the same fund, in the same period, should be grouped together.

If you hold more than one class or series of a single fund, you must calculate the adjusted cost base (ACB) for each class or series separately for each mutual fund that you own.

When calculating the capital gain or loss on the sale of capital property made in a foreign currency:

convert the proceeds of disposition to Canadian dollars using the exchange rates in effect at the time of the sale
convert the ACB to Canadian dollars using the exchange rate in effect at the time the property was acquired and returns of capital were received
convert the outlays and expenses to Canadian dollars using the exchange rate in effect at the time they were incurred

Report the dispositions from your mutual fund units and shares from Period 1 on lines 10689 and 10690 of Schedule 3, Capital Gains or Losses. Report dispositions from Period 2 on lines 13199 and 13200.

Capital gains from a T3 slip are reported at lines 17599 and 17600 while capital gains from all other tax slips (for example, a T5 slip) are reported at lines 17399 and 17400.

How to calculate your capital gains and capital losses

To calculate your capital gain or capital loss, subtract the total of your property's adjusted cost base (ACB), and any outlays and expenses you incurred to sell it, from the proceeds of disposition.

Calculate your ACB

Mutual fund units or shares are identical properties because each property in the group is the same as all the others. You may buy and sell several identical properties at different prices over a period of time. This occurs, for example, when you immediately reinvest your distributions in the mutual fund.

To calculate your capital gain from the units or shares you sell or redeem, you first have to calculate your ACB. To calculate the ACB of the units or shares sold or redeemed, multiply the average cost per unit of all units or shares held immediately before the sale or redemption by the number of units or shares redeemed (see Chart 1).

The average cost per unit or share of your total investment increases or decreases when you buy new units or shares, or reinvest your distributions, depending on the price when the transaction occurred. Every time you buy additional units or shares, or reinvest your distributions, you should recalculate the average cost per unit or share. Do this for each of your mutual funds.

If you receive a T3 slip with an amount in box 42 – Amount resulting in cost base adjustment, the ACB of the units of that mutual fund trust identified on the slip will change. If box 42 contains a negative amount, add this amount to the ACB of the units of the trust. If box 42 contains a positive amount, subtract this amount from the ACB of the units of the trust.

If the ACB of the units of the trust is reduced below zero during the tax year, the negative amount is deemed to be a capital gain in the year. In Schedule 3, Capital Gains or losses, enter the amount of the capital gain on line 10690 for Period 1 and on line 13200 for Period 2. Enter a zero on lines 10689 or 13199, depending on the period, since there is no actual sale of units. The new ACB of the trust units is deemed to be zero.

For example, you purchased RST Mutual Fund Trust units for $1,000 in 2013 and received a $200 return of capital in each of the 2016 to 2020 tax years. Because of these returns of capital totaling $1,000, the ACB of the units is zero by the end of 2020. In May this year, you received an additional $100 return of capital for the units. Since the ACB of these units is already zero, you must include on line 10690 this $100 in the calculation of the capital gains and losses for the year.

In the case of shares of a mutual fund corporation, amounts distributed on the shares as a return of capital will reduce the ACB of the shareholder’s shares in a way similar to that described above. Although any amounts distributed as a return of capital on such shares will not be reported on the T5 slip, you should keep track of such amounts so that you can correctly calculate the ACB of your shares.

Example

You have mutual fund investments in XYZ Mutual Fund Trust and STU Mutual Fund Corporation. Over the years, you bought units in XYZ Mutual Fund Trust and reinvested the distributions from the trust to buy more units.

On June 30 of this year, you redeemed 200 units from XYZ Mutual Fund Trust at a price of $17.42 per unit, for a total of $3,484. The redemption fees were $70. You record the redemption and your reinvested distributions, and recalculate the ACB of the units for XYZ Mutual Fund Trust as shown in Chart 1.

For the year, you received the following tax 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 you take is to calculate 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). The average cost of the units at the time of redemption is $15.20 per unit. To calculate the proceeds of disposition, you multiply the number of redeemed units by the redemption price (200 x $17.42 = $3,484).

Step 2 – Completing schedule 3

When you complete your return for the year, record the ACB ($3,040), the proceeds of disposition ($3,484), and the 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." In this case, you would enter the amounts on lines 13199 and 13200, on page 4, since the disposition happened in Period 2. To determine your capital gain or loss on this transaction, subtracts the ACB and redemption fee from the proceeds of disposition [$3,484 - ($3,040 + $70)]. In this example, your gain is $374.

Also, report the capital gain of $750 from the T3 slip on line 17600 of Schedule 3 and the capital gains dividend of $330 from the T5 slip on line 17400 of Schedule 3. You do not report the amount of $500 from box 42 of the T3 slip as income on your return. This box 42 amount does result in an adjustment to the ACB as shown in Chart 1.

Your total capital gains are $1,454 ($374 + $750 + $330). To calculate the net taxable capital gains and determine the inclusion rate, you must complete Part 4 and Part 5 in Schedule 3. Once the calculation is completed, enter the amount from line 19900 on line 12700 of your return.

Record your redemption and any future buys or reinvested distributions, and recalculate the ABC as shown in Chart 1.

If, instead of a capital gain, you had a capital loss of $1,454, you would still complete Part 5 of Schedule 3 to calculate your net capital loss. You would file Schedule 3 with your return to report your loss. You can use this net capital loss to reduce taxable capital gains in any of the three previous years of any future year.

Step 3 – Completing the Federal Worksheet

Complete the Federal Worksheet and include 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."

Chart 1 – Recalculation of Adjusted Cost Base (ACB)

**Chart 1 – Recalculation of adjusted cost base (ACB)**
Date	Description	Total cost in $ (A)	Number of units (B)	Average cost per unit (A ÷ B)
March 12, 2018	Purchase at $14.75 per unit	20,000.00	1,355.9322	$14.75
December 31, 2018	Reinvested distribution at $16.40 per unit	+ 1,427.82	+ 87.0622	$16.40
December 31, 2018	ACB	21,427.82	1,442.9944	$14.85
April 15, 2019	Purchase at $17.29 per unit	+ 5,000.00	+ 289.1845	$17.29
April 15, 2019	ACB	26,427.82	1,732.1789	$15.26
December 31, 2020	Reinvested distribution at $13.77 per unit	+ 962.11	+ 69.8700	$13.77
December 31, 2020	ACB	27,389.93	1,802.0489	$15.20
June 30, of the year	Redemption of 200 units at $17.42 per unit^{Footnote 1}	− 3,040.00	− 200.0000	$15.20
June 30, of the year	ACB	24,349.93	1,602.0489	$15.20
December 31, of the year	Reinvested distribution at $15.00 per unit^{Footnote 2}	+ 750.00	+ 50.0000
	Return of capital of $500^{Footnote 2}	− 500.00
	ACB	24,599.93	1,652.0489	$14.89

How to use a capital loss

If you have a capital loss, you can use it to reduce any capital gains you had in the year. If your allowable capital loss is more than your taxable capital gain, you may have a net capital loss. You cannot use this loss to reduce other income. However, you can use a net capital loss to reduce taxable capital gains in any of the three previous years or in any future year. For more information on capital losses, read Chapter 5 of Guide T4037, Capital Gains.

Claiming a capital gains deduction

You cannot claim a capital gains deduction for capital gains from mutual funds. However, if you filed Form T664 or T664 (Seniors), Election to Report a Capital Gain on Property Owned at the End of February 22, 1994, for any of your units or shares, the unused balance of your exempt capital gains balance (ECGB) that expired after 2004 can be added to the ACB of your units and shares. For more information, go to Line 12700 – Taxable capital gains.

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Date modified:: 2025-03-13

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