How is income from mutual funds 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 flowed out 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 shares of a mutual fund corporation, the corporation 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
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, see Line 12700 – Taxable capital gains or see Guide T4037, Capital Gains.
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