Although Canadian corporations have already paid taxes on their earnings before paying dividends to your mutual find, you must still declare these dividends for tax purposes. By claiming the dividend tax credit, however, you will reduce the amount of tax payable. Capital gains can be made either by selling units in a fund, and getting back more money than you originally paid, or by receiving a capital gains distribution from the fund itself. The amount subject to tax can be reduced by adding any charges, such as a front-end load, to your purchase price and subtracting any expenses incurred, such as redemption fees, from the sale price before calculating the amount of tax owed. The actual amount of tax paid by an individual will vary, of course, depending on the type of income earned, his or her base income, and the province they live in.
Many investors have the mistaken notion that by reinvesting distributions they avoid paying tax.
Whether you reinvest all distributions or receive a cheque in the mail, you will still have to pay tax on them. Also, while switching from one fund to another within a group of funds has become quite commonplace, many investors don't realize the tax implications. When you move money between funds, you are selling units in one fund and buying units in another. Revenue Canada will expect you to pay taxes on any gains. Moreover, if it is near the end of the year and you are thinking of buying units of a fund, it is important to ask when the next distribution will take place.