Your Guide to Investment Funds and Taxes. Mutual Funds, Private Pools and ETFs

Transcription

1 Your Guide to Investment Funds and Taxes Mutual Funds, Private Pools and ETFs

2 Table of Contents Types of Income in a Mutual Fund... 4 Comparison of Mutual Fund Corporations, Mutual Fund Trusts... 5 Exchange Traded Funds (ETFs)... 6 Adjusted Cost Base and Capital Gains/(Losses)... 9 Year End Tax Receipts T T Relevé 16 (Quebec Residents Only) Relevé 3 (Quebec Residents Only) NR4 (Non-Residents of Canada Only) T5008 (CRA Only No RQ Equivalent) Mackenzie Tax Tips

3 Types of Income in a Mutual Fund Mutual funds invest in a variety of stocks, bonds and other securities that generate various types of income for the fund. When a mutual fund receives income from the investments it holds or sells an investment, it reports the income or capital gains allocated to each investor on a T3 (mutual fund trust) or T5 (mutual fund corporation). The following table shows how each type of income is taxed Investment Type of income earned Tax category Tax treatment Canadian treasury bills, bonds and mortgages Interest Other Income Taxed at investor s marginal tax rate Foreign bonds Interest Foreign non-business income Taxed at investor s marginal tax rate Foreign stocks Dividends Foreign non-business income Taxed at investor s marginal tax rate Canadian stocks Dividends Eligible dividends Taxed at a reduced rate* When the fund sells investments Capital gains (losses) Capital gains (losses) Taxed at half investor s marginal tax rate** * Eligible dividends are grossed up and eligible for the dividend tax credit, reducing the investor s tax rate relative to interest, foreign interest and foreign dividend income. ** A mutual fund cannot distribute net capital losses. It can use its losses to offset gains, but the investor will either receive a capital gain distribution or no distribution at all (if the net capital gain is less than or equal to zero) A realized capital gain (or loss) will also be reported when an investor sells his or her shares in the mutual fund. These capital gains are taxed at the same rate as capital gains that arise when the fund sells investments, but are reported on the T5008 (Return of Securities Transactions). 3

4 Comparison of Mutual Fund Corporations and Mutual Fund Trusts Mutual funds can be structured as either trusts or corporations. The two structures can result in some differences for you as an investor. The table below summarizes the main differences: Mutual Fund Trust Mutual Fund Corporation Tax Treatment Fund by Fund Basis Entire Corporation Taxed Tax Reporting T3 Tax Slip* T5 Tax Slip* Income Flow All Types of Income (including interest, dividends and capital gains) Capital Gains, Canadian Dividends Canadian stocks Eligible Dividends Eligible dividends When the fund sells investments Capital gains (net of capital losses) Capital gains (net of capital losses) A mutual fund corporation is a single legal entity where each fund is a class of shares in the corporation attributable to a portfolio. The tax positions and expenses of all funds under the corporate umbrella are consolidated in reporting the corporation s overall taxable income. As a result, one fund s capital losses may be used to offset taxable income in the other funds. The mutual fund corporation then declares and pays only capital gains or eligible dividends (including the dividend tax credit) to shareholders of the various funds. Investment income from a mutual fund corporation is reported on a T5 tax slip. Mutual fund trusts are also separate legal entities; however the taxable income is determined on a fund by fund basis. When income is distributed from a mutual fund trust, it flows through to the investor so that the trust can distribute many forms of income. The trust may also flow through the dividend tax credit and a foreign non-business tax credit. This arises when the fund has tax withheld by foreign governments on interest and dividends earned in foreign countries. Mutual fund trusts issue a T3 tax slip containing investment income information. * Please note that reporting is done on a consolidated bases, with account holdings shown on the reverse of the forms. 4

5 Exchange Traded Funds (ETFs) Although ETFs and mutual fund trusts have many similarities, ETFs have unique taxation aspects when they re held in non-registered accounts. Similar to mutual fund trusts, ETFs distribute interest, foreign income, dividends and capital gains to shareholders. And, as with all mutual funds (trust or corporate structure), ETF distributions may be reinvested or paid out in cash. However, a reinvested ETF distribution is not used to purchase more units. Instead, it increases the adjusted cost base. In doing so, the distribution is treated for tax purposes as a capital gain and is recorded on a T3 tax slip under re-invested distribution per share. The tax treatment of distributions depends on the country in which the ETF is based. Tax withheld on the distribution may be claimed by Canadian taxpayers as a foreign tax credit when filing their returns. Distributions made by Canadian ETFs to shareholders can consist of: non-taxable return of capital, which reduces the adjusted cost base; reinvested distributions, which increase the adjusted cost base; capital gains, which are 50% taxable; Canadian dividends, which are eligible for the dividend tax credit; Interest or foreign income, both of which are 100% included in taxable income; and capital losses. Mutual fund trusts distribute all of the above except capital losses. If an ETF pays out a distribution in cash, the distribution will be taxed depending on what type it is in the above list. There may also be withholding tax at source of foreign portfolio holdings held within the ETF. The following table Illustrates the tax in various types of accounts. Tax I: Withholding taxes levied by the country where the underlying stocks/holdings are domiciled Tax II: Additional withholding tax (15%) levied by the virtue of being a U.S.-listed ETF ETF Structure Account Type U.S. Markets RRSP TFSA, RESP Taxable Accounts U.S.-listed ETF Holding U.S. stocks directly Exempt Tax I Tax I Creditable Canadian-listed ETF holding a U.S.-listed ETF of U.S. stocks Tax I Tax I Tax I Creditable Canadian-listed ETF holding U.S. stocks directly Tax I Tax I Tax I Creditable International Markets RRSP TFSA, RESP Taxable Accounts U.S.-listed ETF Holding international stocks directly Tax I Tax II Exempt Tax I Tax II Tax I Tax II Creditable Canadian-listed ETF holding U.S.-listed ETF of international stocks Tax I Tax II Tax I Tax II Tax I Tax II Creditable Canadian-listed ETF holding international stocks directly Tax I Tax I Tax I Creditable 1. Creditable means that foreign tax credits are available to the taxable Canadian-resident investor or ETF (to the extent that the Canadian recipient is taxable), to be claimed against the foreign income/distribution received. 2. Most countries impose a tax on income when paid to foreign investors. The U.S. levies a 30% withholding tax (reduced by any respective income tax treaties) on certain income distributions to foreign residents. 5

6 Treatment of Capital Gains When investors in mutual funds (trusts or corporate structures) sell or redeem units or shares, the fund portfolio manager may have to liquidate some of the fund s holdings, meaning capital gains or losses. Investors holding the mutual fund may receive a capital gains distribution at year-end, though this would be minimized by the capital gains refund mechanism used within the fund to lower the tax impact and avoid double taxation. Capital gains may also be created when a fund portfolio manager sells a portion of the underlying securities to change the asset allocation of the fund. A mutual fund investor who has only recently purchased units can still receive a taxable capital gains distribution. The ETF investor would not experience this, however, as the securities in an ETF portfolio are exchange in-kind for fund shares, and new fund shares are created through in-kind exchange for securities. Treatment of Capital Losses Another specific tax feature of ETFs is that capital losses at the portfolio level flow through to the investor and can be used to offset capital gains realized from other investments. This is different from mutual fund trusts, which trap the loss within the trust itself for use in future years. This also differs from corporate-class mutual funds, which use capital losses within one fund to offset capital gains in other funds within the mutual fund corporate and thereby reduce the investor s taxable distributions. Calculating the ACB of an ETF Investors holding ETFs in their non-registered portfolios will have to keep track of their adjusted cost base (ACB). The ACB is calculated as follows: ACB: total purchase price (including commissions) + reinvested distributions return of capital Return of capital will be shown on the investor s T3 and should not be included in income for tax purposes. 6

7 Adjusted Cost Base and Capital Gains/(Losses) For Mutual Fund Trusts and Corporate Class To calculate your capital gains or capital losses, you first need to calculate the adjusted cost base (ACB) of your units. The following tables describe, and walk you through, the ACB and capital gains calculations using a hypothetical example. The total of all amounts paid to purchase your securities including any sales commission paid at the time of purchase + The amount of any reinvested distributions The return of capital component of distributions The ACB of any securities previously redeemed = The ACB of your securities The ACB is easier to calculate on a total investment basis rather than on a per unit/share basis. To obtain the ACB per unit/share, divide the total ACB by the number of units/shares held. For a partial redemption, the capital gain or loss is determined by multiplying the ACB per unit/share by the number of units/shares redeemed. ACB Example (refer to the next page for calculations) Transaction 1 Purchase During 2015 an investor purchased $5,000 of Fund A, a Mutual Fund Trust at $14.00 per unit for a total of units ($5,000 divided by $14.00). Transaction 2 Purchase Later during 2015, the investor made a second purchase of $5,000 of Fund A at $15.00 per unit for a total of units ($5,000 divided by $15.00). Transaction 3 Distribution On December 31, 2015, the fund paid a distribution of $0.30 per unit. This investor received a distribution of $ ( units x $0.30) which was reinvested in additional units at $ per unit, the price at year end additional units were purchased ($ divided by $ ). The distribution also included a return of capital of $ per unit, or $5.04 in total ( units x $0.0073). After the distribution, the ACB becomes $ per unit ($10, divided by units). Transaction 4 Redemption On June 30, 2016, the investor redeemed 300 units at $18 per unit for gross redemption proceeds of $5, The investor paid a 5.5% redemption fee at that time and therefore received net proceeds of $5,103 in cash (5.5% x $5,400 = $297 redemption fee). The ACB of the 300 units redeemed is $4, (300 multiplied by the ACB per unit of $ ). The total Adjusted Cost Base of the remaining units is reduced by $4, The new total ACB is $5,847.84, the remaining number of units is and the ACB per unit remains at $ The ACB per unit immediately after a partial redemption is the same as the ACB per unit immediately before the redemption. 7

8 ACB Calculations The ACB of your units, on a total investment basis is equal to the following: The ACB would be calculated as follows: Transactions 1 & 2 Total Cost Units ACB Per Unit The total of all amounts paid to purchase your units, including any commissions you paid at the time of purchase: $5, $5, Transaction 3 Plus: + $10, The amount of any reinvested distributions $ Less: The return of capital component of distributions (regardless of whether or not the distribution was paid in cash or reinvested in additional units) ($5.04) $10, Transaction 4 Less: The Adjusted Cost Base of any units redeemed ($4,354.26) (300.00) Adjusted Cost Base of units remaining $5, The capital gain or loss from the example shown would then be calculated as follows: Activity Proceeds of disposition $5, (the gross amount of the redemption which is equal to the net asset value per security the price on the date of the redemption multiplied by the number of units redeemed i.e., $18 per unit x 300 units): Less: The Adjusted Cost Base of the securities (see Adjusted Cost Base calculation in previous chart) ($4,354.26) Less: Any expenses incurred on the redemption of the securities (such as redemption fees and administrative costs i.e., 5.5% redemption fee $5,400 x 5.5%) ($297.00) Capital gain (loss) $

9 Year End Tax Receipts Year End Tax Receipts T3 SAMPLE Report these amounts on your income tax and benefit return. Please note that reporting is done on a consolidated basis, with account holdings shown on the reverse of the forms Dividends from Canadian corporations The amounts you have to report as income are the amounts shown in box 32 and box 50. Also, include the amount shown in box 32. The federal dividend tax credit to which you are entitled is the total of box 39 and box Foreign business income tax paid Foreign non-business income tax paid Insurance segregated fund net capital losses Capital gains Subtract any amount in box 30 from the amount in box 21. All or part of the amount inbox 21 may be foreign non-business income, which will be footnoted. Other income Subtract any amount in box 31 from the amount in box Investment tax credit The investment code should be identified as a footnote on this slip. Amount resulting in cost base adjustment This amount represents a distribution or return of capital from the trust. Follow the instructions in the footnote area and adjust the cost base of the property at the end of the tax year. 12 Recipient identification number You have to give your social insurance number or business number to the preparer of this slip. If this box is blank, provide your number to the preparer as soon as possible. 45 Other credits Include the footnoted amount on Form T1129 for Newfoundland and Labrador or Form T1232 for Yukon, whichever applies. 24 Foreign business income 25 Foreign non-business income * Note that year end tax receipts are not typically mailed until the month of February. This may vary based on the type of tax receipt and the issuing institution. 9

10 Year End Tax Receipts T5 SAMPLE Report these amounts on your income tax and benefit return. Please note that reporting is done on a consolidated basis, with account holdings shown on the reverse of the forms Dividends from Canadian corporations other than eligible dividends The amount an individual has to report as income is the amount shown in box 11. The dividend tax credit that an individual is entitled to is in box Recipient type The code in this box indicates if the amount was paid to an individual ("1"), a joint account ("2"), a corporation ("3"), an association, trust, club, or partnership ("4"), or a government ("5") Interest from Canadian sources Other income from Canadian sources Foreign income Eligible dividends from Canadian corporations The amount an individual has to report as income is the amount shown in box 25. The dividend tax credit to which an individual is entitled is shown in box Foreign tax paid. Use this amount to calculate your foreign tax credit. Royalties from Canadian sources Capital gains dividends Foreign currency Will be blank if you the reported amounts are in Canadian dollars. Recipient account The recipient s account or policy number. 19 Accrued income: Annuities. This amount is the earnings part of a general annuity. 10

11 Year End Tax Receipts Relevé 16 (Quebec Residents Only)* SAMPLE Explanation of boxes A C1 Capital gains. Subtract the amounts in boxes A-2, A-3 and H from the amount in box A. In the case of a capital loss of a segregated fund trust, the amount in box A is negative. Box C1 Actual amount of eligible dividends. J K Box J Dividend tax credit. Box K Foreign income tax on business income. This amount gives entitlement to the foreign tax credit relating to business income. C2 E Box C2 Actual amount of ordinary dividends. Box E Foreign business income. L Box L Foreign income tax on non-business income. This amount gives entitlement to the foreign tax credit relating to non-business income. F G H I Box F Foreign investment income. Box G Other income. Box H Capital gains giving entitlement to a deduction. Subtract the amount in box H-3 from the amount in box H. Box I Taxable amount of eligible dividends and ordinary dividends. M Box M Cost base adjustment of capital interest. Use this amount to adjust the cost base of your capital interest in the trust. If the amount in box M is positive, it generally corresponds to a distribution of capital or a non-taxable benefit. Subtract this amount from the adjusted cost base (ACB) of your capital interest. If the amount is negative, add it to your ACB. Boxes under Renseignements complémentaires (additional information) A-1 Foreign capital gain I-1 Split income A-2 Split income: Capital gain deemed to be an ordinary dividend. J-1 Tax credit for the dividends entered in box I-1 H-3 Split income: Capital gain deemed to be an ordinary dividend. * The T3 is the CRA equivalent to RL16 11

12 Year End Tax Receipts Relevé 3 (Quebec Residents Only)* SAMPLE Explanation of boxes A1 Actual amount of eligible dividends F Gross foreign investment income A2 B Actual amount of ordinary dividends Taxable amount of dividends from taxable Canadian corporations G H Foreign income tax. This amount is used to calculate the foreign tax credit. Royalties from Canadian sources C Dividend tax credit I Capital gains dividends D Interest J Accrued income: annuities E Other income from Canadian sources Boxes under Renseignements complémentaires (additional information) E-1 Actual amount of eligible dividends 204 Social insurance number of one of the joint account holders E-2 Actual amount of ordinary dividends 205 Unclaimed dividend account 200 Currency used 206 Unclaimed interest account 201 Social insurance number of one of the joint account holders 207 Unclaimed dividend account: Income tax withheld 202 Social insurance number of one of the joint account holders 208 Unclaimed interest account: Income tax withheld 203 Social insurance number of one of the joint account holders * The T5 is the CRA equivalent to RL3 12

13 Year End Tax Receipts NR4 (Non-Residents of Canada Only) NR4 Statement of Amounts Paid or Credited to Non-Residents of Canada État des sommes payées ou créditées à des non-résidents du Canada 10 Year Année 11 Recipient code Code du bénéficiaire 12 Country code for tax purposes Codes de pays pour fins d'impôts 13 Payer or agent identification number Foreign or Canadian tax identification number Numéro d'identification du payeur ou de l'agent Numéro d'identification étranger ou canadien aux fins de l'impôt Protected B when completed / Protégé B une fois rempli Line Ligne 1 14 Income code Code de revenu 15 Currency code Code de devise 16 Gross income Revenu brut 17 Non-resident tax withheld Impôt des non-résidents retenu Line Ligne Non-resident recipient's name and address Nom et adresse du bénéficiaire non-résident Individual's surname, first name and initial / Corporation, organization, association, trust, or institution name Nom, prénom et initiale du particulier / Nom de la société, de l'organisme, de l'association, de la fiducie ou de l'établissement Second individual's surname, first name and initial Nom, prénom et initiale du deuxième particulier Address Adresse Country code Code pays Name and address of payer or agent Nom et adresse du payeur ou de l'agent SAMPLE Non-resident account number Numéro de compte non-résident NR Exemption code Code d'exemption 18 See the privacy notice after the codes on the next page. Consultez l'avis de confidentialité qui suit les codes à page suivante. NR4 (17) Code Type of Income Code Type of Income 02 Other Periodic payments 26 RRIF Periodic payments 03 Other Lump-sum payments 27 RRIF Lump-sum payments 07 Deferred profit-sharing plan Periodic payments 28 RRSP Periodic payments Dividends paid by Canadian subsidiaries to foreign parent corporations Dividends Other Estate and trust income Income-averaging annuity contract Management or administrative fee or charge RRSP Refund of premiums RRSP Refund of excess amounts Deferred profit-sharing plans Lump-sum payments RRSP Amounts deemed received on deregistration RRSP Amounts deemed received on death 24 Registered education savings plan 13

14 Year End Tax Receipts T5008 (CRA Only No RQ Equivalent) SAMPLE Note: The T5008 is not generally sent to investors as a separate tax slip. It is typically included on the account issuer statement. Exceptions to this may apply. 14

15 Mackenzie Tax Tips What if I m dealing with USD to CAD conversions? For Canadian income tax purposes, all transactions must be reported in Canadian dollars. Your T3 (RL16 for Québec) and T5 (RL3 for Québec) tax slips have been issued in Canadian dollars. Distributions paid to your US dollar account have been converted to Canadian dollars at the rate of CDN$ On the back of your T3 (RL16 for Québec) or T5 (RL3 for Québec) slip we have indicated the relevant exchange rates. What is the difference between a fund switch and a fund exchange? An exchange is the sale of securities of one fund to purchase securities of another fund. When you exchange Fund A for Fund B, you have actually sold, or redeemed Fund A and purchased Fund B. It is therefore a taxable transaction. What is return of capital? Return of capital is the portion of a distribution that does not consist of dividends, interest or realized capital gains. For example, if a mutual fund pays $1 in distributions but only makes 90 cents in interest, dividends and capital gains on investments it sold during the year, the remaining 10 cents will be classified as ROC. What happens if return on capital (ROC) distributions result in my adjusted cost base (ACB) equaling zero? All of my original capital is back has come back to me, so would I still have all of my shares intact in the account? With enough ROC payments, it is possible for your ACB to reach zero. This does not, however, mean the fund s net asset value (NAV) will equal zero. The NAV may increase, rise or stay the same depending on whether the fund s distributions have been greater than or less than its total return from all sources. The fund s NAV will not fall as long as interest, dividend and capital gains (whether realized or unrealized) match or exceed the amount distributed over the long run. Only when distributions exceed the total return of the fund will the NAV erode. The main takeaway for tax purposes is that if your ACB does fall to zero, any subsequent distributions of ROC are treated as capital gains. You would not deduct these distributions from your ACB, but would pay tax for the year the distribution was received. What is the difference between an Estimate and the Distribution Amounts I see on my tax slips? Distribution Estimates are the amounts that each fund would have distributed following the end of year, if that taxation year had ended on the date as of which these amounts are calculated for our funds, corporate classes and ETFs. Factors such as income earned by the fund or corporation, changes in market value of the underlying investments, portfolio turnover, or purchases and/or redemptions within the fund or corporation may result in the actual Distribution differing significantly from the Distribution Estimates. 15

16 GENERAL INQUIRIES For all of your general inquiries and account information please call: ENGLISH BILINGUAL ASIAN INVESTOR SERVICES TTY FAX WEB mackenzieinvestments.com Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The content of this document (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it. This should not be construed to be legal or tax advice, as each client s situation is different. Please consult your own legal and tax advisor MF /17