Distributions from mutual funds can contain any of the following: interest income, dividends, realized capital gains, return of capital, withholding taxes, foreign income, among others. If a mutual fund only holds dividend-paying stocks, the distributions are likely to be composed primarily of dividends, not interest income.

Tax efficiency is a key reason mutual funds distribute cash to clients. Mutual funds are structured as unit trusts which means they benefit from a non-taxable status provided they distribute earned capital gains and income within the calendar year. Investors must pay tax on these distributions however the individual will pay tax at their own marginal tax rate which is usually lower than the fund’s marginal tax rate. Distributions received in a registered account, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Plan (TFSA), are not subject to taxation.

The types of investments held in the fund determine the source of the distributions. For example, a fund invested in fixed-income assets such as bonds or money markets, will receive interest from them and distribute interest income. Funds invested in dividend-paying equities, will receive distributions in the form of dividend income and distribute dividend income. Funds may generate capital gains from selling investments and distribute likewise. Funds may also invest in assets that do not make distributions.

Unitholders receive distributions based on the number of units they hold on the “record date”. Example: If you held 100 mutual fund units on the record date, and the distribution was $0.50 per unit, you would receive a distribution of $50.

A distribution reduces the net asset value (NAV) of the fund by the exact amount that was paid out. This does not affect your portfolio value when you leave the funds in a tax-exempt account.

In non-registered accounts, the type of underlying asset in the fund determines the kind of tax treatment. For example, fixed income will be taxed as interest income at your marginal tax rate. Dividends from Canadian corporations and capital gains are taxed at a lower rate. In simple terms, when a fund pays a distribution, you get taxed on it. When the distribution is in fund units, the book value increases at the same time by the amount of the distribution to avoid double taxation. This information is reported on your T3 slip (Relevé 16 for Quebec residents).

In registered accounts, reinvested distributions are not immediately taxed. They also do not affect your contribution room in your RRSP and TFSA.

At Pender, our goal is to protect and grow wealth for our investors over time. Our team of security analysts and seasoned investment professionals manage a suite of differentiated fund strategies with the goal of achieving first-quartile, award-winning performance.

Below is a list of our funds and how we approach distributions in each of them.

Equity Funds

Fixed Income Funds

Balanced Fund

Liquid Alternative Funds