Glass Box Series
Taxation of NBI Solutions
09 February 2022
by
Here are 7 things of interest to know about the taxation of NBI solutions
1. How are distributions tax-efficient?
Mutual funds are designed to maximize tax credits and fund
expenses.
They offer tax optimization to participants by
minimizing taxation on distributions.
As such, the mutual fund
fees, or management expense ratio (MER), are applied to the taxable
portions in the following order:
- Interest income
- Dividend income
- Capital gains
2. Which tax slip for which type of mutual fund?
If the fund is:
Trust |
Corporation |
|---|---|
T3 slip (RL-16 slip in Quebec) |
T5 slip (RL-3 slip in Quebec) |
3. What is the adjusted cost base?
ACB includes:
All purchases |
+ |
Reinvested distributions |
+ |
Returns of capital |
- |
The reinvestment of distributions in a mutual fund may cause its cost base to change in relation to its net asset value. This can have a fiscal impact.
4. In what case does the client get a return of capital?
If the mutual fund has a fixed target distribution policy and the
mutual fund income (interest, dividends and/or capital gains) is
insufficient, participants receive a non-taxable return of capital for
the year underway.
This reduces the cost base of the initial
investment and defers income taxes to when units are sold or the
adjusted cost base is back at zero.
5. What is the fiscal impact of purchasing mutual fund units at the end of the year?
If an investor decides to purchase mutual fund units at the end of the year, they must first identify the last business day before the distribution date.
- Before the distribution date: Distributions are taxed, whether they are paid out or reinvested in the mutual fund. This increases the ACB, thereby avoiding a double taxation1 situation. While taxes are partly paid in advance, the investment can benefit from market movements more quickly.
- After the distribution date: No income tax is paid when units are purchased after the distribution date.
6. What happens if units are redeemed or switched?
The resulting capital gains or losses will be equal to the amount received during the redemption or switch, net of fees or the adjusted cost base of units. In a non-registered account, half of this capital gain must be included in the calculation of the taxable income.
7. What happens if units are converted?
Converting units from one mutual fund series to units from another
series of the same mutual fund does not have any fiscal impact.
Converting units between series of different currencies, from a
hedged series to an unhedged series and vice versa, results in a
capital loss or gain and therefore has a fiscal impact.
1Applicable to non-registered accounts only.
Legal notes
The information and opinions herein are provided for information purposes only and are subject to change. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.
NBI Funds (the “Funds”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated.
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