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Be aware of the effect of buying units near year end
You should be cautious about purchasing
mutual funds immediately prior to a distribution date, especially
near year end as you will be allocated your proportionate share
of any such distribution no matter how long you have owned the fund.
Many mutual fund companies will provide preliminary calculations
of year-end distributions for each fund beginning in late-November
or December.
Consider funds that pay tax-effective
distributions
Not all distributions are taxed the
same. Distributions classified as capital gains or Canadian dividends
are taxed at a lower effective rate than other income (e.g., interest,
foreign dividends). When choosing between competing funds that meet
your investment objectives, consider the nature of the distributions
that each fund pays because taxes affect your overall investment
return.
Add
re-invested distributions to your ACB
Do not forget to add the amount of
reinvested distributions to the adjusted cost base of your mutual
fund units. This will reduce the ultimate capital gain (or increase
the capital loss) you have on your investment.
Maintain
good records of your Mutual Fund transactions
Keep, the account statements for each
mutual fund you own, especially your year-end statements. In order
to correctly calculate the gain or loss on each redemption of fund
units, it is essential that you be able to calculate the proceeds
received and the adjusted cost base (ACB) of fund units. If you retain your statements, you will be able to make the correct calculations.
Make losses
work for you
Capital losses arising on the redemption
of fund units may be used to offset other capital gains. Capital
losses are not deductible against any other sources of income. Excess
capital losses not used in the current year may be carried back
three years or may be carried forward indefinitely until they are
fully utilized. Never repurchase the same fund within 30 days after
a loss is realized or the capital loss will be denied.
Be
aware of deemed dispositions
Changing the registration of your account,
transferring fund units to an RRSP, and becoming a nonresident are
a few of the more common examples where, for tax purposes, you can
be deemed to have disposed of your holdings. This could trigger
a tax liability to you even if you did not receive any cash as a
result of the transaction. Don't expect to receive a statement outlining
the amount you should be reporting on "deemed dispositions"
- the onus is on the individual to report such gains.
Deduct
expenses where permitted
Deductions permitted for tax purposes
generally include: interest on money borrowed to purchase non-registered
investments, safety deposit box charges, fees for the management
or safe custody of non-registered investments, and accounting and
bookkeeping fees for keeping records of investments. Commissions
paid to brokers or dealers are not deductible, but form part of
the adjusted cost base of the property acquired. Redemption fees
(or deferred sales charges) are treated as expenses related to the
disposition of fund units, and while not deductible can be added to your adjusted cost base and increase a capital loss or reduce a capital gain.
Keep
track of carry-forward information from prior years
Investors who owned mutual fund units
in 1994 and continue to own those units may have filed a final-year
election to utilize the capital gains exemption before it was eliminated.
The amount so elected can be applied to reduce future capital gains
on those units (up to the end of the year 2004), including capital
gains distributions paid. In addition, investors who have capital
loss carry-forward amounts related to prior years may be able to
use those amounts against the current year's capital gains. These
deductions are not automatic - the onus is on the taxpayer to claim
the benefit.
Save
money in a tax-deferred account where possible
Taxes take a big bite out of your
investment return. Take advantage of the benefits of tax-deferred
compounding of investment returns by investing in RRSPs, RRIFs and RESPs,
to the maximum extent possible. Whether accumulating funds for your
retirement, or for your child's education, it is almost always advantageous
to use these government-sanctioned tax-deferral programs.
Surf the web for
good tax information
The following list of useful Web sites
you can use to get current information about tax matters that may
be relevant to you.
- Check out the InterWeb
section on this site for added information, Calculator links etc.:
- Revenue Canada's Web site at http://www.rc.gc.ca
provides on-line access to most of Revenue Canada's public information,
including guides, brochures, forms, news releases and answers
to frequently asked questions.
- Most of the major accounting firms'
Web sites include useful tax information. Ernst & Young Canada's
site at www.eycan.com is one of the best. It provides budget analysis,
useful tax calculators (e.g., to calculate your tax bill in each
province), publications and answers to frequently asked questions.
It's also updated weekly.
- Many of the major fund company
Web sites contain useful tax information. GlobeFund offered by
the Globe and Mail @ www.globefund.com includes links to all fund
companies' Web sites and offers a myriad of useful mutual fund
related information, including some basic tax information.
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