Mutual funds investments are popular with Canadians as they offer the opportunity to access professional money managers without a significant upfront investment. Yet, unlike buying stocks, tracking your tax cost (Adjusted Cost Base or “ACB”) takes a lot of work and many people simply don’t bother. Even though the CRA does have a guide to assist you in this task (RC4169 Tax Treatment of Mutual Funds of Individuals) and they have made the guide as simple as possible sometimes it’s just easier to talk to an Oakville tax advisor.
The most significant challenge is having the patience and the time to review your old investment statements and tax slips to calculate the tax cost correctly. Perhaps your mutual fund company has done this work for you as part of the information it provides to you during tax season. However, it may not be correct. Possible reasons include incorrectly programmed computer systems or the superficial loss rules may have applied to prior sales and you may have the same investment at a different institution. Note that fund companies will have a disclaimer that information may not be accurate and direct you to an Oakville tax advisor to review the calculations.
I have also noticed that mutual fund corporations are getting more popular with Canadians as they offer tax-efficient and tax-deferred investing. Tracking the ACB for these investments is even harder because, unlike a mutual fund trust that uses a T3 slip to report distributions, mutual fund corporations issue distributions on a T5 (like interest from banks). Mutual fund corporations, like trusts, can pay you a distribution that is considered a “return of capital”. The return of capital is a non-taxable distribution that lowers your ACB and creates a capital gain in the future. However, there is no space on the T5 to indicate a return of capital. As an Oakville tax advisor, I have seen some mutual fund companies put this amount into an empty space on the T5. If the return of capital is not put onto the T5, you would have to look at your investment statements and perhaps even talk to the fund company to ensure you calculate your cost correctly.
Getting the ACB right is important so that you pay the proper amount of tax. You want to avoid overpaying your taxes and giving the government a gift / interest-free loan or underpaying only to risk the CRA charging you large amounts of interest. Bringing in an Oakville tax advisor is the safest way to calculate ACB. Please contact me and I will be happy to review your ACB calculation or do it for you.
William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.