Watch out for year-end fund distributions
by Gordon Powers, Sympatico / MSN Finance
With the stocks trading at multi year lows, somebody must be thinking of getting back in. But, if you’re going the fund route rather than buying individual stocks, you may want to hold off just a bit longer.
Fund companies will be making their year end distributions over the next couple of weeks. And, if you’re not careful, you could get stung with an unexpected tax bill by buying in too soon.
Remember, mutual funds are pass-through entities. Even though the fund's value has likely declined this year, it may have realized capital gains on longer-term holdings it sold over the course of the year. If so, the fund company is required to pay those gains out to unitholders before the end of the year, who must then report them as income.
And it doesn't matter whether you've owned units of the fund for just a few days – you're still looking at the same tax burden.
While the tax you pay now will either offset the tax you owe when you sell your units at a (ahem) gain in the future, paying taxes sooner rather than later is a bad idea.
In a recent report, Dave Paterson, an independent fund analyst at Toronto-based Paterson & Associates, highlights CI Emerging Markets, AGF Canadian Balanced, and Trimark Canadian as just a few of the funds where unitholders face significant payouts.
The largest, he estimates, is CI Global Opportunities, where the capital gains payout will likely be a whopping 27% of the fund’s net asset value.
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