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December 21, 2021

Watch out for year-end fund distributions

With the stock market continuing to push higher and lots of cash on the sidelines, 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 few days. And, if you’re not careful, you could get stung with an unexpected tax bill by buying in too soon.

If you decide to invest in a certain mutual fund before the record date, you may be subjecting yourself to the same tax burden on the distribution as those who bought the fund at the beginning of the year.

Remember, mutual funds are pass-through entities. It’s not so much that the fund's value has likely improved this year, it may have also 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 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 Mackenzie Saxon U.S. Small Cap, Mackenzie Destination+ 2020, RBC Global Precious Metals, and Bissett Micro Cap as just a few of the funds where unitholders face significant payouts.

If any of these are on your list, holding off for a few more days likely makes sense.

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...