Where You Hold Investments Matters
When building your portfolio, it is important to consider a variety
of approaches to achieve your long-terms goals. When choosing investments,
you may want to incorporate tax-effective strategies to guide your
selection process. Your advisor can help you understand the tax
implications of investing so that you can take advantage of the
most tax-effective ways to meet your objectives.
If you hold mutual funds outside of a registered plan, keep in mind
that all income earned by these investments is subject to tax. However,
not all investment income is taxed equally.
Understanding Mutual Fund Distributions
Mutual funds distribute income in the same form as it is earned
- interest income, Canadian dividends, capital gains or a combination
of all three. Mutual funds can earn dividends and interest from
their underlying investments and realize capital gains or losses
upon sale of investments held within the fund. These types of income
may be fully or partially offset by fund expenses.
| Interest Income |
Earned
on treasury bills, commercial paper, bonds, debentures,
mortgages |
- receives no special
tax breaks
- taxed at same rate as employment income (your marginal
tax rate) |
- monthly on money market
funds
- quarterly on other |
RBC Canadian Money Market
Fund |
| Canadian Dividends |
Generated
when funds invest in shares of Canadian public companies
that declare dividends |
preferential tax treatment
with a dividend tax credit for personal tax returns |
quarterly or annually
|
RBC Canadian Dividend Fund |
| Capital Gains |
Incurred
when an investment is sold for more than its original
price |
only 50% of a capital
gain is subject to tax |
annually, usually in
December |
RBC Canadian Equity Fund |
|
Based on the different tax treatment of investment income, you
may wish to consider strategies that maximize tax-efficiency within
your portfolio. One option is to hold investments that earn interest
income within your registered plan where income is tax sheltered
and investments with preferential tax treatment in a non-registered
account. Speak to your advisor about other tax-efficient strategies
for your portfolio.
Understanding T3 Slips
Based on Canada Revenue Agency requirements, fund managers must
provide unitholders with a T3 slip for any fund held within a non-registered
plan that distributes income. Your T3 slip indicates the amount
and type of taxable, distributed income that you received during
the previous year. This income must be declared on your tax return.
If you do not receive distributions from your mutual fund investments,
you will not receive a T3 slip. For example, capital gains realized
from the sale of a mutual fund will not appear on your T3 slip.
However, you are still responsible for reporting that income on
your tax return.
Points to Note:
- You will not receive a T3 slip for income earned on investments
held in a registered plan. Holdings within a registered plan are
tax sheltered until withdrawn.
- You will receive a T3 slip for distributions from mutual funds
held within non-registered plans.
- All distributions from non-registered investments, whether reinvested
or received as cash, are taxable.
Learn more about our selection of RBC
Funds or explore the options available to invest
now.
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