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.

Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this Executive Notes are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein, readers should seek advice that is appropriate to their personal circumstances from a professional advisor.