The Money Management Newsletter: Investing in Mutual Funds
Systematic Withdrawal Plans: When is the tax paid?
Is it capital gains or dividend income?

By The Money Mangement Editor
Money Management Newsletter - September 2003

You’ve arranged to have your mutual fund investments pay you an income throughout the year, choosing the systematic withdrawal plan (SWP) option and wonder how withdrawals are taxed. Here's a quick refresher.

Non-Registered Accounts

Withdrawals

Each systematic withdrawal is essentially a redemption of mutual fund units at their fair market value. Any capital gain or loss is calculated as the difference between the total proceeds received (# of units sold x market price/unit) and the average cost of these redeemed units immediately before the withdrawal.( # of units sold x adjusted cost base/unit). You should be keeping track of your adjusted cost base which is affected each time a purchase or distribution is made into a fund. Think of each unit redeemed as consisting partly of principal (tax-free) and partly of a capital gain (50 per cent of which is taxable) or capital loss (50 per cent of which can be deducted against other capital gains).

A tax slip is not issued for the capital gains or losses incurred under a systematic withdrawal plan however some companies will detail these figures on their year end statement If they are not reported on these statements you will have to calculate the gains &/or losses yourself as the institutions will report the transactions to Canada Customs and Revenue Agency.

Distributions

Any distributions received, even if reinvested, must be included in the investor's taxable income. Distributions may include interest income, Canadian dividends, foreign income and capital gains. They are reported to Canadian residents on a T3 slip or T-5 slip issued by the investment fund manager early in the following year (normally February); Quebec unitholders also receive a Releve 16.

Registered Accounts

Withdrawals

All SWP withdrawals from a RRIF will be taxed in full at the unitholder's marginal tax rate. The amount withdrawn will be reported to Canadian investors as income on a T4RIF slip.

Quebec residents will also receive a Releve 2.

Withholding taxes will apply to all RRIF withdrawals in excess of the annual "minimum amount."

Distributions

All distributions will be tax deferred until the funds are withdrawn from the RRIF.

* * *

Use this link to load a printer-friendly version of this document.

Have a question regarding this article? Use our feedback form to send us a note.

© , Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.
(905) 844-7700

Knowledge Bank Money Centre Learning Centre Financial Tools Newsletter Products & Services Radar Screen About Us Legal | Site Map | Home | Search Information on supported Internet Browsers Mutual Fund Investments - Statutory Sales Disclosure Information Copyright © 1984 - Fiscal Agents Financial Services Group Questions? Comments? Use our Feedback page to contact us.