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How are mutual funds taxed?

Tax on income earned on mutual fund units held in registered plans such as RSPs (Retirement Savings Plans, RIFs (Retirement Income Funds) and RESPs(Registered Educational Savings Plans) is deferred until the income is withdrawn. Mutual fund units held in a TFSA (Tax-Free Saving Account) are not taxed at all. Any income you earn from a mutual fund in a non-registered plan is subject to tax. 

You can earn income two ways: through distributions such as: interest, dividends, capital gains and foreign income from the fund, as well as from capital gains when you redeem (sell) mutual fund units.

All distributions of income that are received in non-registered accounts are taxable, whether they are received in cash or reinvested by buying more units of the fund. A mutual fund can earn income from the investments held in the portfolio. For example, it can earn interest on treasury bills, dividends from stocks, and capital gains (or losses) when it sells an investment at a profit (or loss). 

The T3 Supplementary/Relevé 16 tax slip you receive from the fund company will identify the type and amount of income to report on your tax return.

For non-money market funds, TD will issue a T5008 which discloses capital gains realized by you on the redemption (sale) of mutual fund units. Mutual fund companies are required to report all redemptions and transfers to Canada Revenue Agency.

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