As an owner of a mutual fund that makes distributions, you are entitled to receive these payments. Not all mutual funds make distributions, but many do. If you own one of these funds, from time-to-time, a cash payment or additional fund units will be deposited into your account. This may occur on a monthly, quarterly, or annual basis. As an informed investor, it is a good idea to understand why and how mutual these fund distributions work.
Distributions from mutual funds can contain any of the following: interest income, dividends, realized capital gains, return of capital, withholding taxes, foreign income, among others. If a mutual fund only holds dividend-paying stocks, the distributions are likely to be composed primarily of dividends, not interest income.
Tax efficiency is a key reason mutual funds distribute cash to clients. Mutual funds are structured as unit trusts which means they benefit from a non-taxable status provided they distribute earned capital gains and income within the calendar year. Investors must pay tax on these distributions however the individual will pay tax at their own marginal tax rate which is usually lower than the fund’s marginal tax rate. Distributions received in a registered account, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Plan (TFSA), are not subject to taxation.
The types of investments held in the fund determine the source of the distributions. For example, a fund invested in fixed-income assets such as bonds or money markets, will receive interest from them and distribute interest income. Funds invested in dividend-paying equities, will receive distributions in the form of dividend income and distribute dividend income. Funds may generate capital gains from selling investments and distribute likewise. Funds may also invest in assets that do not make distributions.
Unitholders receive distributions based on the number of units they hold on the “record date”. Example: If you held 100 mutual fund units on the record date, and the distribution was $0.50 per unit, you would receive a distribution of $50.
A distribution reduces the net asset value (NAV) of the fund by the exact amount that was paid out. This does not affect your portfolio value when you leave the funds in a tax-exempt account.
In non-registered accounts, the type of underlying asset in the fund determines the kind of tax treatment. For example, fixed income will be taxed as interest income at your marginal tax rate. Dividends from Canadian corporations and capital gains are taxed at a lower rate. In simple terms, when a fund pays a distribution, you get taxed on it. When the distribution is in fund units, the book value increases at the same time by the amount of the distribution to avoid double taxation. This information is reported on your T3 slip (Relevé 16 for Quebec residents).
In registered accounts, reinvested distributions are not immediately taxed. They also do not affect your contribution room in your RRSP and TFSA.
Distribution Option
Impact on Fund Value
Impact on Adjusted Cost Base (ACB)
Option 1: Cash Distribution
Unit price decreases by the amount of the distribution and the total fund value decreases.
No impact on ACB unless the distribution consists of Return of Capital (ROC), which will reduce the ACB by the ROC amount.
Option 2: Reinvested Distribution
Unit price decreases by the amount of the distribution; however, since the distribution is reinvested, the total fund value does not change.
The total ACB increases by the reinvestment distribution amount less any ROC component of such distribution.
At Pender, our goal is to protect and grow wealth for our investors over time. Our team of security analysts and seasoned investment professionals manage a suite of differentiated fund strategies with the goal of achieving first-quartile, award-winning performance.
Below is a list of our funds and how we approach distributions in each of them.
Name of Fund
Distributions
Equity Funds
Pender Small Cap Opportunities Fund
Net income and net capital gains annually. Automatically reinvested in additional units; cash upon request.
Pender Small/Mid Cap Dividend Fund
Net income quarterly; net capital gains annually. Automatically reinvested in additional units; cash upon request.
Pender Value Fund
Net income and net capital gains annually. Automatically reinvested in additional units; cash upon request.
Fixed Income Funds
Pender Bond Universe Fund
Net income monthly; net capital gains annually. Automatically reinvested in additional units; cash upon request.
Pender Bond Universe Fund
Net income monthly; net capital gains annually. Automatically reinvested in additional units; cash upon request.
Balanced Fund
Pender Strategic Growth & Income Fund
Net income quarterly; net capital gains annually. Automatically reinvested in additional units; cash upon request.
Liquid Alternative Funds
Pender Alternative Absolute Return Fund
Net income monthly; net capital gains annually. Automatically reinvested in additional units; cash upon request.
Pender Alternative Arbitrage Fund
Net income and net capital gains annually. Automatically reinvested in additional units; cash upon request.
Pender Alternative Arbitrage Plus Fund
Net income and net capital gains annually. Automatically reinvested in additional units; cash upon request.
Pender Alternative Multi-Strategy Income Fund
Net income quarterly; net capital gains annually. Automatically reinvested in additional units; cash upon request.
Pender Alternative Special Situations Fund
Net income and net capital gains annually. Automatically reinvested in additional units; cash upon request.
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