Automatic Withdrawals & Capital Gains
Courtesy of Invesco, Posted 07 Apr 2015
Many investors have automatic withdrawals (AWD, or systematic withdrawal plans, SWP) that enable them to receive payments from their accounts on a regular basis.
We are often asked questions about the tax treatment of these plans, so the following is for the benefit of mutual fund investors with non-registered plans.
Realized Capital Gains
Each withdrawal is considered a redemption of units. A capital gain or loss is calculated as the difference between the total proceeds received (ie, the automatic payment) and the adjusted cost base for the units redeemed. This information is often included on your account's annual statement, but some mutual fund dealers are unable to include this as easily as you would hope. If you have an automatic payment from a non-registered account and have not received a summary of your capital gains for these withdrawals, get in touch with your financial advisor to obtain your gain and loss information for the year to be filed with your taxes.
Any income and capital gains within the distribution of a mutual fund also has tax implications. These amounts are reported on a T3 or T5 and must be included in the taxpayer's return for the given tax year. The income portion may comprise a combination of interest, Canadian dividends, and foreign non-business income. Interest will be taxed as ordinary income, Canadian dividends will be eligible for the dividend tax credit, and the foreign non-business income may have a foreign tax credit attached to it.
The distribution for mutual funds may also have a capital gains component, which represents the gains realized by the mutual fund through the sale of some of its holdings.The taxpayer must include 50% of both the realized capital gain on a disposition (like the automatic withdrawals above) AND the capital gain received by distribution.
If the automatic withdrawals are from a Registered Retirement Income Fund (RRIF), the gains realized are sheltered from taxes. However, the withdrawal itself, if above the minimum amount prescribed by the CRA, is taxable.
If the withdrawals are from a Tax-Free Savings Account (TFSA), the gains realized AND the withdrawal itself are also sheltered from taxes.