Dear Expert,
I recently sold a mutual fund that was not held in an RRSP after holding it for 20 years. The fund had considerably increased in value since the day I bought it. Is the increase taxable as income or capital gains? Are the distributions I received throughout the years involved in the calculation somehow? Is there a way to reduce the tax bite when filing my income tax return this spring? Expert Answer:
The difference between the proceeds on the redemption of your mutual fund units and your adjusted cost base (ACB), minus any commission paid on the disposition, is a capital gain that must be reported in the year of sale. This is simple enough. However, the difficulty may be in determining the ACB of the units.
The cost base is averaged over all units owned. You start with your purchase cost, including any commission you may have paid. To this amount, you add all the distributions you received during the period of ownership that were reinvested in the fund, and you subtract any non-reinvested return of capital distributions (return of capital distributions that are reinvested do not affect the ACB).
If you made additional purchases after your initial investment, the amount of those purchases must be added to the ACB as well. And if any units have been redeemed along the way, the cost base is reduced by the ACB per unit at the time of redemption times the number of units redeemed. Many mutual funds keep track of investors' ACBs, so you might want to check with the fund.
As for reducing the related taxes, if you have realized capital losses this year on other investments or have net capital losses carried forward from prior years, these will offset the capital gains. And if you have investment related expenses, such as interest, safety deposit box fees or investment counsel fees, you may claim these as a deduction on your tax return.
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No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
