Mutual funds

Mutual funds are pools of assets that are invested by professional managers, either in general investments or in a particular sector.

Some mutual funds pay dividends but may designate all or a portion of the dividends as capital gains dividends to reflect capital gains earned by the mutual fund. Such dividends are treated as capital gains for income tax purposes.

If you sell or redeem mutual fund units, you have to recognize a capital gain (or loss) to the extent the disposition proceeds exceed the cost base of the units sold (and vice versa). As mutual fund units are identical properties, a new tax cost calculation has to be made each time other units are purchased or distributions are reinvested. The cost base of mutual fund units needs to be tracked on an ongoing basis and is rarely the amount you paid for the units. Your broker and/or professional adviser can assist with this calculation.

Most mutual funds allocate their income to registered owners as of December 31 of the particular year. Therefore, if you invest in a fund near the end of the year, you may receive an income information slip showing income that has to be reported for tax purposes even if you have only owned the fund units for a few days.

Segregated funds

Segregated funds are actually insurance contracts with two components: an investment that produces the return and an insurance contract that covers the risk. Like mutual funds, these funds cover a wide variety of asset categories. However, they also provide some benefits that are not available in a mutual fund. For example, segregated funds guarantee either 75% or 100% of your principal. They can also offer protection from creditors if certain conditions are met. This can be a benefit if you’re a sole proprietor or in partnership and want to save for your retirement without putting those funds at risk. Finally, like all insurance contracts, they allow you to name a beneficiary. This means that after your death, the fund proceeds can be paid to the beneficiary without having to go through probate.