Capital Gains on Mutual Funds and ETFs: How They Are Taxed in Canada

Mutual funds and ETFs can create tax in two ways: through gains the fund passes out to you each year, and through the gain or loss when you sell your units. Slips arrive in the spring, and the numbers do not always line up with what you remember paying.

This article explains how to report distributions, how the cost base of your units changes, and how a sale is taxed. A lawyer or accountant can confirm how it applies to your accounts.

This article covers Canadian federal tax law, which applies in every province.

Capital gains on your slips

Capital gains or losses shown on T3, T4PS, T5 or T5013 slips are generally reported on line 17400 or 17600 of Schedule 3. Those gains are then part of your net result for the year. The taxable capital gain is one-half of the capital gain.

If taxable capital gains exceed allowable capital losses, the difference is included on line 12700 and taxed at your marginal rates with your other income.

How box 42 changes your cost base

On a T3 slip, box 42 is the amount resulting in cost base adjustment. A negative amount is added to the ACB of your units, and a positive amount is subtracted. This is how return of capital and reinvested distributions change your ACB.

ACB can never be negative. If subtracting box 42 would take it below zero, the negative amount is deemed a capital gain for the year, the ACB becomes zero, and the gain is reported on line 13200 of Schedule 3.

Selling units and average cost

On a sale, subtract the ACB and the selling outlays and expenses from the proceeds. Identical properties, such as units of a mutual fund trust, use an average ACB that is recalculated at each purchase, and a sale does not change the average ACB per unit. On a part sale, divide the ACB between the part you sell and the part you keep.

If you sold units of a foreign-currency fund, convert proceeds at the exchange rate at the time of the sale and the ACB at the rate when you acquired the units, and report in Canadian dollars.

Losses and switching funds

• Net capital losses can be applied only against taxable capital gains, carried back three years or forward indefinitely.
• A loss is superficial if you or an affiliated person acquires the same or identical property within 30 days before or after the sale and still owns it at the end of that period.
• Your spouse or common-law partner, and a corporation you or your spouse control, are affiliated persons. A superficial loss cannot be deducted and is usually added to the cost base of the substituted property.
• Some situations, such as the owner becoming a non-resident or the owner's death, are not treated as superficial losses.

Whether two different funds count as identical property can depend on the details, so ask an adviser before relying on a switch.

What to do next

• Collect every T3, T5 and T5013 slip, and note any box 42 amounts.
• Keep a running ACB record for each fund, including reinvested distributions.
• Report sales on Schedule 3, Part 3, and file a return even if no tax is owing.
• Check whether any ACB would drop below zero.
• Ask an accountant if you repurchased a fund you sold at a loss.

Frequently asked questions