Capital Gains Distributions from Mutual Funds and ETFs in Canada

It can be a surprise to receive a tax slip showing capital gains from a fund when you have not sold a single unit. Many investors assume gains only arise when they sell, so they wonder whether the slip is a mistake.

In most cases it is not. This article explains in plain terms why the slip arrives, where the amounts go on your return, and how the adjusted cost base (ACB) of your units can change so that you do not pay tax twice when you eventually sell.

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

Why you can have a gain without selling

A mutual fund trust or ETF holds a portfolio of investments. Capital gains connected to a fund can appear on slips such as the T3, T4PS, T5 or T5013. Those gains are then reported to you on a slip, even though you personally sold nothing.

If you receive a slip showing capital gains, the sensible first step is to read it closely and report what it shows, rather than assuming it is a mistake. The slip is your record of what to report, and capital gains on it are generally reported on line 17400 or 17600 of Schedule 3. Whether a particular fund does this, and how much, depends on how it is run and structured, so the slip itself is the best record of what happened.

Reporting the amounts on your return

Capital gains or losses shown on T3, T4PS, T5 or T5013 slips are generally reported on line 17400 or 17600 of Schedule 3. You report a disposition in the calendar year it occurs, you should file a return even if no tax is owing, and amounts are reported in Canadian dollars.

The taxable capital gain is one-half of the capital gain. If your taxable capital gains exceed your allowable capital losses, the difference is included on line 12700 of your T1 return. It is added to your other income and taxed at your marginal rates, not at a separate flat tax.

The one-half rate applies to gains realized in 2024, 2025 and 2026, because the proposed increase was cancelled.

How T3 box 42 changes your ACB

ACB is usually the cost of a property plus the expenses to acquire it, such as commissions and legal fees. For trust or mutual fund units, the ACB does not stay fixed. T3 slip box 42 is labelled "Amount resulting in cost base adjustment".

This is how return of capital and reinvested distributions change the ACB of trust or mutual fund units. Keeping your ACB current matters because it is subtracted from your proceeds when you sell.

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

Selling later and the average cost

Identical properties, such as units of a mutual fund trust, use an average ACB that is recalculated at each purchase. A disposition of identical properties does not change the average ACB per unit.

When you sell, subtract the ACB and the outlays and expenses of selling from the proceeds of disposition to find the gain. If you sold only part of your holding, the average ACB per unit stays the same. Because slip adjustments change the ACB, ignoring them can lead you to overstate or understate your gain.

What to do next

• Collect every T3, T4PS, T5 and T5013 slip you received for the year.
• Report capital gains from slips on line 17400 or 17600 of Schedule 3.
• Record the T3 box 42 amount for each fund and adjust your ACB records.
• Keep a running average ACB for each fund, updated at each purchase.
• Check whether any box 42 adjustment could push an ACB below zero.
• Ask a tax lawyer or accountant for help if your records are incomplete or you hold many funds.

If you have lost track of past purchases or adjustments, a lawyer or accountant can help you rebuild the ACB history from your statements and slips.

Frequently asked questions