Get the cash flow you need from mutual fund distributions
The type of cash flow and how mutual funds are taxed are important considerations for investors.
There are multiple ways to draw income from mutual fund investments:
Many people looking to draw income from their investments naturally think fixed-income investments but you can receive a cash flow from many types of mutual funds:
These funds typically have a regular distribution schedule, which can be monthly, quarterly or annually. It’s important to remember that the amount can fluctuate, even if the fund has a stated target yield.
If your fund has the word “Class” in its name, it’s likely part of a mutual fund corporation (a group of funds in an incorporated structure). A mutual fund corporation will use any expenses or losses from one fund to reduce the impact of capital gains or income from another fund within the corporation. This means that, even if you’re invested in an income-producing fund, you won’t receive a distribution unless the corporation declares a dividend. So to set up a cash-flow stream, consider a Systematic Withdrawal Plan or purchase / transfer to* the Series T or V options.
* If you don’t need a cash-flow stream right away, you can purchase the MF series and then switch to the Series T or V option without penalty or incurring a taxable event.
While it is possible to make a withdrawal from a Registered Retirement Savings Plan (RRSP)**, any early withdrawals would be subject to withholding tax.
If you’re nearing retirement (or aged 71), consider converting your RRSP to a Registered Retirement Income Fund (RRIF).
** Withdrawal restrictions apply to a locked-in RRSP or LIRA.
Think you can do it alone?
Given that most retirees are living longer, it is important to access income needs as early as possible and how that will be financed – not just the amount required but also the annual rate of return in order to sustain for the desired length of time.
Speak to your financial advisor about what combination of registered plan types (RRSP, TFSA) and non-registered accounts may be best suited to provide for both the expected income needs as well as the unexpected expenses.
'AGF Elements', 'Elements', 'What are you doing after work?' and the AGF logo are trademarks of AGF Management Limited and used under licence. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The payment of distributions and/or dividends should not be confused with a fund's performance, rate of return or yield. If distributions and/or dividends paid by the fund are greater than the performance of the fund, your original investment will shrink. Dividends paid as a result of capital gains realized by a fund, and income and dividends earned by a fund are taxable in your hands in the year they are paid. Monthly distributions on Series T and Series V shares may generally be a return of capital so long as there is sufficient capital attributable to the relevant series. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base falls below zero, you will have to pay capital gains tax on the amount below zero.
Please refer to the prospectus for each product for complete information regarding targeted annual distributions, minimum investments and other important information.
^Under AGF's distribution policy, Series T and V unit-holders will receive 12 monthly distributions. In addition, if an annual distribution of net realized capital gains and/or net income/capital gains is required, unit-holders will receive an additional 13th distribution in December. This may result in two December distributions - one that is the regular monthly distribution and one annual distribution, if required. This annual distribution must be reinvested in additional units of the fund.
The All World Tax Advantage Group is a mutual fund corporation that currently offers approximately 20 different classes of securities. In addition to fund diversification by investment style, geography, and market capitalization, a key benefit of investing in any of the classes within the group is the possibility of sharing incurred expenses (and losses) of the combined structure potentially offsetting income earnings to minimize chance of a dividend declaration. While the articles of AGF All World Tax Advantage Group Limited provide authority to make distributions out of capital and AGF All World Tax Advantage Group Limited intend both to calculate capital in the manner contemplated by the corporate statute for corporations that are not mutual fund corporations and only to declare distributions out of capital if there is sufficient capital attributable to a series, no definitive case law exists to confirm that a mutual fund corporation may make distributions of capital and how it is to be calculated. Further, no advance income tax ruling has been requested or obtained from Canada Revenue Agency, nor is AGF aware of any published advance income tax ruling or the possibility of obtaining such a ruling, regarding the characterization of such distributions or the calculation of capital for such purposes.
Investors should consult their investment professionals and tax advisors prior to implementing any changes to their investment strategies.
The information contained in this document is designed to provide you with general information and is not intended to be tax advice applicable to the circumstances of the investor.
Publication date – September 23, 2016
1Please read important disclosure and disclaimer information included on the following page.
2Please read important disclosure and disclaimer information included on the following page.
7Please read important disclosure and disclaimer information included on the following page.