MD Financial Management Inc., the wealth management organization owned by the Canadian Medical Association, released year-end income and capital gains distributions for MD Funds, MD Precision Portfolios™ and MDPIM Pools between December 18 and 29, 2017.
What Is a Distribution?
Mutual funds earn various forms of income from their investments throughout the year. Distributions are made up of these earnings and of capital gains that may result from selling these securities.
Distributions from mutual funds can result in a tax liability for those who have investments in non-registered accounts. However, distributions also reflect the active management taking place in the fund. The fund’s underlying asset managers regularly replace one asset with another that may have better growth potential. As fund manager, MD will sometimes choose to actively reallocate assets between the underlying asset managers. This was the case for the MD Balanced Fund where, in 2017, MD reallocated the entire U.S. equity portion of the portfolio to optimize the fund’s international equity exposure.
Any income earned by a mutual fund is subject to tax if the income remains in the fund. Mutual funds are taxed at high rates, so it makes sense to distribute income and capital gains to investors, who will likely be taxed at a lower rate. Reducing the tax paid by a fund may contribute to higher returns on investments for investors.
When distributions are made, investors generally have two options. They can:
- take the distribution as a cash payment, or
- reinvest the distribution by purchasing more units at the prevailing price.
Most investors choose to automatically reinvest their distributions in the fund; that is, the distribution is automatically used to buy new units in the fund. Even though a distribution will cause the unit value of your investment to decrease, the acquisition of additional units compensates for this price drop. The overall value of your investment remains the same, other than through regular market fluctuations.
It is important to note that a distribution is not a profit and is not related to a fund’s performance, yield or rate of return. It is possible for a fund to have a negative rate of return in a given year while still paying distributions.
Why Don’t All MD Funds and Pools Make Distributions?
If a particular fund does not declare a distribution, it does not mean that the fund performed poorly in the tax year. A distribution is paid only to reduce the tax payable by the fund. In fact, the goal is to minimize distributions payable to investors to minimize current year tax (assuming investments are held in non-registered accounts).
As a general rule, distributions may be required if a fund earns income in excess of the expenses it incurred during the year. When this happens, income, dividends and/or capital gains are distributed to investors, and T3 slips are issued for investments held in non-registered accounts.
About MD Financial Management Inc.
Owned by the Canadian Medical Association, MD has one main goal: to help Canada’s physicians achieve financial well-being.
MD has more than $45 billion in assets under administration and is dedicated to serving Canada’s physicians and their families. MD provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. For a detailed list of these companies, visit md.cma.ca.
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