MD Financial Management Inc. (MD), a Canadian Medical Association (CMA)-owned wealth management organization, released year-end income and capital gains distributions for MD Funds and MD Precision Portfolios™ on December 19 and 21, 2016. Distributions were announced for the MDPIM Pools on December 23, 2016. In addition, MD Growth Investments Ltd. issued an eligible dividend on December 19, 2016.
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 from capital gains that may result from selling these securities.
Distributions from mutual funds can result in a tax liability for investors in non-registered accounts. However, distributions also reflect the active management taking place in a client’s portfolio. By realizing gains on an asset that has attained its full potential, MD’s managers can replace the asset with one that may have better growth potential.
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 instead to investors who will likely be taxed at a lower rate. Reducing 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 or shares 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 or shares in the fund. Even though the unit value has decreased, the additional units or shares compensate for this price drop. The value of the investment remains the same, other than through regular market fluctuations.
It’s 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 (or a T5 slip for distributions from MD Growth Investments Ltd.) will be issued for investments held in a non-registered account.
For more information about MD Financial Management, please visit md.cma.ca, talk to an MD Advisor or call the MD Service Centre at 1 800 267-2332.
About MD Financial Management
Owned by the Canadian Medical Association, MD’s only business imperative is to enhance physicians’ financial outcomes by focusing on their distinctive needs and operating in their best interests.
MD has more than $40 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.
MD Precision Portfolio™ is a trademark owned by the Canadian Medical Association, used under licence.
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