AGF Management : The 411 on Distributions

Insights and Market Perspectives

Author: Sound Choices

December 10, 2020

Providing a better understanding of your investments

The content in the article below is meant for Canadian investors only.

Distributions are payments from a fund to the investor and can derive from multiple sources, such as income and capital gains realized from securities held within the underlying funds, as well as return of capital.

Components of a distribution may consist of:

• Dividends - Income earned on Canadian and foreign equities.
• Interest - Income derived primarily from fixed-income products such as bonds, GICs and cash equivalents.
• Realized Capital Gains - The gain received when an investment is sold at a higher price than purchased at.
• Return of Capital - Occurs when a fund 'returns' a portion of the money you invested in the fund, typically resulting from the fund paying a higher amount of distribution compared to the net income and gains earned by the fund.

What you need to know

Distributions do not create wealth

Wealth gets created when a fund receives dividends and interest from the underlying holdings, and through realized capital gains when holdings are sold at a profit. A distribution, when reinvested, creates units without changing the total value of the investment.

Here is an example to illustrate how it works:

When the fund declares a distribution of $0.10 per unit and reinvests it, there are two results:

1. The unit price drops by the amount of the distribution paid ($0.10) presuming the market is steady.
2. The number of units owned increases when the value of the distribution is used to buy additional units of the fund at the post-distribution price ($100 distribution buys 10 units of the fund at $9.90/unit).

Although you now own additional units of the fund, the distribution does not affect the total dollar value of the investment as you own more units valued at a lower price.

'Distributions' and 'Dividends' are not the same

A fund distribution can be comprised of dividends, earned interest, realized net capital gains and return of capital.

Dividends are only a component of distribution; they can be earned by a fund holding Canadian or foreign companies paying a dividend per share.

The higher the distribution amount does not mean the better the fund

All funds have different objectives and may have different distribution policies. One series of a mutual fund, for example, may target a 3% payout while another series of the same fund may target a 5% payout, despite holding the same investments.

If a fund cannot cover its target distribution from earned income (interest, dividends and realized capital gains), it will return capital to the investor, depleting the principal available to grow.

Distributions are not an indicator of a fund's performance

Distribution is often misconstrued as positive performance of a fund. However, a distribution may include a combination of earnings and/or return of capital. The portion of the distribution relating to earnings only represents a part of the fund's total return.

Overall appreciation in market value is a better indication of how well a fund is performing.

Distributions can either be reinvested in additional units of the fund or paid out as cash

Deciding which is best for you will be determined by account type and preference for income or to maximize growth.

• If you hold an investment outside of a tax-sheltered plan - outside of a Registered Retirement Savings Plan (RRSP), a Registered Retirement Income Fund (RRIF), a Registered Education Savings Plan (RESP), or a Tax Free Savings Account (TFSA) - you are required to report on your Canadian income tax return all distributions (interest, dividends or capital gains) paid to you by any fund, including those reinvested.
• On the other hand, distributions on funds held in a tax-sheltered plan do not need to be reported as taxable income as they are automatically reinvested in registered plans. Taxes are reported and owed only when money is taken out of the registered plan (the exception being a TFSA).

Which tax reporting slips are provided in order to report distributions paid?

Funds or portfolios

If the trust funds or portfolios paid a distribution in 2020, a 'consolidated' T3/RL16 slip:

• will be mailed (usually with the annual statement, aggregating the reporting of distributions from funds or portfolios.)
• would be issued unless the income consists solely of 'other income' (usually interest) and is less than $1.

Classes

Corporate class mutual funds are 'classes' of a mutual fund corporation. A corporate class structure does not distribute interest or foreign income to its investors and is able to offset any income or gains earned within the corporate class structure against expenses from anywhere within the mutual fund corporation.

If the classes invested in paid a dividend and/or a distribution in 2020, a 'consolidated' T5/RL3 slip:

• will be mailed (usually with the annual statement, aggregating the reporting of the dividends and/or distributions from the classes in each account).
• would be issued unless the dividend and/or distribution per account in the year was less than $1 (refer to the annual statement).

NOTE: Distributions received on funds held within a tax-deferred plan, such as an RRSP, are not required to be reported as taxable income as long as they stay within the plan.

What about ETFs? Are they taxed like mutual funds or like securities?

If an ETF is set up like a mutual fund trust, it would pass through both income and capital gains earned within the fund to unitholders in the form it was received by the fund - for example, income earned is passed through as income. ETFs generally pay capital gains at year-end in the year it is earned and pay income in the first few weeks following year-end. As with mutual funds, this is only applicable to investors holding ETFs in non-registered accounts.

NOTE: Because AGF doesn't maintain records of ETF unitholders, brokers are responsible for providing all tax reporting for investors, including preparing T3 forms.

To better understand your investment, please contact your financial advisor. Don't have a financial advisor? Before you start your search, read about working with a financial advisor.

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.

Commissions, management fees and expenses all may be associated with investing in ETFs. Exchange-traded funds are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. There is no guarantee that ETFs will achieve their stated objectives and there is risk involved in investing in the ETFs. Before investing you should read the prospectus or relevant ETF Facts and carefully consider, among other things, each ETF's investment objectives, risks, charges and expenses. A copy of the prospectus and ETF Facts is available on AGF.com.

The commentaries contained herein are provided as a general source of information and should not be considered personal investment or tax advice. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or reliance on the information contained here.

The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

AGF Management Limited ('AGF'), a Canadian reporting issuer, is an independent firm composed of wholly owned globally diverse asset management firms. AGF's investment management subsidiaries include AGF Investments Inc. ('AGFI'), AGF Investments America Inc. ('AGFA'), Highstreet Asset Management Inc. ('Highstreet'), AGF Investments LLC (formerly FFCM LLC) ('AGFUS'), AGF International Advisors Company Limited ('AGFIA'), AGF Asset Management (Asia) Limited ('AGF AM Asia'), Doherty & Associates Ltd. ('Doherty') and Cypress Capital Management Ltd. ('CCM'). AGFI, Highstreet, Doherty and Cypress are registered as portfolio managers across various Canadian securities commissions, in addition to other Canadian registrations. AGFA and AGFUS are U.S. registered investment advisers. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. AGF investment management subsidiaries manage a variety of mandates composed of equity, fixed income and balanced assets.

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 intends 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.

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Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF's suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

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