Cat Davids is a client of Q Wealth’s and invested $250,000 in Quintessence Wealth Factor IQ Dividend Canadian Equity & Yield Fund (Fund A) on February 3, 2025, in her non-registered account. Fund A is a mutual fund trust (MFT).
When investing in an MFT, there are two layers of tax reporting clients must consider, namely: the top investor layer and the underlying, fund layer. Cat’s initial investment in the fund is $250,000 – this is the top layer. Upon receipt of the $250,000, portfolio managers of Fund A invest the funds by purchasing securities such as shares and bonds that align with the fund mandate. Over the course of 2025, Fund A may earn interest and other income, Canadian dividends, foreign income and realize capital gains or losses from selling any of the fund investments – this is the underlying layer.
As a MFT is a trust for Canadian tax reporting purposes, each MFT must complete a Trust Income Tax and Information Return (T3 Return) every year. An MFT distributes its net income (net of operating expenses) and net capital gains (net of capital losses) to its investors each year. The net income earned by the MFT retains its character when distributed to investors. As Fund A invests in Canadian publicly traded equities and bonds, it will generate Canadian eligible dividends and interest.
Each investor of the fund will receive a Statement of Trust Income Allocations and Designations slip (T3 slip) reporting their respective share of Fund A’s distributions for the year. The T3 slip reports the fund layer for each investor.
In early March 2026 Cat received a 2025 T3 from Q Wealth that reported eligible dividends, other income (interest), and capital gains. Please see the T3 below:
While Q’s MFTs have December year-ends, their financial statements and T3 returns are prepared soon thereafter along with the T3 slips reporting investor distributions.
Distributions are taxable to the investor in the year they are deemed received. The amounts reported on the T3 slip should be included in their respective tax returns for the year in which the MFT year-end falls in. For example: a 2025 T3 slip will be reported on an individual’s Personal Income Tax and Benefit Return (T1) for 2025.
Admittedly Cat is confused as she does not see any cash deposits reported in her Q non-registered account in 2025 that reflect the distributions reported on her T3 slip. What happened?
Q MFTs pay out notional distributions, meaning no cash is distributed, as any net income and capital gains are reinvested back into the respective fund.
In Cat’s situation, she was allocated $5,000 in eligible dividends (Box 49), $1,000 in capital gains (Box 21), and $7,500 in other income (Box 26) for a total of $13,500. She will report on the income and gain distributions on her 2025 T1. Due to these distributions, the ACB of her investment in Fund A will also increase by $13,500. Q Wealth will reflect the increase in her ACB in late March 2026.
In early January 2026 Cat reaches out to share she has bought a house and needs to sell her Fund A units. As the disposition will be at the investor level, Cat will have to report the disposition and resulting capital gain on her 2026 T1. Here is a summary of Cat’s disposition of her Fund A units:
Cat will receive a Statement of Securities Transactions (T5008) in 2026 reflecting the disposition of her Fund A units, including their ACB of $263,500 and Proceeds of Disposition of $280,000.
Take Note
In a year when units of an MFT are sold by the investor, it is possible to report two separate capital gain and/or loss amounts. This is due to the two layers of reporting – the top, investor layer and the underlying, fund layer. Where there is significant market volatility, it is possible for an investor to report capital gains at the fund level from realized gains early in the year, but also report a capital loss at the investor level if the underlying fund investments and its NAV drop significantly towards the end of the year. The NAV would represent Proceeds of Disposition.
Connect with Precision Wealth Management.
If you need assistance in understanding the reporting and taxation of Q MFTs, please reach out to our team to connect you with a Q Wealth Portfolio Manager. We are happy to assist.
Disclaimer
This example is for illustrative purposes only and does not reflect actual client results.
Precision Wealth Management. is an owner and partner in the Q Wealth Partnership. Portfolio Management services are provided by Q Wealth. Financial planning services are provided by Precision Wealth Management. This document has been provided for information purposes only and is not intended to be relied upon as investment, financial, tax or legal advice. Please consult an independent legal or tax professional if considering the implementation of a planning strategy. The planning strategies and technical content are provided for the general guidance and benefit of our clients at the time of writing; however, we cannot guarantee the accuracy or completeness of the information contained herein.
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