Investors Shocked by Their Tax Bills?

You may have noticed more of your clients expressing dismay over the high amount of taxes owing this April 30.  The culprit could be the late year capital gains distributions declared  by fund companies in 2025, which can be a particular surprise for investors who bought their funds late in the year.  Their T slips will indicate an entire year’s distribution.  Worse, they won’t necessarily have the cash to pay the taxes – now or throughout the rest of the year.  Here’s what you need to know:

The Backdrop.  Mutual fund companies will often make late year capital gains distributions for investors with non-registered accounts but they won’t pay out the cash.  Instead these “notional” distributions are reinvested to acquire more fund units.  This increases the number of shares held within the cost base, which will be taken into account calculating capital gains down the road when the taxpayer actually sell the funds. The investor will notice a corresponding drop in the Net Asset Value (NAV), of the units owned.

ETFs are treated somewhat differently.  In this case, distributions can be paid in cash or reinvested in the funds.  If reinvested, there is no increase in the units held or the Net Asset Value. Instead the Adjusted Cost Base or book value is adjusted by the amount of the distribution.     

The Taxes Payable.  So that produces a tax problem – often unanticipated - as taxfilers receive their T3 or T5 slips.  Not only does income rise, so do taxes and further, there is another surprise:  often quarterly tax instalment payments will be required for the first time in advance for tax year 2026 or for annual remitters, quarterly amounts will be increased.  CRA’s requests for these additional payments can be ignored if income will be lower in 2026, but if not enough is paid in advance, interest will be charged.

In addition, your clients may not have the cash on hand to pay all of these taxes plus property taxes which tend to come up in June.   They may have to tap into their savings to pay those taxes.  So what’s important is to help them decide the appropriate account to draw from, so that they don’t create an unintended tax consequence in 2026. (Withdrawing from an RRSP rather than a TFSA, for example, can have significant tax and retirement income planning consequences, for example).

Bottom Line:  Tax and financial advisors are best to collaborate as part of their year end tax filing initiatives to ensure the client takes advantage of tax planning options when a late year capital gains distribution occurs.  That can include tax loss harvesting and increasing charitable donations.