IFIC Mutual Funds Licensing Practice Exam · Question
Which of the following is true regarding taxation of mutual funds in a non-registered account in Canada?
In non-registered accounts, phantom income can occur when a fund realizes capital gains, but instead of distributing cash, it reinvests the gains, increasing th
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Question: Which of the following is true regarding taxation of mutual funds in a non-registered account in Canada?
Answer options:
- Income distributions are tax-free.
- Capital gains distributions are taxed at 100% of the gain. ✅ Phantom income can occur, where tax is owed even if no cash distribution is received.
- Only interest income is taxable, not capital gains.
Correct answer: Phantom income can occur, where tax is owed even if no cash distribution is received.
Explanation: In non-registered accounts, phantom income can occur when a fund realizes capital gains, but instead of distributing cash, it reinvests the gains, increasing the NAV. Investors still owe tax on these realized gains, even without a cash payout. Capital gains are taxed at 50% inclusion rate.
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