A client, Mr. Henderson, holds units in a Canadian equity mutual fund in a non-registered account. This year, the fund distributed capital gains, dividends, and interest income. Which of the following best describes the tax treatment of the capital gains distributed by the mutual fund to Mr. Henderson?

Question: A client, Mr. Henderson, holds units in a Canadian equity mutual fund in a non-registered account. This year, the fund distributed capital gains, dividends, and interest income. Which of the following best describes the tax treatment of the capital gains distributed by the mutual fund to Mr. Henderson?

Answer options: ✅ Only 50% of the distributed capital gains are taxable at Mr. Henderson's marginal tax rate.

• The full amount of the distributed capital gains is taxable at Mr. Henderson's marginal tax rate.
• The capital gains are tax-exempt if reinvested within the mutual fund.
• The capital gains are subject to a flat tax rate, regardless of Mr. Henderson's income.

Correct answer: Only 50% of the distributed capital gains are taxable at Mr. Henderson's marginal tax rate.

Explanation: In Canada, only 50% of capital gains are included in taxable income. Therefore, only half of the distributed capital gains will be taxed at Mr. Henderson's marginal tax rate.