Question

QUESTION #5

1. Briefly explain the reinvestment feature offered by most mutual funds.
2. What is the potential tax issue at year-end if the investment income from the mutual fund is reinvested into additional units.
3. Describe three types of transactions that would result in a change to the funds adjusted cost base (acb) to the investor.

Answer 1

A. In most of the mutual funds, there is an option to the investor wherein the investor can reinvest the dividends and income earned on mutual funds to purachse more shares or units in the fund. With this feature the income earned in not withdrawn and reinvested in the same funds with which the investor can earn higher income on the reinvested funds.

B. The potential tax issue that may arise at the time of the reinvestment of the investment income is that the investor has to pay the tax on the income earned even though the income has been reinvested in the form of additional shares and the income is not earned in cash.

C. An adjusted cost base is an income tax term that refers to the change in the book value of the asset which is a result of the transactions like Purchase of the additional units, Sale of the units and improvements/ reinvestment. All this transaction will lead to the change in the fund adjusted cost base(ACB) to the investor.

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