Question

Are all distributions from a ETF’s to their investors taxable? If not, please explain.

If a non-taxable distribution from an ETF is paid to the unitholders, how does the payout affect the adjusted cost base of the investors ETF units?

Answer 1

ETF stands for ExchangeTraded Funds. It is usually traded in stock exchange, and is much more similar like stocks. It is a type of investment fund. It is usually traded close to its net asset value, subject to occational deviations. Investors can buy and sell ETFs, whenever they want during the trading hours.

ETFs dohave a taxabe effect. It is taxed just similar to how sale of stocks is been taxed. For instance, if you hold an ETF for more than one year, then tax will be payable under the Capital gains. Eventough an ETF is taxable, it comes with some advantages. Capital gains realised on an ETF will be held taxable, only when the entire investment is sold.

ETF do have distributions, they distribute Cpital gains and divideds. Said so, distribution from ETF to their investors are taxable, whereas they enjoy a more favourable tax treatment due to their unique structure. ETF distributions are taxable, once they are sold.When a sale occurs, it triggers a taxable event. The sale results in a Capital gain or loss, which is taxable. Capital gains or losses can be either long term or short term. This depends upon the timethe ETF is been held. If your ETF is been held for more than one year, it comes under the Long Term category, and if it is held for a period less than a year, itcomes under the Short term category. Whatever the case may be,the ETF distrbution will be taxable to the investors. However, if the ETF is been held and has resulted in a Qualified dividend, it is taxable from 0% to 20%, depending upon the investors inome tax rate. If the investor falls under non-taxable category, the dividend received from ETF will remain non-taxable.

Adjusted cost base is related to income tax, that refers to a change in an assets book value resulting from new purchases, improvements, payouts sales and other factors. Distributions from ETFs can affect tye adjusted cost base positively or negatively depending upon the payouts. Adjusted Cost Base will be higher, if the value of a stock keeps increasing over time. If the stock value goes down, the adjusted cost base will also go down proportionately. Non taxable payouts on ETFs will have a positive effect on the adjusted cost base, as it will be higher due to the absence of tax factor in it.