Leith Wheeler Explainer Series: ‘Tis the Season for Capital Gains Distributions

Leith Wheeler Explainer Series: ‘Tis the Season for Capital Gains Distributions

As capital gains distributions will be occurring this week, we thought it was a good time to revisit our refresher on how these distributions work. 

Anatomy of a distribution

Funds have two sources of return that the CRA taxes: income and realized capital gains. Income represents the dividends paid out by shares held in a fund, plus any interest received from bonds or other short-term securities.

Realized capital gains represent the gain locked in when we sell a security for more than we paid for it (or loss if we exit below our original cost). These gains and losses from the year are netted out against one another and the net gain is then “distributed” to clients, which is taxable. Income distributions tend to be issued monthly or quarterly and capital gains distributions annually, at this time of year.

Gains are realized when we trim or sell positions when they become overvalued or our outlook changes. While there is not necessarily a relationship between fund performance and distributions in any given year, over time investors should expect to receive them as a marker that progress has been made in growing their investments.

One of the benefits of investing with us is that our long-view investment style naturally gives rise to lower distributions in any given year – because we tend to buy and hold for longer periods and therefore don’t trade as often, we tend to trigger relatively fewer realized capital gains from year to year.

A few housekeeping items

A quick reminder that all Leith Wheeler funds pay distributions in December (they will pay either December 19th or December 31st this year, depending on the fund).

You may notice that when a distribution happens in a fund, the fund’s unit price dips. This dip is the exact amount of the distribution. Because that gain has now effectively been taxed in the hands of unitholders, the price for new buyers of the fund lowers. For this reason, you will see the unit prices for all of our funds with distributions fall slightly on the date of payment. Don’t be alarmed; you receive a commensurate number of units via the distribution, so your overall market value is unaffected!

Finally, as the holiday season arrives, we at Leith Wheeler find ourselves reflecting on how thankful we are to have the opportunity to work with you, our clients. So we want to take a moment to thank you for your business, and pledge to work diligently and loyally to better your interests again in 2020. Your trust in us is the reason we get to do this every day, and we are grateful.

Happy holidays, and all the best in the new year!