It’s that time of year when fund companies start to pay out capital gains distributions to their unit holders. If you’re a Canadian resident investing in U.S.-listed mutual funds or ETFs, you might receive capital gains distributions. But how are they taxed? Here’s a quick breakdown to help you understand the cross-border tax implications!

U.S.-listed mutual funds and ETFs often distribute realized capital gains to investors. For Canadian residents, these distributions are foreign income—not capital gains. You’ll find them reported as foreign income on tax slips, like a T3 or T5.

In Canada, these capital gains distributions are treated as foreign income and are fully taxable at your marginal income tax rate—not at the lower Canadian capital gains rate (where only 50% is taxed).

The U.S. typically withholds 15% tax on this foreign income (thanks to the Canada-U.S. tax treaty). If held in a non-registered account, you can claim a foreign tax credit in Canada to offset some or all of this withholding tax.

If your U.S. ETF or mutual fund is in an RRSP or RRIF, U.S. withholding tax is exempt due to the tax treaty. But in a TFSA, the withholding tax still applies, and you can’t claim a foreign tax credit. Choose your account wisely!

Capital gains distributions don’t increase your ACB (or cost base) for Canadian tax purposes. So, when you eventually sell the ETF or fund, calculate any capital gains/losses based on your purchase price and any additional contributions.

To sum up: U.S. mutual fund or ETF capital gains distributions are treated as foreign income in Canada, fully taxable at your marginal rate, with U.S. withholding tax that you might be able to credit.

Understanding how these distributions are taxed can help you make smarter choices about where to hold U.S.-listed funds and how to maximize your returns after taxes.