The funds paid out management fee rebate distributions and year-end distributions on Dec 27th and 31st respectively, so distributions have been on my mind lately. As we went through the distribution process, I made a number of notes. A lot of the notes are very system-specific and internal to us, however, I thought they may be interesting to those of you channeling your inner accountant:

1. Taxable income in a mutual fund consists of:
   1. net income: Canadian and foreign dividends, plus interest, less management fees and administrative expenses.
   2. net taxable capital gains: taxable capital gains, less capital losses and taxable capital gains that remain untaxed due to the capital gains refund.

2. The management fees that we charge to the fund are partially offset by the management fee rebate that we distribute to the unitholders quarterly. The fee rebates are paid out of the income and capital gains of the funds, and in turn, Steadyhand reduces the management fee that is charged to the fund. Unitholders receive the rebates in the form of distributions.
3. Taxable capital gains/losses occur when the fund managers sell securities at a gain/loss. Some of the taxable capital gains do not have to be distributed and can remain in the fund on a non-taxable basis, as they have been distributed already on redemptions of fund units throughout the year (i.e. they have already been taxed). This is the capital gain refund.
4. Mutual fund trusts (i.e. the Steadyhand funds) are flow through entities. The taxable income earned inside the funds flows through to the unitholders as if they held the securities directly. The income/gains are taxed in the hands of the unitholder at his/her marginal tax rate.
5. Income and capital gains are earned by the fund throughout the year and reflected in the net asset value per unit (NAVPU). When the distribution is made, the income and capital gains realized are divided by the number of units in the fund to arrive at the distribution factor (i.e. the distribution per unit). Distributions are allocated to unitholders based on the number of units they own.
6. Reinvested distributions are deemed to have been received by the investor in cash and reinvested back in additional units of the fund. This increases the unitholder's total adjusted cost base (ACB), which results in a lower capital gain when the units are redeemed. This also means you are not taxed twice on the capital gain distribution amount.
7. Capital losses do not flow through to the unitholder or offset income distribution amounts. If a fund has positive income distributions and a capital loss, they do not offset each other; the fund pays out the full income distribution amount and the capital loss is carried forward.
8. Distributions are reported to Canadian residents on a T3 slip issued by March 31 of the following year.
9. When units of a fund are redeemed, the unitholder may realize a capital gain/loss.
10. A return of capital (ROC) from a trust is essentially a repayment of the investor's capital, and can happen when a trust pays out more in distributions than it earned in income (i.e. there is not enough income to cover the distribution, so some of the original investment is returned to the investor).
11. ROC reduces the ACB of an investment, thereby increasing it's capital gain when sold. The ROC is shown on the T3, but is not actually taxed.
12. ROC from income trusts in the funds flows through to the unitholders of the Steadyhand fund.
13. While the total distribution amount is known at year-end, the allocation of income and capital gains for a fund are not known until the mutual fund trust itself receives T3's from the trusts it holds. Steadyhand is not able to issue T3's for the funds until after this happens.
14. At year-end we initially classify the distributions entirely as income, however, when the T3 is issued it shows the correct allocation between income and capital gains.