Your client Charlie is thinking about making a large investment into the Sentinel Canadian Equity Fund on December 15. The ex-dividend date for the mutual fund is December 20. What advice would you give
Charlie to avoid the tax trap?
A.
Purchase the mutual fund after the ex-dividend date of December 20.
B.
Make the purchase on December 15 but choose to reinvest the distributions.
C.
Make the purchase on December 15 but choose to receive the distributions in cash.
D.
Purchase the mutual fund before the ex-dividend date of December 20.
A tax trap is a situation where an investor buys a mutual fund just before its ex-dividend date and ends up paying taxes on the distributions that they receive shortly after. This reduces their after-tax return and erodes their capital. To avoid the tax trap, it is advisable to buy the mutual fund after the ex-dividend date, when the fund’s net asset value (NAV) drops by the amount of the distribution. This way, the investor does not receive any taxable income and preserves their capital. Therefore, you should advise Charlie to purchase the Sentinel Canadian Equity Fund after December 20, when the fund goes ex-dividend.
Canadian Investment Funds Course, Unit 8, Section 8.2; 4; 5; 6
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