Many of you have received cheques in the mail from your mutual fund companies, and are wondering what it’s all about.

In 2003, the Ontario Securities Commission (OSC) began investigating the practice of frequent trading market timing activities at five mutual fund companies. If you owned mutual funds with AGF, AIC, CI, Investor’s Group or Franklin Templeton you may have received a cheque in the mail. Although market timing is not illegal, it does affect the volatility and can add extra cost for long-term investors. Normally, when a mutual fund is sold within 90 days of its purchase, a short-term trading fee of 2% is charged. These fund companies, and others had not been consistent in applying these fees. As a result, the five companies have negotiated a settlement with the OSC. They will pay $205.6 million dollars to clients who held the affected funds.

If you receive a cheque, you may spend it as you wish (of course we recommend putting it back into your investment!), but you should be aware of the income tax consequences. Depending on what type of account you had, the reporting requirements will vary.

If your account was a registered plan (RRSP, RRIF or LIRA), the payments are considered to be income in the tax year that you received the cheque. Any cheques over $200 will have income taxes withheld automatically. For registered pension plans and DPSPs, the same rules apply and you will receive a tax slip by February 28, 2006.

For non-registered accounts, if you still own the fund, the adjusted cost base (ACB) will be reduced by the amount of your cheque. You are not required to report any capital gain or loss until you redeem your investment, alternatively, if you wish, you can report the payment as capital gain this year. If the fund has been redeemed, your payment must be included on your taxes as a capital gain with an ACB of zero.

If you think you are entitled to a payment but do not receive it, you may make a claim for your settlement until June 1, 2008. After this date, any remaining settlement amounts will be deposited to their corresponding mutual funds, and your chance to receive this “found money” will be missed. Merry Christmas!

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.