Investors using the TD e-Series mutual funds may have noticed an unusual episode at year-end. The TD International Index Fund (TDB911), which has been making quarterly distributions for years, did not make one in December 2020. This has caused some confusion, so let’s try to clear up The Curious Case of the Missing Distribution.
The first thing to appreciate is that fund investors didn’t get short-changed. While TDB911 did not pay out a cash distribution in the fourth quarter of 2020, investors still got the full benefit of the dividends paid by the stocks in the fund.
Since equity index funds often hold hundreds or thousands of individual stocks, they receive a steady stream of dividends. Of course, they don’t pay them out as fast as they come in. Instead, they typically reinvest most of that cash by purchasing more shares, and this is reflected in the fund’s net asset value: in other words, its unit price.
At regular intervals—most often quarterly, but sometimes monthly, semi-annually, or annually—funds can pay out the dividends in cash to unitholders, but they’re not required to. If the fund doesn’t make a cash distribution, investors still benefit, since the value of the fund includes dividends that were retained and reinvested.
If the fund does pay a cash distribution, then things get more complicated. The fund’s price will fall by an amount equal to the distribution, just like a stock or ETF does on the ex-dividend date. And if you’ve elected to reinvest all distributions (as most mutual funds investors do), you’ll receive additional units of the fund.
The key point here is that the distribution policy doesn’t make any meaningful difference: in both cases, the overall value of the holding would be the same.
Consider Rob, who owns 1,000 units of a fund with a unit price of $30, so his holding is valued at $30,000. At year-end, the fund pays no cash distribution. Nothing changes: Rob still holds 1,000 shares, they’re still priced at $30, and his holding is still worth $30,000.
Now imagine Patty also owns 1,000 units of a fund with a unit price of $30, so her holding is valued at $30,000. At year-end, this fund pays a cash distribution of $1.50 per unit, or $1,500 in total, which is automatically reinvested.
In Patty’s case, the unit price of the fund will fall to $28.50 when the distribution is paid, and the $1,500 will be used to purchase 52.6316 new units (that’s $1,500 divided by $28.50). Patty now owns 1,052.6316 units of the fund at $28.50 each, for a total value of $30,000.
The ETF that lies beneath
You can see this principle at work when you compare the 2020 return of TDB911 to that of its underlying holding, the TD International Equity Index ETF (TPE). The ETF paid all four quarterly cash distributions in 2020, and these added up to just over $0.47 for the year. Assuming those distributions were reinvested immediately (this is the way ETF performance is always measured) the fund reported a total return of 5.75% in 2020.
Compare this to TDB911 which made just three quarterly distributions, skipping out on the December payout. However, the fund still delivered an annual return of 5.48% for the year. The difference in return between the ETF and the mutual fund is explained entirely by fees: TPE is 27 basis points cheaper. The distribution policy had no effect.
If you hold TDB911 in a TFSA or an RRSP and you reinvest your distributions, you should be indifferent to whether the fund pays cash distributions or simply reinvests all the dividends. It won’t affect your returns in any way. The only difference is, if there is no cash distribution, you won’t see any change in the number of units you own, nor will you see an adjustment to the unit price.
Yeah, you still need to pay the tax
If you hold TDB911 in a taxable account, however, there’s a second important idea to understand. Even though you received no cash distribution, you will still need to pay tax on the reinvested dividends.
This can be confusing, and the situation apparently hasn’t been helped by TD’s customer service reps. One reader said he contacted TD about the missing distribution and was told it would provide a tax benefit: “It is generally more valuable to the client to have no payout,” the rep told him, because only cash distributions are taxable. This is nonsense. Despite the TD rep’s wishful thinking, you can’t escape paying taxes on dividends by reinvesting them instead of taking them in cash. Wouldn’t it be nice if you could.
As we’ve said, the ETF version of this fund paid a cash distribution of about $0.47 per unit last year, which works out to a yield of about 2.5%. Since TDB911 is almost entirely made up of this ETF, its unitholders would have received those same dividends, so they will face essentially the same tax liability. If you held $10,000 worth of TDB911 in a taxable account for all of 2020, you should expect to receive a T3 slip at tax time, and this should declare foreign dividends of approximately $250.
I can’t explain why TD elected not to make a cash distribution from its international index fund at the end of 2020. But if you’re using the e-Series funds in your portfolio, rest assured the decision won’t have any material effect on your performance or your tax bill.
Thank you. Saved me 2 hours of hold time with TD.
Keep up the great work!
Thank you. I did spend 3 1/2 hours on hold and speaking to many TD investment reps – all knew nothing! You are a great source of very useful info. Appreciate it – truly.
Thanks for the explanation, I probably wouldn’t have even noticed the missing distribution. But what is TPE? Is there a new ETF version of e-series? If so, I’d be interested in a post about this and whether it’s a better/cheaper option than e-series!
Still feels like we’re getting short changed, and paying taxes on non-distributions kinda stinks. It’s a weird situation that TD created with this and I’m a little angry with then…
@noob: The e-Series funds use ETFs as their underlying holdings. The ETFs are cheaper, but that has always been true: there’s nothing new here. There are still many benefits of using e-Series funds over ETFs for some investors (see the comparison table on my model portfolios page).
Doesn’t the reinvested dividend result in an increase to the ACB of the fund so that you don’t pay tax twice on the dividends?
very helpful article – took me awhile to understand tax impact from monthly distributions paid as cash vs re-invested
I do have a follow up tax question: are the fees, MERs charged in my non registered, taxable account eligible for deduction?
@Wreckingball90: Yes, the fund’s ACB would increase to reflect the reinvested distribution, so there will be no double taxation. The good news is that this will be done at the fund level, so you would not need to make any adjustment yourself.
@Anna: Fund MERs cannot be claimed as carrying costs on your tax return, but they are indirectly tax-deductible.
Fees are subtracted from a fund’s distributions before they are paid to you as a unitholder, reducing your taxable income. To give a very simple example, if a fund generated 2% in income from its holdings and it had a 0.50% MER, you would receive 1.50% and be taxed on that amount. Which is the same as receiving the full 2% and then claiming a deduction the 0.50% MER.
This should help:
https://www.steadyhand.com/industry/2010/07/08/management_fee_deductibility_clearing_the_air/
appreciate prompt reply and reference article – my question was exactly on how to interpret CRA line item 22100 re carrying charge deduction on taxable accounts
This complicates trying to determine your annual income for the purpose of avoiding a claw-back on OAS, requires a little guessing. Sad that Canadian Couch Potato has to inform us, TD could have/should have done this in one of their many almost daily letters.
Hi Dan,
I am waiting for my TD direct investing setup but in the meantime I noticed VGRO is trading higher than it’s previous day NAV, e.g. today at 30+ so shall I wait to invest 10,000$ to get it’s nav low or how this thing work.sorry for such a dumb question. Nav going up everyday is good sign or bad? How it affects returns?
Thanks for your help
Dumb question alert — in the example you give, I receive a dividend but my net worth (as it were) remains the same because the value of the fund goes down by the same amount as the dividend I receive. How did I benefit from the dividend then?
Hey Dan!
Seems like everywhere I go on the internet is people talking about the gains of the market and to expect a downturn or crash. Is the correct strategy here to continue dollar cost averaging, since market crashes/rises can’t be predicted? Or should I try and save more in emergency funds, etc just in case?
Thanks! Cheers man. I suspect you will say dollar cost averaging (and to ignore anyone predicting market swings) but maybe not so just curious lol.
Hi Dan, could you recommend a few accountants who can help me navigate taxes across different assets like real estate, investments and inter-generational wealth? I’m in Alberta while my other family is in Ontario. Thanks!
@Alli: I’m afraid I can’t make accountant recommendations.
@Vince: Assuming you already have adequate emergency savings (which is important), then gradually adding to your investment portfolio, rebalancing occasionally, and staying disciplined is still the only strategy makes sense. I’m pretty sure you knew that. :)
@CJ: It’s not a dumb question at all: it’s actually one of the most common misunderstanding among investors. People often think of dividend stocks as though they paid interest like bonds, i.e. “If I start with $1,000 of stock and I get 2% dividend, I’ll have $1,020.” It’s not true: in simplified terms, you end up with $980 in stock and $20 in cash. When you think about this, it makes perfect sense. If a company pays $100 million in cash to its investors, it must be worth $100 million less, and therefore its stock price will decline to reflect this.
To answer your larger question about how you benefit from the dividend, the answer is that you don’t unless the business continues to earn profits that will maintain or grow its value, thereby maintaining or increasing its stock price. This is why many people argue that a company’s dividend policy is largely irrelevant, and what matters more is whether the company is profitable. The company can choose to pay out those profits in dividends or reinvest them in the business, both of which should benefit investors: https://www.investopedia.com/terms/d/dividendirrelevance
Thanks for reply Dan! You’re right it does make sense, and I think I did know that previously but did not retain. Maybe meet you back here for a refresher when I forget again in 2030 or so!
Loved the “Dude, where’s my Car?” reference.
@Leif: Glad someone got my 20-year-old movie reference. :)
Little update on this. TDDI has released the T3s for 2020 and the reported distributions don’t include anything for December. The total amount for TDB911 includes only for what was paid out by the fund over the three other trimesters. So we don’t have to pay taxes on non-distributions, as I hoped. I suspect they deferred the December distribution for some reason and we’ll see a larger distribution than usual at the end of Q1 2021…
@Charles: Thanks for this update. I have to admit I do not understand this. As I explained in the post, a fund cannot simply decide not to make taxable distribution, and to defer it to the following year. They don’t have to pay the distribution in cash, but they still need to declare it for tax purposes. So there must be something else going on here. Of course, TD has not been forthcoming, and some of their reps have even been repeating the nonsense about choosing not make a distribution so they can reduce the unitholder’s tax bill. It’s disappointing.
Does anyone know why today (March 5) the TD International Equity Index ETF closed 0.99% higher than previous day, but TDB911 closed 0.61% lower than previous day? Wouldn’t the fund match with the corresponding underlying ETF?
Hi Dan
You mentioned in Feb that in account distributions will increase your holdings ACB value and it is done at the fund level? How? By increasing your number of units?
Thanks
@Roy: Mutual fund companies will adjust the book value of your holding automatically: you will just see the new value on your statement. The specifics depend on the type of distribution: not every adjustment increases your ACB. In some cases (such as a reinvested dividend) there will be an increase in the number units, as described above. The market value of each unit falls, but you get more units and the overall value of your holding remains unchanged.
Hi Dan,
Thank you very much for this information. I just discovered these missing dividend payments in three of my accounts and was absolutely dreading having to contact TD. Just have others have pointed out, the wait times are horrendous and does not look like improving any time soon.
Hi Dan, I understand that whether dividends are paid out or not the value remains the same. Yet, I prefer to receive the dividends and here is why.
Ex.1 I have 1000 units of this fund which I bought at $13.68 in May of 2019. (Total value $13,680. If dividends were never paid out, today I would still have 1000 units but as of December they are $15.76 each. (Total value $15,760.)
Ex.2 Same as above but dividends are paid out so now I have 1010 units. at $15.76 my total value is $15,917.60. Which means I now have 10 more units to sell if I wish to do so and a difference of $157.60 more in my pocket. Maybe I’m missing something but I would rather get the dividends.
@Maria: The problem with your examples is that you have assumed that the unit price of $15.76 would be the same in both examples. This is the misconception that I tried to clear up with the example of Rob and Patty in the article.
I know this is confusing, but if it were not true then dividends would be “money for nothing.” We know this can’t be true.
Thank-you! I do get it now. In other words it wouldn’t make a difference. The unit price would be different based on whether dividends where paid out or not. P.S. Love your site!
Hi, I don’t think I’m the only one who’s noticed that the projected income for e-series funds have decreased since the start of the year, so I could kindly use more clarification as to why. For my investments, I’ve noticed that in December 2021 I received dividends of:
– $455.06 for TDB 900
– $203.32 for TDB 902
– $280.03 for TDB 911
Now, even after contributing since the start of 2022, my projection for this December as of today is only:
– $17.57 for TDB 900
– $133.11 for TDB 902
– $103.05 for TDB 911
Would you say this is because the fund is only paying out a portion of the dividends in cash and the rest automatically reinvested? Or, does this have to do with a decrease in the fund’s price? I’m still trying to comprehend why it’s expected to pay out less than before when the fund’s dividend yield doesn’t seem to show any steep declines. I also haven’t been paying attention to any changes in the fund price/units owned since investing in this has been mostly passive for me.
Thanks in advance!
@Austin: It’s not uncommon for equity mutual funds to pay out most of their distributions at the end of the year. You’re right to assume there should not be any dramatic difference between 2021 and 2022 distributions, but I don’t think you can make a meaningful comparison until after the December 31 distributions have been declared. Of course, when making that comparison you will also have to ensure you held the same number of units in both years.