Q. Do iShares ETFs pay distributions?
A. As with most mutual funds, iShares ETFs distribute income and capital gains to unitholders. These distributions are taxable to investors, whether they are paid in cash or reinvested in the fund. Please check the individual fund product page on BlackRock.com/CA for specific distribution dates and tax information.
Your broker is responsible for determining whether to withhold tax on any distribution paid to you. Your broker is also responsible for providing all required tax reporting, including T3 tax slips. In Canada, BlackRock Canada provides brokerage firms with the information that they need to prepare your T3 tax slips (such as the proportionate share of distributions attributable to dividends, income, capital gains, return of capital or foreign tax withheld) through the facilities of CDS Clearing and Depository Services Inc. (CDS). This is different from a typical mutual fund, where the mutual fund company maintains investor accounts and provides tax reporting directly to unitholders. Any questions related to a T3 tax slips should be directed to your broker.
Q. What is the difference between cash distributions and reinvested distributions?
A. iShares ETFs may pay distributions to unitholders in cash or may reinvest the distribution amount in the fund. Generally, net income and dividends received by the iShares ETFs are distributed to unitholders in cash and net realized capital gains are reinvested in the ETF.
Similar to mutual funds, reinvested distributions are reinvested on the unitholder's behalf in additional units of the fund. With mutual funds, this results in an increase in the number of units held by each unitholder and a corresponding drop in net asset value (NAV) per unit, such that there is no change in the total value of the holdings resulting from the distribution. With iShares ETFs, immediately following a reinvested distribution, the number of units outstanding is consolidated so that the number of units held by investors is the same as before the capital gains distribution. For iShares funds, unitholders will not see an increase in the number of units held, and will NOT see a change in the NAV per unit. Therefore, like mutual funds, a reinvested distribution for an iShares ETF results in no change in the total value of the holdings resulting from the distribution.
For reinvested distributions for an iShares ETF, an investor can increase the adjusted cost base (ACB) of the iShares ETF by the amount of the reinvested distribution. This adjustment means that any gain realized on a subsequent sale of units will, in effect, be reduced by the amount of the distribution. In this way, you do not pay tax twice on the distribution. In many cases, your brokerage firm will automatically change the ACB to reflect reinvested distributions on iShares ETFs. However, not all brokerage firms provide this service. Please contact your broker for more information on their practices.
