Mutual funds make year-end distributions.  Many investors find those payments confusing.  Here's a simple explanation.

What they are.  Year-end distributions occur when the earningsa fund received during the year exceed its tax-deductible expenses and capital losses.  To avoid being taxed on these earnings, many fund companies distribute them to unit holders at year-end.

How they work.  For mutual funds held within registered accounts, tax on distributions is deferred until the earnings are withdrawn.  However, for non-registered accounts, taxes apply in the year in which the distributions are recieved.  Funds have until March 31 to issue detailed tax slips.

Although it may seem surprising, a fund as a whole may have reported a loss, it may have sold individual securities that showed gains.  The distribution reflects those gains.

Why the matter.  If you are buying a mutual fund for your non-registered portfolio at the end of the year, and the funds pays out a distribution, you will be taxed even though you didn't own the units when the gains were earned.  Distributions are taxable even if they are automatically reinvested in additional fund units rather than received as cash.