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### Do I get a tax break on an RRSP loan...and why does the net asset value of my mutual fund drop at the end of the year?

Let's deal with these two questions in order.

The general rule is that the interest on money borrowed for an investment can be deducted from your income tax.

However, Canada Customs and Revenue Agency will not let you deduct the interest on a loan if that money is used for an RRSP investment.

If you shift into your RRSP an investment, which is financed with a loan, this interest expense would cease to be deductible from your income tax.

Let's consider the second question, on why mutual fund net asset values tend to fall at year-end. This typically happens because of the way mutual funds flow part of their earnings to investors through what are called distributions. Distributions represent part of a mutual fund's total earnings over the year.

Mutual funds get dividends from stocks, interest from bonds and capital gains when investments are sold for more than they cost. This income is added to the fund and is reflected daily in the fund's net asset value per share (NAVPS) price.

Here's how the system works:
Example: You own 1,000 units of a mutual fund. Before a distribution, the fund is valued at \$10 per unit. The total value of your investment is \$10,000. The fund's managers then review the total income that has been received over the year and divide that by the number of units in the mutual fund. Assume that results in a distribution of \$1 per unit. You get a distribution payment of \$1 per unit multiplied by your 1,000 units = \$1,000. A new unit price for the mutual fund must now be calculated. This is done by taking the unit price before the distribution and subtracting the per unit distribution (\$10 - \$1 = \$9). The new unit price is \$9 per unit. You now calculate the number of units that distribution amount of \$1,000 would buy you at the new unit price (\$1,000 divided by \$9 per unit = 111.111 units). These units are then reinvested or redeemed for cash.

Mutual funds get dividends from stocks, interest from bonds and capital gains when investments are sold for more than they cost. This income is added to the fund and is reflected daily in the fund's net asset value per share (NAVPS) price.

Here's how the system works:

Example

You own 1,000 units of a mutual fund. Before a distribution, the fund is valued at \$10 per unit. So the total value of your investment is \$10,000.

Then the fund's managers review the total income that has been received over the year and divide that by the number of units in the mutual fund. Assume that results in a distribution of \$1 per unit. You get a distribution payment of \$1 per unit multiplied by your 1,000 units = \$1,000.

If you reinvest the distribution, your account will still be worth \$10,000, but you will now have 1,111.111 units. If you instead take the distribution as cash, you will get a cheque for \$1,000. Your account will still have 1,000 units, but at the new unit price of \$9, your investment would now be valued at \$9,000.

Most fund companies make capital gains distributions once a year in December. Dividend and interest distributions are typically paid out more frequently.

Consider getting professional advice before making investment decisions. Investment products and strategies appropriate for some investors may not meet your needs.