When I refer to the 'end is near', I am not referring to the end of the world or the bull market (as markets display extreme volatility). Rather, I am referring to the end of the calendar year.

As we approach the end of the year, it may be prudent to invest into mutual funds with caution. December is an important month for mutual funds because it is the month when many funds make their annual distributions.

All mutual funds are required to distribute the realized gains and profits of the fund before the end of the year. If you are a shareholder of a mutual fund outside the RRSP or a TFSA on the date that this distribution of profits is issued, you will have to pay tax on the profits. If you bought the fund late in the year, you will have to pay tax on the entire year's distribution even though you only owned the fund for a short period of time. Purchasing the fund after the distribution will defer any taxes into the following tax year.

The story is not that you should avoid making any investment decisions before the end of the year. Rather, the story is to be aware that some funds can have significant distributions (especially in years with strong growth) and these are the ones to avoid purchasing until the new year.

Some funds can have very significant distributions, while others have little to no distributions. Every fund has different distributions depending on a couple of factors. Firstly, distributions can result from funds that trade actively. Active trading may be a good investment strategy but it is not always a very good tax deferral strategy. Secondly, distributions are more likely to occur in funds that have had success in choosing winning stocks. When stocks are sold for big profits, the good news is you have great returns. Unfortunately, the bad news is you will have to pay tax on those profits. Investors are usually drawn to these funds with great performance.

If you are looking to invest before year end and you do not want to delay the investment, look for funds that have low distributions, low activity, issue distributions more frequently (like monthly or quarterly) or are new.

Usually at this time, the mutual fund companies are trying to get a grasp of the timing and amounts of the distribution. These calculations are only estimates and are subject to change before the end of the year.

As an example, let's say you had $1000 invested in XYZ Mutual Fund which is going to have a distribution of $0.11 per share.  That means 11% or $110 would be taxed as income at your current marginal tax rate. Remember that the $110 of income may be capital gains, dividends or interest and that each of these have different tax implications.  The mutual fund company will issue a tax receipt showing the taxable amounts for the year and investors will have to add this income to their tax returns.

For investors who bought these funds late in the year, they have to pay tax on the whole about but will have a higher Adjusted cost base as a result which means they will pay less tax later when they sell the investment.  I know this can be confusing but tax has never been an easily understood topic so seek tax advice if needed.

Avoiding year end investing into mutual funds might also apply to investing in interest bearing investments like GICs (outside the RRSP).

If you buy a GIC on December 15, 2013 you will have to report the interest in the 2013 tax year because the interest is generated on the anniversary of the GIC. If, on the other hand, you purchased that same GIC in the new year on January 1, 2014, you will not have to report the interest until the 2015 tax year, thus deferring the tax on interest by a full year.

Combine all this information with tax loss selling strategies and you have a lot of confusion. If this stuff makes your head spin, consult your financial advisor or accountant for help.