Rethinking Redemptions : What Every Investor Should Know About Exiting Private Investments

When most investors think about private investments, the focus is usually on when and how to invest. But one of the most critical and often overlooked aspects of investing in the exempt market is understanding the exit : when and how you can redeem your investment, what the implications are, and how to plan for what comes next. 

Exempt market investments are not like publicly traded securities. They are typically longer-term, less liquid, and governed by the terms laid out in offering documents. Knowing your redemption options before investing—and understanding the tax consequences when the time comes to exit—is key to making confident, informed decisions.

Understanding Redemptions in the Exempt Market

A redemption is the process of withdrawing your capital from a private investment. In the exempt market, redemptions are not automatic or guaranteed and may be subject to:

• Lock-up periods

• Quarterly or annual redemption windows

• Advance notice requirements

• Redemption fees or penalties

• Limited liquidity due to fund structure or market conditions

Some investments are structured with fixed terms, meaning redemptions are only permitted at maturity. Others allow more flexibility but may still include gates or restrictions if redemption requests exceed available liquidity. Knowing these terms up front—before you invest—can help prevent surprises down the road and ensure your cash flow planning remains intact.

Why Redemptions Matter as Much as the Initial Investment

A redemption event often marks a new chapter in your financial journey. Whether you’re planning to reinvest, use the funds for a personal goal, or simply reallocate your capital, the choices you make at this stage can carry significant implications—especially from a tax and timing perspective.

Here are some reasons to take redemptions seriously:

• They can trigger taxable events.

• They may present an opportunity to rebalance your portfolio.

• They allow you to re-evaluate your current goals and mindset.

In short, redemptions aren’t just administrative—they’re strategic.

Tax Implications of Redemptions in Canada

One of the most important considerations when redeeming an exempt market investment is taxation. In Canada, how your redemption proceeds are taxed depends on the structure of the investment and the nature of the return.

Here are some key tax scenarios investors should be aware of:

1. Return of Capital (ROC) vs. Capital Gains

• If the investment has distributed return of capital, it means you’ve received back a portion of your original investment.

• When you redeem, any amount received above your adjusted cost base (ACB) is treated as a capital gain.

• Capital gains are taxed at 50% of the gain at your marginal tax rate.

Example: You invest $50,000. Over time, you receive $10,000 in ROC. Your ACB is now $40,000. If you redeem for $60,000, you realize a $20,000 capital gain—only $10,000 of which is taxable.

2. Interest or Income Distributions

• Some exempt market products generate interest income, such as mortgage investment corporations (MICs) or lending funds.

• Interest income is taxed at your full marginal tax rate, which could be significantly higher than capital gains rates, depending on your province and tax bracket.

3. Deferred Tax Consequences

• Many investors delay thinking about tax implications until tax time—but in the case of redemptions, tax planning should happen beforehand.

• In some cases, redeeming in one calendar year versus another can change your taxable income significantly.

• There may also be opportunities to use capital losses from other sources to offset gains, but only if you plan ahead.

4. Registered vs. Non-Registered Accounts

• If your investment is held in a registered plan (RRSP, TFSA, RRIF, etc.), redemptions may be sheltered from immediate taxation.

• However, withdrawals from RRSPs or RRIFs are treated as taxable income in the year of withdrawal.

• TFSAs do not trigger tax on redemptions, but you must respect re-contribution limits in future years.

Planning for Reinvestment: What Comes Next?

Once capital is returned, the natural next question is: What should I do with it?

This is where many investors fall into one of two traps:

• Rushing into the next opportunity without reviewing current goals

• Letting cash sit idle and missing out on potential growth

Instead, consider using this moment to step back and ask:

• Has my risk tolerance changed since I made the original investment?

• Are there areas of my portfolio that need rebalancing?

• Do I want to maintain exposure to private investments, or is it time to diversify differently?

• Is there an opportunity to be more tax-efficient in my reinvestment strategy?

In some cases, investors choose to “ladder” private investments, spreading out maturity dates for better liquidity management. Others use redemptions to align their portfolio more closely with evolving life goals.

Redemptions Deserve Your Attention

Redemptions aren’t just an exit—they’re a transition point. They offer an opportunity to reflect, realign, and take control of your financial path. The more thought you put into this process before and during your investment, the better prepared you’ll be when that liquidity event arrives.

If you're unsure about the redemption mechanics of your current holdings, or how a future redemption could impact your taxes, a conversation with a qualified tax advisor—and a registered Dealing Representative—can offer clarity.

Disclaimer:

This article is for informational purposes only and does not constitute investment or tax advice. Investments in the exempt market carry risk, may be illiquid, and may not be suitable for all investors. Tax treatment varies based on individual circumstances and investment structure. Please consult with a qualified tax advisor and a registered Dealing Representative before making any investment decisions or planning redemptions.