16 May 1994 External T.I. 9406605 - MUTUAL FUNDS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1.Whether the units of a mutual fund trust or the shares of a mutual fund corporation are capital property or inventory?

2.What is the ACB of a unit in a mutual trust?

Position TAKEN:

1.Question of fact.

2.It is generally the amount paid for the unit (including any cost of acquisition) less any distribution by the mutual fund that is not included in the income of the unit holder, plus 1/3 of the capital gain attributed to him by the fund (see 53(2)(h) of the Act).

Reasons FOR POSITION TAKEN:

											5-940660

XXXXXXXXXX Robert Gagnon

May 16, 1994

Dear Sir:

Re: Mutual Funds

This is in reply to your letter of August 1, 1993 wherein you requested a technical interpretation addressed to the assistant director-client assistance of the North York District Office. Your request has been forwarded to the Rulings Directorate for reply. We apologize for the delay in replying.

In preparing our response, we assumed that the mutual funds were mutual fund trusts or mutual fund corporations within the meaning respectively of subsections 132(6) and 131(8) of the Income Tax Act ("Act"). The information that you have provided is limited, necessarily restricting our reply to comments of a general nature.

It is a question of fact whether the units of a mutual fund trust or the shares of a mutual fund corporation are capital property or inventory for a taxpayer, with the distinction being made on a case-by-case basis. Revenue Canada's position on whether a gain or loss on the disposition of securities may be on account of capital or on account of income is set out in Interpretation Bulletin IT-479R (copy enclosed) and is based on the jurisprudence.

Where a taxpayer is unsure whether a gain or a loss for a taxation year is on account of capital or income, he may elect by producing form T123 with his income tax return for that year, that every Canadian security owned in that year and any subsequent year is deemed to be capital property. As a result, all Canadian security dispositions in that year and thereafter must be given capital gain or loss treatment and the election cannot be rescinded.

The election is not available to certain taxpayers, including a trader or a dealer in securities. It is only available on the disposition of a Canadian security, which is defined in the Act and includes shares of a mutual fund corporation and units of a mutual fund trust.

The question of whether there is a redemption of a unit or share of a mutual fund where a transfer is made from a mutual fund trust or corporation to another within the same family of mutual fund should be addressed to the manager of the mutual funds. There is a disposition for income tax purposes where the transfer is made by the redemption of units in a mutual fund trust or shares in a mutual fund corporation and the issuance in exchange of units or shares of another mutual fund. A unitholder or shareholder who disposes of its units or shares of a mutual fund which are capital properties, will realize a capital gain (or a capital loss) equal to the amount by which the proceeds of disposition exceed (or are exceeded by) the aggregate of the adjusted cost base ("ACB") and any costs of disposition. The proceeds of disposition is usually the amount received on redemption.

The ACB of a share in a mutual fund corporation is generally the amount paid for the share (including any costs of acquisition). The ACB of a unit in a mutual fund trust is generally the amount paid for the unit (including any costs of acquisition) less any distribution (before the redemption) by the mutual fund that is not included in the income of the unit holder, plus 1/3 of the taxable capital gain attributed to him by the fund.

Where a taxpayer owns a number of identical properties acquired after 1971 which have been purchased at different times, the ACB of each individual property is averaged by dividing the total ACB of all identical properties owned by the taxpayer by the number of such properties. Units or shares in a mutual fund which are the same in all material respects are identical properties.

The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate