3 November 2000 External T.I. 2000-0024475 - INTEREST ON CAPITAL GAINS REFUND

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:

Whether a mutual fund trust will be subject to interest charges in the situation where a loss carry-back reduces its capital gains refund.

Position: Yes.

Reasons: Subsections 160.1(1) and 132(2.2) of the Act.

		2000-002447
XXXXXXXXXX 	A. Seidel
(613) 957-2058
Attention: XXXXXXXXXX 

November 3, 2000

Dear Sir/Madam:

Re: Interest on Capital Gains Refund

This is in reply to your letter dated May 2, 2000 in which you requested our views as to whether a mutual fund trust would be assessed interest pursuant to subsection 161(7) of the Income Tax Act (the "Act") in the situation where the carryback of a capital loss results in a reduction of a mutual fund trust's capital gains refund.

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

You have described a situation where a mutual fund trust, within the meaning thereof in subsection 132(6) of the Act, disposes of property in the year giving rise to a taxable capital gain. The mutual fund trust chooses not to allocate the gain to the unitholders and pays tax on the gain pursuant to Part I of the Act. The mutual fund trust receives a capital gains refund pursuant to subsection 132(1) of the Act. In the subsequent year, the mutual fund trust disposes of property giving rise to an allowable capital loss. The mutual fund trust requests that the allowable capital loss be carried back to the previous year and is, therefore, no longer entitled to the capital gains refund received in the previous year. You have queried whether subsection 161(7) of the Act would apply to the mutual fund trust.

Subsection 161(7) of the Act applies, amongst other things, for the purpose of computing interest under subsection 161(1) of the Act. Subsection 161(1) of the Act essentially provides that a taxpayer will pay interest on amounts owing to the Receiver General after the taxpayer's "balance-due day", which is defined in subsection 248(1) of the Act. Subparagraph 161(7)(a)(iv) of the Act provides an exception to the application of subsection 161(1) of the Act where the amount owing is the result of "any amount deducted ... under section 111 in respect of a loss for a subsequent taxation year". Therefore, in the general situation where an allowable capital loss of a subsequent taxation year is deducted in a previous taxation year and as a result thereof an amount becomes payable to the Receiver General, subsection 161(1) of the Act will not apply by virtue of subparagraph 161(7)(a)(iv) of the Act.

However, there are special rules which apply to, amongst others, a mutual fund trust and its taxable capital gains. Provided that all of the requirements are otherwise satisfied, subsection 132(1) of the Act allows a mutual fund trust to receive a "capital gains refund" in respect of its taxable capital gains which are not distributed to its unitholders. Subsection 132(2.1) of the Act requires that the Minister also pay interest on any such capital gains refund from the date specified therein.

Subsection 160.1(1) of the Act provides that interest is payable by a taxpayer at the prescribed rate "[W]here at any time the Minister determines that an amount has been refunded to a taxpayer for a taxation year in excess of the amount to which the taxpayer was entitled as a refund under this Act". Accordingly, in the situation where a mutual fund trust received a capital gains refund in a taxation year and the carryback of an allowable capital loss of a subsequent year reduces or eliminates the mutual fund trust's entitlement to the capital gains refund, it is our view that subsection 160.1(1) of the Act would apply to the mutual fund trust.

In summary, in the situation described above, it is our view that a mutual fund trust would not be assessed interest pursuant to subsection 161(1) of the Act but would be assessed interest at the prescribed rate in respect of the capital gains refund pursuant to subsection 160.1(1) of the Act and in respect of any interest received under the capital gains refund under subsection 132(2.1) of the Act pursuant to subsection 132(2.2) of the Act.

The publications referred to in this letter may be obtained from your local tax services office or from our Internet web site (www.ccra-adrc.gc.ca).

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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