13 December 2000 External T.I. 2000-0033715 - MUTUAL FUND DEF. SALES CHARGES

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:

When a taxpayer pays a deferred sales charge (DSC) on the disposition of mutual fund units, is the DSC included in the calculation of the taxpayer's capital gain or loss?

Position TAKEN:

Yes.

Reasons:

Subparagraphs 40(1)(a)(i) and 40(1)(b)(i) (i.e., it is an outlay or expense made or incurred for the purpose of making the disposition).

XXXXXXXXXX 2000-003371
T. Young
Attention: XXXXXXXXXX

December 13, 2000

Dear madam:

Re: Calculation of Capital Gains and Losses

This is in reply to your letter of June 22, 2000 concerning the calculation of capital gains and losses on the sale of units in a mutual fund. We also acknowledge our telephone conversation (Young/XXXXXXXXXX) of November 20, 2000.

Often, an investor purchasing units in a mutual fund is subject to either:

1) a front-end load fee (or sales commission) paid at the time of purchasing units; or

2) a back-end load fee or deferred sales charge ("DSC") payable on redemption if the units are redeemed within a certain period of time.

You inquired if the payment of a DSC on the redemption of units in a mutual fund is included in the taxpayer's calculation of a capital gain or loss. In your letter, you provided a hypothetical example where a taxpayer invested $10,000 in a particular mutual fund. The taxpayer later sold the same units for $12,000, but paid a DSC of $500 reducing the net proceeds to $11,500.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Therefore, we can only provide you with the following general comments.

The CCRA's general position is that the payment of a DSC on the sale of units in a mutual fund is an outlay or expense made or incurred by the taxpayer for the purpose of making the disposition. Accordingly, the DSC will reduce the taxpayer's capital gain pursuant to subparagraph 40(1)(a)(i) of the Income Tax Act (the "Act") or increase the taxpayer's capital loss pursuant to subparagraph 40(1)(b)(i) of the Act, as the case may be.

In the example you provided, the taxpayer's capital gain would be $1,500 ($12,000 proceeds less $500 DSC less $10,000 adjusted cost base). For purposes of your example, we have assumed that the taxpayer did not own any other units in the particular mutual fund.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Business and Publications Division
Income Tax Rulings Directorate

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