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:
It appears that a particular corporation received dividends from another corporation that may or may not qualify as a mutual fund corporation, and received income from various mutual fund trusts. The principal issue is the impact on the recipient corporation's capital dividend account.
Position:
If the dividends are received from a mutual fund corporation, the payor corporation can elect to have the dividends be deemed to be a capital gains dividend, in which case the entire gain will be added to the recipient corporation's capital dividend account. If income is received from a mutual fund trust, the payor trust can designate the income to be a taxable capital gain; however, only the taxable portion of the gain will be added to the recipient corporation's capital dividend account.
Reasons:
Subsection 131(1) applies where the payor is a mutual fund corporation, while subsection 104(21) applies where the payor is a trust (including a mutual fund trust). Pursuant to 131(1), the recipient is deemed to have received a capital gain. Pursuant to 104(21), the recipient is deemed to have received a taxable capital gain, and thus cannot the non-taxable portion of the capital gain recognized by the mutual fund trust is not deemed to be received by the recipient corporation.
2000-003658
XXXXXXXXXX J.D. Brooks
(613) 957-2103
September 21, 2000
Dear Sir:
The Toronto East Tax Services Office forwarded a copy of your letter of June 5, 2000 and asked that we respond to you on the technical issues therein. You wrote concerning an assessment of one of your clients under Part III of the Income Tax Act (the "Act"). Contrary to the view expressed in writing by that tax services office, it is your view that where a mutual fund trust allocates a portion of its net taxable capital gains to a beneficiary that is a corporation, the corporation would be able to add the non-taxable portion of the trust's relevant capital gains to its capital dividend account. In addition to receiving income from trusts, it appears that the corporation received dividends from a corporation.
We have not received an authorization from your client that you are authorized to represent it and thus the confidentiality provisions of the Act prevent us from discussing the corporation's income tax matters with you. Nevertheless, we make the following general comments which address the issue you raised. However, you should be aware that we are not commenting herein on whether any particular payor qualifies as a mutual fund trust or a mutual fund corporation.
a) Income received from mutual fund trusts:
Subsection 104(21) of the Act allows a trust to designate a portion of its net taxable capital gains for a taxation year as a taxable capital gain of a beneficiary of the trust. In essence, the designated portion of the net taxable capital gains of a trust is deemed to be a taxable capital gain of a particular beneficiary. However, paragraph 104(21) does not deem beneficiaries to have triggered the entire capital gain themselves. Therefore, we are of the opinion that the non-taxable portion of a trust's capital gains is not added in computing a corporate beneficiary's capital dividend account under subsection 89(1) of the Act as a consequence of an allocation to the corporation of a portion of a trust's net taxable capital gains. You may wish to refer to the Round Table on Federal Taxation, 1999 APFF Conference (see questions 7 and 20) since this issue was addressed by both the Canada Customs and Revenue Agency and the Department of Finance. The Department of Finance noted that there are principle-based arguments in favour of an amendment to the Act to permit the non-taxable portion of a trust's capital gains to be added to a corporate beneficiary's capital dividend account, but other issues need to be considered concurrently.
With respect to the T3 Summary and Supplementary forms, we disagree with your opinion as they contain no statements that are contrary to the above comments.
b) Dividends received from mutual fund corporations:
Subsection 131(1) of the Act allows a mutual fund corporation to elect to have a dividend that it is payable by it, be deemed to be a capital gains dividend. In that case, any amount received in satisfaction of the dividend is not treated as income from a share of the capital stock of the payor but rather is deemed to be a capital gain of the recipient. Accordingly, where the recipient is a corporation, the recipient will be able to add the non-taxable portion of the capital gain in computing its capital dividend account. Of course, if the corporate beneficiary received the dividends in a year from a corporation that was not a mutual fund corporation (within the meaning of subsection 131(8) of the Act) throughout that year, an election could not be made to deem the dividend to be a capital gain to the recipient.
We trust that these comments clarify our position on the issues. You will need to consult with the Toronto East Tax Services Office concerning the specific adjustments to the capital dividend account of your client.
Yours truly,
T. Murphy, Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
CC Karol Shipley, Team Leader, Special Services
Toronto East Tax Services Office
BC Ken Udle, A/Manager, T2 Processing Section
Business Returns Processing Division
Business Returns and Payments Processing Directorate
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