25 April 2001 External T.I. 2001-0076585 - EXPENSES OF ISSUING MUTUAL FUND UNITS

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 the undeducted balance of unit issuance costs, which is greater than 20% of total fees, is deductible in the year of windup of a unit trust under paragraph 20(1)(e)?

Position: No

Reasons: Deduction is limited to a maximum of 20% in each year.

XXXXXXXXXX 2001-007658
N. L. Storry
April 25, 2001

Dear XXXXXXXXXX:

Re: Paragraph 20(1)(e) of the Income Tax Act (Canada)

We are writing in response to your correspondence of March 23, 2001, wherein you requested our opinion concerning a hypothetical situation where a unit trust incurs unit issue costs, which are deductible at a maximum rate of 20% per year under paragraph 20(1)(e). However, the trust is wound up before four years have elapsed and a balance of issue costs representing more than 20% of the original expense remains to be deducted in its final taxation year. You have requested our view with respect to paragraph 20(1)(e) of the Income Tax Act (the “Act”) and whether the undeducted balance, in its entirety, would qualify as a deduction in the final taxation year of the trust.

Our Comments

Paragraph 20(1)(e) of the Act limits the annual deduction of the expenses described therein, including expenses incurred in the course of an issuance or sale of units by a unit trust to a maximum of 20% each year. Subparagraph 20(1)(e)(v) provides an exception to the 20% limit where debt obligations in respect of a borrowing are settled or extinguished and subparagraph 20(1)(e)(vi) provides for the deduction of expenses by partners where a partnership ceases to exist. No similar rule exists to permit the deduction of costs incurred by a unit trust where the trust ceases to exist before the costs have been fully deducted. In the above circumstances, it is our view that in the year of windup the deduction by the trust would be limited to that proportion of 20% of the original expense that the number of days in the final year is of 365. Therefore, the trust would not be able to deduct the balance of the unit issuance costs.

The foregoing comments are given in accordance with the practice referred to in paragraph 22 of information Circular 70-6R4 and are not binding on the Canada Customs and Revenue Agency.

We trust these comments will be of assistance.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch