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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Reporting of capital gains dividends from a mutual fund corporation.
Position: An individual to whom a capital gains dividend was payable and was paid in 2001 by a mutual fund corporation will include the dividend in income in 2001 in accordance with the capital gains inclusion rates applicable in the period in which the disposition of property giving rise to the capital gains dividend occurred.
Reasons: Legislation
XXXXXXXXXX K.Cooper, LL.B.
2001-011348
January 2, 2002
Dear XXXXXXXXXX:
Re: Mutual Fund Corporation
This is in reply to your letter of December 3, 2001 wherein you requested our views with respect to the reporting of capital gains dividends paid to shareholders of a mutual fund corporation.
The particular circumstances described in your letter appear to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R4 dated January 29, 2001, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an income tax ruling. Should your situation involve specific taxpayers and completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we can offer the following general comments which may be of assistance.
The situation outlined in your letter is one where the mutual fund corporation has disposed of property during the year 2000 with respect to which it declared and paid capital gains dividends to shareholders within 60 days of the end of its taxation year, in this instance on January 15, 2001. You have also advised us that the mutual fund corporation made the prescribed election in respect of the capital gains dividends on January 15, 2001 and that all of the shareholders are individuals with calendar year taxation years.
Since the dividends were payable to and received by the shareholders in 2001, the shareholders will be required to include them in income in 2001 in accordance with subsection 131(1) and paragraph 38(a) of the Income Tax Act (the "Act"). Subsection 131(1) of the Act provides that where a dividend becomes payable by mutual fund corporation, the dividend has been paid and the mutual fund has made the appropriate election, the dividend is not to be included in the income of the recipient taxpayer as income from a share of the capital stock of a corporation but is deemed to be a capital gains dividend which is included in income as a capital gain. Paragraph 131(1)(b) further provides that the dividend will be grossed up by a rate which will vary depending on the taxation year of the recipient and the period during which the disposition giving rise to the dividend was made.
By virtue of subparagraph 131(1)(b)(iii) and paragraph 38(a) a dividend relating to dispositions which occurred before February 28, 2000 (Period 1) will be grossed up by 3/2 and included in income as a taxable capital gain at the inclusion rate of 1/2. For example, a dividend of $100,000 will be deemed to be a capital gains dividend of $150,000 and $75,000 will be included in come by the individual taxpayer as a taxable capital gain. Dividends relating to dispositions which occurred after February 27, 2000 and before October 18, 2000 (Period 2) will be subject to subparagraph 131(1)(b)(iv) which grosses up the dividend by 4/3. Using the same example in the context of a disposition which occurred in Period 2, a dividend of $100,000 will be deemed to be a capital gains dividend of $133,333 and $66,667 will be included in come by the individual taxpayer as a taxable capital gain. Thus, the effective inclusion rate which will apply is the inclusion rate which would have applied if the taxpayer had disposed of the property directly during the relevant periods in 2000 notwithstanding that the actual inclusion rate will be 50%.
We hope that our comments will be of assistance.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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