23 January 2003 Internal T.I. 2003-0183797 - Capital Div Account - MFC & MFT Distrib.

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:		Clarity of summary to 2000-0036585

Position:			Amend summary

Reasons:			For greater certainty

		January 23, 2003

Mr. Andre Gauthier J.D. Brooks

Industry Specialist Trusts Section
Financial Services
Quebec Tax Services
165 de la Pointe aux Lièvres Street South
Québec QC G1K 7L3
2003-018379

Capital Dividend Account

We are replying to your query of September 9, 2002, in which you commented on our technical interpretation E2000-0036585. You agreed with the position stated in the letter but pointed out that the summary of the letter was less clear.

The purpose of the letter was to note the difference in the manner in which taxable capital gains and capital gains dividends were treated for purposes of the capital dividend account ("CDA"). The thrust of the letter was that where a corporation owned shares of a mutual fund corporation ("MFC") and the MFC paid a dividend, electing to treat the dividend as a deemed capital gains dividend, the recipient corporation could add the non-taxable portion of the deemed capital gain in computing its capital dividend account; whereas, where a corporation owned units of a mutual fund trust ("MFT") and the MFT made a distribution, designating the distribution (or part thereof) to be paid out of the MFT's net taxable capital gains, the recipient corporation could not add the non-taxable portion that pertains to the MFT's capital gains. In the summary that accompanied the electronic copy of the letter, we commented that the corporation in receipt of a capital gains dividend could add the entire amount of the gain to the CDA. This would be by virtue of clause (a)(i)(A) of the definition of CDA in subsection 89(1) of the Act. You are correct in noting that clause (a)(i)(B) of that definition requires the taxable portion of the gain to be deducted in calculating the CDA.

Of course, some of the comments in our original letter are now outdated due to the amendment made in 2001 to the definition of CDA. Now, paragraph (f) of the definition provides for the addition of an amount which takes into consideration the non-taxable portion of the gain realized by the trust. Nevertheless, the relevant portion of the summary will be amended to read:

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 deemed capital gain will be added to the recipient corporation's capital dividend account pursuant to clause (a)(i)(A) of the definition and the taxable capital gain will be deducted pursuant to clause (a)(i)(B), resulting in the non-taxable portion being added pursuant to clauses (A) and (B) together. If income is received from a mutual fund trust, the payor trust can designate the income to be a taxable capital gain; however, no part of the gain will be added to the recipient corporation's capital dividend account pursuant to clause (a)(i)(A).

(Jan. 23/03 P.S. See 2001 amendment adding paragraph (f) to the definition of capital dividend account in subsection 89(1).)

If you have any questions concerning the above comments or if we can be of further assistance regarding this matter, please do not hesitate to contact the writer.

Theresa Murphy
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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