26 February 1990 Administrative Letter 59546 F - Capital Gains Derived by Mutual Fund Trust

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.

February 26, 1990

Dear Madam:

This is in reply to your letter of October 16, 1989, received in this office on February 9, 1990, and further to our (Delorey 19(1)) telephone conversations on February 15 and 16, 1990.

With respect to capital gains derived by a mutual fund trust in a particular taxation year, you ask if such gains must be distributed to unitholders at the time in the year that they occur in order for the trust itself not to be taxable on the taxable portion thereof, or whether the distribution can be made at the end of the year when the net capital gains for the year can be determined.  The year end distribution would be made to persons who are unitholders at that time.

As indicated in paragraph 2 of Interpretation Bulletin IT-286R2, a copy of which is enclosed for your perusal, a trust will not be taxable on its net taxable capital gains for a taxation year where those gains are made payable in that year to the beneficiaries of the trust. Thus where the terms of a mutual fund trust are such that at the end of its taxation year the net taxable capital gains of the trust for the year are made payable to its unitholders at that time, the trust will not be taxed on those gains.  Particular comments with respect to mutual fund trusts are contained in paragraph 8 through 10 of IT-286R2.  Also enclosed for your perusal are copies of IT-390 and the Special Release thereto which contain comments relevant for unitholders to whom capital gains of a mutual fund trust are payable.

In order for a trust to qualify as a "mutual fund trust", as that term is defined in subsection 132(6) of the Income Tax Act (the "Act"), it must meet the conditions set out in subsection 108(2) of the Act. One of these conditions is that the issued units of the trust include units "having conditions attached thereto that included conditions requiring the trust to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units, or fractions thereof, that are fully paid..." Where a unit is redeemed, we presume the above procedures are not intended to delay payment therefor until year end such that this "redemption on demand" requirement would not be met.

We trust our comments are of assistance.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate