1993 Administrative Letter 9336246 F - 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.

January 4, 1994

Head Office Head Office

Provincial and International Rulings DirectorateRelations Division E.E. Campbell A/Director

Attention:  P. Sarrazin

O.E.C.D. Questionnaire on Tax Incentives

This is in reply to your memorandum of December 7, 1993 wherein you requested our assistance in responding to an O.E.C.D. questionnaire on tax incentives found in the Income Tax Act (Canada) (the "Act") with respect to certain specified business sectors. Specifically, you have asked for our comments on the use of trusts in those sectors. Our response is limited to federal income tax provisions.

Mutual fund trusts are often used in the portfolio investment funds sector.

A mutual fund trust is essentially a vehicle that permits a large number of investors to pool their funds in order to obtain certain advantages that would not otherwise be available to them individually.

Such advantages include diversification, professional management, liquidity and flexibility. To qualify as a mutual fund trust under the Act, the trust must be resident in Canada, it must restrict its undertaking to the investing of its funds and it must have at least 150 unitholders of the same class of units, each holding units having an aggregate fair market value of not less than $500.

As a mutual fund trust is subject to federal income tax at the highest marginal tax rate, the general policy is to distribute all income of the trust to the unitholders such that the mutual fund trust is not liable to income tax in any year. Generally, distributions of income to non-resident unitholders are subject to withholding tax under paragraph 212(1)(c) of the Act at the standard rate of 25%, or such lower percentage as set by treaty. An exception from paragraph 212(1)(c) of the Act is made for taxable capital gains where the trust has made a designation under subsection 104(21) of the Act. By virtue of that designation, the gains are deemed to be taxable capital gains from the disposition of capital property by the non-resident beneficiary. Such gains would not be subject to tax under Part I of the Act unless the gain is from taxable Canadian property and there is no treaty exemption.

While the Act does not specifically encourage non-resident investment, a mutual fund trust may be said to have the following "advantages" with respect to non-resident investors:

(a)      A mutual fund trust is exempt from Part XII.2 of the Act.

A Canadian trust with non-resident beneficiaries is subject to tax under Part XII.2 of the Act on all income earned from the conduct of a business in Canada or from the ownership of Canadian real property, resource property, timber property and on taxable capital gains on such property to the extent that such income is currently distributable to beneficiaries.

The tax under Part XII.2 of the Act is set at 36%.

Withholding tax is also imposed at the standard rate of 25%, or such lower percentage as set by treaty, on payments made to the non-resident beneficiary.

(b)      Provided certain conditions are met, a unit of a mutual fund trust is not taxable Canadian property. (It should be noted that pursuant to subsection 116(6) of the Act, a unit of a mutual fund trust is excluded property for purposes of the certificate requirements for dispositions by non-residents.)

(c)      Capital gains of the trust can be designated as capital gains of the non-resident beneficiaries (subsection 104(21) of the Act applies only to beneficiaries resident in Canada unless the trust is a mutual fund trust).

We hope our comments will be of assistance in responding to the O.E.C.D. questionnaire.

A/DirectorManufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch