21 March 1994 Internal T.I. 9405257 - ATTRIBUTION OF CAPITAL GAINS EARNED BY MUTUAL FUND

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.

		March 21, 1994

	Ottawa District Office	Head Office
	Client Assistance	Rulings Directorate
		Sandra Short
	Attention: Gabor Obert	957-8953

		940525

Subsection 74.1(2) of the Income Tax Act -
Attribution on capital gains earned in a Mutual Fund

This is in reply to your correspondence of February 29, 1994 which queries whether subsection 74.1(2) of the Act attributes capital gains earned by a mutual fund and distributed to a unitholder (reflected on T3 supplementary slip issued to the unitholder) to a transferor where the transferor has bought units in a mutual fund for a related minor. You have noted that paragraph 19 of Interpretation Bulletin IT-510 states that:

Where property is transferred to a related minor...subsection 74.1(2) does not apply to attribute to the transferor any taxable capital gain or allowable capital loss arising from a subsequent disposition of that transferred property by the minor...

In the situation being reviewed by you, the capital gain reported on the unitholder's T3 supplementary is not in respect of a disposition of transferred property but is merely in respect of a transaction or transactions undertaken by the mutual fund that has resulted in a capital gain being generated by that trust.

We have assumed for the purposes of our response that the mutual fund referred to by you is a mutual fund trust, within the meaning of that term in subsection 132(6) of the Income Tax Act and, as a result, that the fund constitutes a unit trust under paragraph 108(2)(a) of the Act.

Provided that the trust makes a valid designation pursuant to subsection 104(21.2) of the Act in respect of its eligible taxable gains, as determined in accordance with paragraph 108(1)(d.2) of the Act, for a particular taxation year, paragraph 104(21.2)(b) of the Act applies to deem each unitholder that is an individual to have a taxable capital gain from the disposition of a capital property in the year. Where subsection 75(2) of the Act does not apply (see discussion below) and where the unitholder is a "related minor", the capital gains remain those of the minor unitholder even where the units have been purchased on behalf of the minor by an individual subject to subsection 74.1(2) of the Act. Hence, it is our view that, any capital gains earned by the mutual fund trust and designated to unitholders in the manner described above will not attribute to the transferor. For a general discussion of the tax consequences of owning a unit of a unit trust, see Interpretation Bulletin IT-390 entitled "Unit Trusts - Cost of Rights and Adjustments to Cost Base" and the Special Release attached thereto dated June 21, 1985.

Without a review of the trust document which would reveal the conditions, if any, under which the trust's property may revert to a contributor to the trust, may be distributed to beneficiaries determined by the contributor at a time after the trust is created, or where the property may only be disposed of with the consent of, or at the direction of, the contributor while alive, we cannot say with certainty that subsection 75(2) of the Act would not apply to attribute the trust's income or loss from property or its taxable capital gains or allowable capital losses from the disposition of property to the person or persons from whom the trust received property. Given that a mutual fund trust is not excluded, by virtue of subsection 75(3), from the application of subsection 75(2) of the Act, it is conceivable, depending on the terms of the trust agreement, that subsection 75(2) of the Act may apply in the circumstances. See Interpretation Bulletin IT-369R in this regard.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch