26 July 1994 External T.I. 9409795 - TAXATION OF MUTUAL FUND INCOME

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.

		940979
XXXXXXXXXX	L. Holloway

Attention: XXXXXXXXXX

July 26, 1994

Dear Sirs:

Re: Mutual fund Income

This is in reply to your letter dated March 31, 1994, requesting clarification of the taxation of mutual fund income.

Mutual funds are viewed as conduit investment vehicles largely because they are able to allocate their income to their unitholders (investors). Therefore, investors in mutual funds are required to include in their income for tax purposes the amount of net investment income and net taxable capital gains, if any, paid or payable to them in the year, whether or not any of these amounts are reinvested in additional units of the fund. The fund in such a case would not pay tax on amounts so earned and such amounts would be shown on the T3 slips for the investors. Where actual distributions to an investor exceed that investor's share of the net realized capital gains and net investment income of the fund for the year, this excess would be a return of capital and would not be taxable in the hands of the investor. Such a return would reduce the adjusted cost base of the investor's units in the fund. Amounts reinvested in additional units in the fund would be added to the adjusted cost base of the investor's units in the fund.

The purchase price of units acquired by an investor will include any accrued but unrealized gains in the assets of the fund. Such gains, when realized, as are made payable to investors, will form part of the net investment income or net taxable capital gains that would be allocated to investors as described above.

Where an investor redeems, exchanges or otherwise disposes of mutual fund units he or she will realize a capital gain (or capital loss) to the extent that the proceeds of disposition exceed (or are exceeded by) the aggregate of the investor's adjusted cost base of the units and any costs of disposition. Unless this disposition takes place, decreases or increases in the fund value are not recognized. The taxable capital gain must be included in income. The allowable capital loss may be deducted from the taxable capital gain but cannot be deducted from other types of income. The capital gain or loss which an investor may realize on the disposition of his or her units must not be confused with the taxable capital gains and other income that an investor will be required to include in income as a result of the fund allocating such amounts to investors.

The general discussion found in the preceding paragraphs should be in the fund's prospectus documents. In response to your request for departmental publications on mutual funds, we enclose Interpretation Bulletin IT-390 on Unit Trusts, as a mutual fund share or a mutual fund unit may fall within the definition of a unit of a unit trust. Please note that IT-390 has not been updated for some time and, consequently, does not reflect the current taxable capital gains rate.

These comments are made in accordance with paragraph 21 of Information Circular 70-6R2 and while we trust that these comments will be of assistance, they do not constitute an advance income tax ruling and consequently, are not binding on Revenue Canada, Customs, Excise and Taxation.

Yours truly,

for Director
Manufacturing Industries
Partnerships and Trusts Division
Rulings Directorate
Policy and Legislation Branch

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