13 April 1995 External T.I. 9504395 - CAPITAL GAIN DISTRIBUTIONS BY MUTUAL FUNDS

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.

Principal Issues:

1.Whether capital gains distributed by mutual fund trusts in 1994 are ineligible for the capital gains exemption.

2.Whether capital gains dividends paid by a mutual fund corporation after February 22, 1994 are ineligible for the capital gains exemption.

Position TAKEN:

1. Yes

2. Yes

Reasons FOR POSITION TAKEN:

1.According to new subsection 104(21.1) of the Act, a mutual fund trust cannot make a designation of its capital gains under subsection 104(21.2) of the Act for its 1994 taxation year. This means that an individual will not be able to claim the capital gains exemption in respect of a taxable capital gain flowed out to the individual by the mutual fund trust.

2.Subsection 131(1) of the Act, as amended, provides that capital gains dividends paid after February 22, 1994 are treated as capital gains in the hands of the shareholders and therefore, no longer qualify for the capital gains exemption.

		5-950439
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

April 13, 1995

Dear Sir:

Re: Capital Gain Distributions by Mutual Funds

We are writing in response to your letter of February 13, 1995 wherein you requested our comments on the availability of the capital gains exemption with respect to capital gain distributions made by mutual fund trusts and mutual fund corporations in 1994.

It is your understanding that all capital gains distributed by a mutual fund trust in 1994 and all capital gains dividends paid by mutual fund corporations after February 22, 1994 are not eligible for the capital gains exemption. You ask that we confirm your conclusions and comment on the manner of reporting these gains on T3 and T5 Supplementary forms.

Our Comments

We agree with your conclusions as stated above. As regards mutual fund trusts, although subsection 104(21.2) of the Income Tax Act (the "Act") provides that trusts can allocate their net taxable capital gains to their beneficiaries for the purpose of section 110.6 of the Act, you will note that new subsection 104(21.2) of the Act does not apply to mutual fund trusts. New subsection 104(21.2) of the Act applies to a trust's taxation year that includes February 22, 1994. Accordingly, a mutual fund trust cannot make a designation of its capital gains under subsection 104(21.2) of the Act for its 1994 taxation year. This means that an individual will not be able to claim the capital gains exemption in respect of a taxable capital gain flowed out to the individual by the mutual fund trust. The only way for the individual to shelter such a gain with the exemption is to elect under subsection 110.6(19) of the Act in respect of his or her units and then offset all or a portion of the taxable capital gain that resulted from the subsection 104(21) designation with the individual's exempt capital gains balance that resulted from the election.

With respect to mutual fund corporations, as a result of the elimination of the $100,000 capital gains exemption for gains realized on dispositions that occur after February 22, 1994, it is no longer necessary to treat capital gains of a mutual fund corporation that are flowed through to its shareholders under subsection 131(1) of the Act as capital gains that are either eligible or ineligible (i.e., when paid out of the non-qualifying real property capital gains dividend account) for the exemption. Accordingly, subsection 131(1) of the Act has been amended, effective for capital gains dividends paid after February 22, 1994, to treat a capital gains dividend paid by the corporation as a capital gain in the hands of its shareholders. Such a gain will no longer be eligible for the exemption.

We trust that these comments will assist you in reporting capital gains distributed by mutual fund trusts and mutual fund corporations on T3 and T5 Supplementary forms. However, should you require further assistance in this respect, we suggest you contact your local Tax Services office.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch