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. If taxable capital gains are designated by a mutual fund trust to a corporate beneficiary, can the non-taxable portion be added to the corporation's capital dividend account?
2. Can a private corporation, that is a shareholder of a mutual fund corporation, that receives a capital gains dividend from the corporation, include the non-taxable portion in its capital dividend account?
Position: 1. No.
2. Yes.
Reasons: See text below.
983058
XXXXXXXXXX D.A. Palamar
957-2127
Attention: XXXXXXXXXX
June 1, 1999
Dear Sir:
Re: Section 104(21) of the Income Tax Act (the "Act")
This is in reply to your recent letter regarding the interaction of subsection 104(21) and the definition of capital dividend account in subsection 89(1).
Specifically, you have reviewed one of our recent technical interpretations (#952499), dated February 12, 1996, wherein we commented as follows:
Subsection 104(21) of the Act allows a trust to designate a portion of its net taxable capital gains for a taxation year as a taxable capital gain of a beneficiary of the trust. In essence, the designated portion of the net taxable capital gains of the trust is deemed to be the taxable capital gain of a particular beneficiary. Paragraph 104(21) of the Act does not deem beneficiaries to have triggered the entire capital gain themselves. Therefore, we are of the opinion that the non-taxable portion of a trust's capital gain is not added in computing a beneficiary's CDA under subsection 89(1) of the Act as a consequence of an allocation to the corporation of a portion of a trust's net taxable capital gains.
You have asked us a number of questions relating to these comments which questions can be summarized as follows.
1. Would our comments be the same if a corporation was a beneficiary of a mutual fund trust?
2. Can a private corporation, that is a shareholder of a mutual fund corporation, that receives a capital gains dividend from the corporation, include the non-taxable portion in its capital dividend account.
3. If there is a difference between the treatment between the treatment given to taxable capital gains allocated to unitholders of mutual fund trusts and that given to shareholders of mutual fund corporations, has this been discussed with the Department of Finance to determine if it is in accordance with tax policy?
4. In the past few years, a number of new investment products have been offered to the public which appear to have been structured in the form of unit trusts and mutual fund trusts. Can a Canadian corporate investor in these investment products include in its CDA account the non-taxable portion of any allocated capital gains?
Our Views
In response to your first question, our comments would be the same in the case of net taxable capital gains designated as such by a mutual fund trust to a corporate beneficiary.
In response to your second question, subsection 131(1)(b) provides that a capital gains dividend received by shareholder of a mutual fund corporation will be deemed to be a capital gain of the taxpayer for the year from a disposition of capital property. Accordingly, we agree that a private corporation that is a shareholder of a mutual fund corporation, that receives a capital gains dividend from the corporation, may include the non-taxable portion in its capital dividend account.
In response to your third question, we have forwarded a copy of this letter to the Department of Finance.
Lastly, in response to your fourth question, we are unable to comment, other than in a general manner as in our first and second responses above, on the tax consequences relating to any particular investment product without knowing all of the details of the particular product. Our Tax Services Offices, if provided with all the relevant information, would be pleased to provide more detailed assistance.
These comments should only be construed as a general statement of our opinion and are not binding on Revenue Canada.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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