17 April 2003 Internal T.I. 2003-0009837 - Redemption of Units of 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.

Principal Issues: Tax consequences arising from redemption of units of a mutual fund trust.

Position: Amounts paid out of income of the trust must be included as income in the hands of the unitholder but such amounts do not form part of the proceeds of disposition for the redeemed units.

Reasons: Wording of paragraph (i) of the definition of "disposition" in s. 248(1) of the Act.

Ms. May Wong
Calgary Tax Services Office
Room 136, Harry Hays Building					2003-000983
220 - 4th Avenue S.E.						J. MacGillivray
Calgary AB  T2G 0L1

April 17, 2003

Dear Ms. Wong:

Re: Redemption of Units of Mutual Fund Trust

This letter is in response to your request dated March 24, 2003 for assistance with respect to an inquiry that you received from XXXXXXXXXX regarding the taxation of certain securities that she referred to as "deferred preferred shares" of XXXXXXXXXX, a non-resident corporation. XXXXXXXXXX indicated that she was in the process of advising a client as to how to file its 2002 Canadian income tax return with respect to a disposition of these securities. In this regard, we understand the following events occurred:

(a) the securities were issued prior to 2001 at a price of $XXXXXXXXXX;

(b) XXXXXXXXXX's client purchased the securities at a price of $XXXXXXXXXX in 2001;

(c) the securities matured in 2002 and were redeemed by the issuer based on a redemption price of $XXXXXXXXXX; and

(d) XXXXXXXXXX's client received a tax information reporting slip for 2002 indicating that the client had received a dividend of $XXXXXXXXXX per security at maturity.

XXXXXXXXXX inquired as to how the dividend income could be "backed out" from the proceeds of disposition realized on the maturity of the securities. Initially, we were under the impression that the securities were shares of a non-resident corporation, which made it difficult to understand why XXXXXXXXXX's client had received dividend income for Canadian income tax purposes solely because of the maturity of the securities. However, after requesting information regarding the terms and conditions of the securities from XXXXXXXXXX, we learned that the securities were not shares of a non-resident corporation, but rather units of the XXXXXXXXXX, a "mutual fund trust" as defined under s. 132 of the Income Tax Act (Canada) (the "Act").

Accordingly, it appears that XXXXXXXXXX realized income from its underlying investments in 2002 (in the form of dividend income received from a non-resident corporation) and that it made this income payable to its unitholders. The payment of this income amount to the unitholders of XXXXXXXXXX would have occurred on the maturity of the units of XXXXXXXXXX such that $XXXXXXXXXX of the $XXXXXXXXXX unit redemption price was treated as a payment out of the income of XXXXXXXXXX, as determined for income tax purposes. Any amounts paid by XXXXXXXXXX to its unitholders out of the income of XXXXXXXXXX would generally be deductible in computing the income of XXXXXXXXXX under s. 104(6)(b) of the Act. The unitholders that received the payment would be required by s. 104(13) of the Act to include such amounts in their income for the taxation year in which the redemption occurred.

The prospectus that qualified the initial public offering of the units of the XXXXXXXXXX, which are similar to the units of XXXXXXXXXX, referred to this income inclusion as a "Dividend Amount". We suspect that this might have been the source of confusion that led XXXXXXXXXX to believe that her client had received dividend income from a non-resident corporation as opposed to the receipt of income from a mutual fund trust. In this regard, it is important to note that although XXXXXXXXXX earned dividend income from a non-resident corporation, the payment of such income to the unitholders of XXXXXXXXXX should not be characterized as a receipt of a dividend by the unitholders, but rather as the receipt of income from a trust for the purposes of the Act.

Accordingly, it is most likely that XXXXXXXXXX's client received an amount out of the income of XXXXXXXXXX as part of the redemption of units that occurred upon maturity in 2002. XXXXXXXXXX's client must therefore include that amount in computing income for the taxation year in which the redemption occurred. However, that amount would be excluded from the proceeds of disposition for the units since paragraph (i) of the definition of "disposition" in s. 248(1) of the Act provides that a disposition does not include any payment to a taxpayer after 1999 in respect of the taxpayer's capital interest in a trust to the extent that the payment is out of the income of the trust for a taxation year (before taking into account any deductions available to the trust for the year under s. 104(6) of the Act), if the trust made the payment in the particular year or the right to the payment was acquired by the taxpayer in the year.

Taking these points into consideration, we advised XXXXXXXXXX by telephone on March 26, 2003 (MacGillivray/XXXXXXXXXX) that her client should include the amounts set forth in the information slip (i.e., $XXXXXXXXXX per unit) in income for the 2002 taxation year, but that this amount would reduce the proceeds of disposition for the units of XXXXXXXXXX redeemed at maturity from $XXXXXXXXXX per unit to $XXXXXXXXXX per unit. A Form T5008 "Statement of Securities Transactions", which should have been issued to the client by XXXXXXXXXX (or its administrator), should confirm this (i.e., the proceeds of disposition for the redeemed units in Box 21 of the form should be equal to $XXXXXXXXXX per unit). We further advised that XXXXXXXXXX's client likely realized a capital loss as a result of the maturity of the units of XXXXXXXXXX of $XXXXXXXXXX per unit (prior to taking disposition costs into account), assuming that the client held the units as capital property and that the adjusted cost base of those units was in fact $XXXXXXXXXX.

XXXXXXXXXX indicated that her client was exempt from tax under Part I of the Act and was therefore not concerned that the capital loss could not be utilized to offset the amount required to be included in income. However, XXXXXXXXXX indicated that the client was still required to file an income tax return for the relevant taxation year and had therefore requested guidance in reporting the disposition of the units of XXXXXXXXXX.

We trust the foregoing is satisfactory. Should you have any further questions with respect to this matter, please contact Jackson MacGillivray at (613) 948-5274.

Yours truly,

Mark Symes
Manager
Corporate Reorganizations Section I
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch