26 November 2001 External T.I. 2001-0095445 - Reporting Capital Gain 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: How should a corporation with a June 30, 2001 year-end that owns units in a mutual fund trust with a December 31, 2000 year-end report its share of capital gains realized by the trust during period 1?

Position: Application of paragraph 104(21.6)(c) of the Act.

Reasons: Wording of the disposition.

XXXXXXXXXX 2001-009544

November 26, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Reporting Income from Mutual Fund Trust

This is in reply to your letter of May 7, 2001. You advise that a corporation with a June 30, 2001 year-end owns units in a mutual fund trust and that it received a T3 slip from the trust for the trust's year-end of December 31, 2000. The T3 includes capital gains for periods 1, 2 and 3; period 1 being January 1, 2000 to February 27, 2000, period 2 being February 28, 2000 to October 17, 2000, and period 3 being October 18, 2000 to December 31, 2000. You indicate that you have been advised that the corporation should report the amounts indicated on the T3 slip in its June 30, 2001 year-end. However, as the corporation's year runs from July 1, 2000 to June 30, 2001, you ask how the corporation should report the gains from period 1.

The situation outlined in your letter appears to relate to an actual completed transaction. We note that written confirmation of the tax implications arising from particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide some general comments.

The taxable portion of a capital gain is determined by multiplying the capital gain by the inclusion rate for the year. As a consequence of Bill C-22, which received Royal Assent on June 14, 2001, the inclusion rate varies for the three reporting periods indicated above. The inclusion rates for each period are 75% for period 1, 66.6666% for period 2, and 50% for period 3. However, where a trust has capital gains in more than one reporting period, there are special rules to determine the inclusion rate. These rules are reproduced in the history of paragraph 38(a) of the Income Tax Act (the "Act") and are set out in the 2000 T3 Trust Guide, which is available on line at:

http://www.ccra-adrc.gc.ca/E/pub/tg/t4013eq/README.html.

Pursuant to subsection 104(13) of the Act, the year in which a beneficiary reports income (including taxable capital gains) from a trust is the trust's taxation year that ends in the beneficiary's particular taxation year. Thus, a corporation with a June 30, 2001 year-end that owns units in a mutual fund trust with a December 31, 2000 year-end will report in its June 30, 2001 tax return, income and taxable capital gains realized by the trust during its taxation year that ended December 31, 2000.

Where the year-end of a trust includes February 28, 2000 or October 17, 2000, paragraph 104(21.4)(c) of the Act provides that the trust shall disclose to the beneficiary in prescribed form (the T3 slip) the portion of capital gains attributable to each period and if it does not do so, capital gains are deemed to be in respect of dispositions of property that occurred before February 28, 2000. Pursuant to paragraph 104(21.4)(a) of the Act, the amount in box 21 on the T3 slip should indicate total capital gains payable by the trust to the particular beneficiary. It is important to note that box 21 on the T3 slip does not indicate taxable capital gains.

Where a portion of the amount of capital gains indicated in box 21 is attributable to dispositions of property before February 28, 2000 (period 1) and the beneficiary's taxation year began after February 27, 2000 and ended after October 17, 2000 then, paragraph 104(21.6)(c) of the Act provides that 9/8¹ of that portion of capital gains is deemed to be realized by the beneficiary during the beneficiary's taxation year and before October 17, 2000, i.e. in the second period. This paragraph ensures that the inclusion rate of capital gains in respect of dispositions that occurred prior to February 28, 2000 is 75%. Thus, a corporation with a June 30, 2001 year-end that owns units in a mutual fund trust with a December 31, 2000 year-end would report on Schedule 6² of its June 30, 2001 tax return (under the section for capital gains realized during period 2), 9/8 of its share of capital gains realized by the trust during period 1. More specifically, this amount has to be reported by the corporation on page 3 of Schedule 6 with other capital gains realized during period 2. The determination of taxable capital gains will be done after on page 4 of Schedule 6.

Your second question is what should be done if a corporation has not reported amounts indicated on the T3 slip in the proper year. We suggest that a letter be sent to the taxation center to which the corporation files its returns outlining the changes to be made to the corporation's returns. The letter should contain a copy of the T3 slip.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and, therefore, as described in paragraph 22 of Information Circular 70-6R4, are not binding on the Canada Customs and Revenue Agency.

We trust that the above comments will be of some assistance to you.

Yours truly,

Jim Wilson
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

ENDNOTES

¹ 9/8 of 66% = 75%
² Summary of dispositions of Capital Property (2000 and later taxation years)