7 August 1990 Income Tax Severed Letter - Taxation of capital gains dividends received by a Canadian taxpayer from a mutual fund trust resident based in the United States

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.

Dear Sirs:

Re: Taxation of Capital Gains Dividends received by a Canadian taxpayer from a Mutual Fund Trust resident and based in the United States

We are writing in response to your letter of December 18, 1989 concerning the above-referenced subject which was referred to us for reply by the Enquiries and Taxpayer Assistance Division. We apologize for the delay in responding to your enquiry.

It is your view that capital gain distributions made by a U.S. based mutual fund trust, regardless of whether the trust is considered to be a corporation or a partnership for U.S. tax purposes, should be treated by the Canadian recipient as income from property by virtue of paragraph 108(5)(a) of the Income Tax Act (the “Act”). You requested our comments as to whether or not such capital gain distributions can be treated as capital gains by the Canadian recipient and, if so, under what circumstances the capital gain treatment could be applicable.

We agree with your view that capital gain distributions made by a U.S. resident mutual fund trust should be included in computing the income of the Canadian beneficiary as income from property pursuant to paragraph 108(5)(a) of the Act provided that the U.S. mutual fund trust is considered to be a trust for Canadian tax purposes, notwithstanding that it may be considered to be a corporation or a partnership for U.S. tax purposes. Such capital gain distributions received by the Canadian beneficiary would be included in computing the income of the beneficiary under paragraph 104(13)(c) of the Act.

The preamble and paragraph (a) of subsection 108(5) of the Act state that, except as otherwise provided in Part I of the Act, an amount included in computing income of a beneficiary of a trust by virtue of subsection 104(13) shall be deemed to be income of the beneficiary from a property that is an interest in the trust and not from any other source. Paragraphs 104(19) and (22) provide certain exceptions to the rules of paragraph 104(13). In particular, paragraph 104(21) would apply to deem that portion of the net taxable capital gain of a trust that is so designated by the trust in respect of a particular beneficiary to be a taxable capital gain of the particular beneficiary. However, in order for paragraph 104(21) to apply, the trust in question must be a trust resident in canada throughout the taxation year in which the net taxable capital gain arises. As the mutual fund trust described in your letter is resident in the U.S., subsection 104(21) would not apply. Also, since the mutual fund trust does not qualify as a “mutual fund corporation” within the meaning assigned by subsection 131(8) of the Act, the capital gain distribution received by the Canadian taxpayer cannot be elected by the trust under subsection 131(1) of the Act to be a capital gains dividend to the Canadian taxpayer.

The above comments are not rulings and are provided in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978.