Section 132

Subsection 132(1) - Capital gains refund to mutual fund trust


The capital gains refund rules in s. 132(1) and following permit a mutual fund trust such as a REIT to retain rather than distribute part (or in some circumstances, all) of the capital gains realized by it in the year in reliance on generating a refund under s. 132(1) that offsets the capital gains tax to which it otherwise would have been subject on that undistributed capital gain.

The amount of this refund is based in part on the amount paid in the year by such trust in the year “on the redemption” of units of the Trust (under the definition in s. 132(1) of “capital gains redemptions.”) In light of the introduction of s. 132(5.3), there is a strong implication that a purchase for cancellation of units will qualify as a unit “redemption” for these purposes, since otherwise it would be possible to avoid this rule (which is intended to avoid a disproportionate allocation of capital gains to the units of a redeemed unitholder) by treating a purchase for cancellation of that unitholder’s units as not constituting their “redemption.” Accordingly, purchasing units of a listed REIT pursuant to a special or normal course issuer bid should qualify as a redemption for purposes of the s. 132(1) refund rules.

The example below shows a simplified calculation of the generation of a refund of capital gains tax to a REIT as a result of purchase for cancellation of some of its outstanding units for $90M pursuant to an issuer bid made in the same year as it realized capital gains and recapture of depreciation of $80M and $20M, respectively from the disposition of buildings having a capital cost and undepreciated capital cost of $120M and $100M, respectively (land is ignored). It is assumed that, but for these dispositions, the REIT would have had a market cap at the end of that year of $1B and would have had an aggregate cost amount for its assets of $1.2B.

Conveniently, s. 770 of the Taxation Act (Quebec) provides that no Quebec income tax is imposed on a REIT that has undistributed capital gains in a year. Accordingly, the spreadsheet assumes that the REIT is not potentially subject to provincial income tax otherwise than in Quebec, so that it addresses only federal capital gains tax.




Year end unit price ($)



Opening number of units (in millions)



Year end number of units (B-R/A)



Year-end value of units (A*C)



Ordinary income for year ($M)



Recapture of depreciation from dispositions



Ordinary income after recapture (E+F)



Capital gains for the year



Taxable capital gains for the year (H*1/2)



Cost amount for ITA purposes of assets before dispositions



Cost amount of assets disposed of in year



Total cost amount of assets at year end (J-K)






REIT unconsolidated debt



Regular distributions for the year



Portion of redemption amount designated under s. 104(21)



Taxable income for year (G+I-O-U)



Value of units redeemed/repurchased in year


Compute refundable capital gains tax on hand (RCGTH):


Tax on taxable income for year before refund (33%*Q)



Tax calculated on taxable cap gains before refund (33%*I)



Special distribution



RCGTH (lesser of S and T)


Compute the capital gains redemption (CGR):


Capital gains associated with the RCGTH (V/.165)



Total accrued capital gain (D+N-L-M)



CGR (R/(D+R)*(W+X)-2*P)


Compute capital gains refund:


16.5% of CGR (.165*Y)






Capital gains refund (lesser of Z and AA)


The capital gains tax that is refunded to the trust under s. 132(1) is equal to the lesser of two amounts (Lines Z and AA). The first amount is the “refundable capital gains tax on hand amount” (RCGTH) in Line V; and the second is the capital gains refund (CGR) in Line Y multiplied by the capital gains tax rate of 16.5%.

In general terms, the RCGTH (i.e., the first of these two amounts) is the lesser of (i) the tax that would otherwise have been payable by the REIT on its undistributed income (includng net taxable capial giains) for the year in the absence of receiving the capital gains refund (Line S), and (ii) the tax that would be applicable to the taxable capital gains realized by it in the year (net of any allowable capital losses that are deductible therefrom) if it had not made any distributions in the year (Line T). In other words, the second (Line T) component computes tax at a 33% rate on the taxable capital gains that were realized in the year on the basis that this taxable income was not reduced by any distributions that were made payable by the trust in the year. Given that, in fact, significant distributions might be made by the trust in the year, it may be unnecessary for the trust to try to generate a refund under s. 132(1) equal to this large theoretical amount of tax, because, in fact, the distributions made in the year “shelter” (i.e., reduce) not only the ordinary income realized in the year by the trust (from which the trust distributions made in the year effectively are applied first) but, also, part of that taxable capital gain. However, in this example, the distributions made in the year were not large enough to generate this effect (The RCGTH is computed on a cumulative basis, i.e., it takes into account any positive balance from a previous year - a situation which the trust would generally seek to avoid.)

In contrast, the income for the purposes of the first (Line S) component of the RCGTH amount is in fact reduced by the distributions made payable in the year. Thus, where there are significant distributions in the year, the RCGTH may be based on the first rather than the second of these two components. In addition to the taxable capital gains realized in the year, this first (Line S) component reflects the additions to the REIT’s income for the year as a result of net rental income and recapture of depreciation realized in the year, as well as reductions for the ordinary and special distributions made payable in the year.

The CGR (Line Y) effectively computes the total of the accrued capital gains in the REIT’s portfolio at year end (computed on the assumption that such portfolio’s value equals the year-end fair market value of its units plus its outstanding debts) (Line X) and the capital gains realized in the year to the extent that they have not been sheltered by the distributions made in the year (Line W), and then determines what pro rata portion of this total is represented by the units that were redeemed in the year (Line Y). Thus the CGR does not recognize capital gains tax except to the extent that the net taxable capital gains for the year have not been reduced by distributions made in the year. Accordingly, in order to generate a capital gains refund under s. 132(1), it is necessary to leave an amount of undistributed taxable capital gains “in” the trust for the year rather than fully distributing the trust’s realized taxable capital gains for the year – or, to put it another way, this refund mechanism permits the trust in various circumstances to reduce the amount of the special distribution (Line U) that it might otherwise have been required to make payable by year end in order to instead fully distribute its net realized taxable capital gains for the year.

However, the capital gains refund is the lesser of (a) the RCGTH and (b) 16.5% (the effective tax rate on capital gains) of the CGR (Line W). As discussed above, in most circumstances, the RCGTH effectively represents the tax that the trust would be subject to in the absence of generating a refund. Accordingly, to the extent that (a) exceeds (b), the trust will have to pay tax equal to that excess. Thus, in order that the REIT not be subject to any capital gains liability, the latter (b) amount must not be less than the former (a) amount. Depending on the quantum of the recapture of depreciation and capital gains to be recognized in the year of the redemption transactions, this may requires choosing a combination of an aggregate issuer-bid redemption amount (Line R) and a special distribution amount (Line U) in order to produce this result – although in the above example, this dilemma does not arise.

The “capital gains redemption” amount as defined in s. 132(4) is reduced by twice the amount designated under s. 104(21) respecting units of the trust that were redeemed in the year. In light of draft s. 132(5.3) it generally will now be rare for an exchange-traded mutual fund trust such as a REIT to “push out” capital gains on redemptions of its units, so that this adjustment to the capital gains redemption amount formula typically will not be relevant to such listed funds. This adjustment does not produce an adverse effect respecting s. 104(21) designations that are made respecting taxable capital gains that have been distributed pursuant to a regular or special cash distribution made by the mutual fund (otherwise than in respect of a distribution).

Accordingly, in the case of an exchange-traded REIT, there does not appear to be a reason why it could not make a s. 104(21) designation equal to ½ (and likely all) of the excess of the distributions (including special distribution) made by it in a year over its ordinary income (including recapture of depreciation) for that year, assuming that the net capital gains realized in the year were more than twice this excess. Conceptually, this seems to make sense. It is only the capital gain that has not been distributed that generates the s. 132(1) refund. Accordingly, it appears to be appropriate that there is permitted to be a flow-through of capital gains treatment (through the making of the s. 104(21) designation), respecting the taxable capital gains that have been distributed, rather than being retained with a view to generating a s. 132(1) refund.

To expand on a point adverted to in the previous paragraph, there does not appear to be any prohibition against the trustees treating all, rather than only ½, of the distributions made by them in the year, in excess of the trust ordinary income for the year, as being a distribution of a taxable capital gain – rather than being forced to treat ½ of such distribution as in effect being a capital distribution (i.e., of the untaxed ½ of the relevant portion of the capital gains realized in the year.

Utilizing the capital gains redemption rules may help a mutual fund trust to address a "dry income " issue, i.e., a situation where, absent such refund, its distributions in they year would be insufficient to fully distribute all of teh income (including a substantial taable capital gain) realized by it in the year. Those rules also may permit the trust to reduce the discretionbary deductions claimed by it in they year (such as for capital cost allowance), thereby preserving those deductions for the future. They also possibly would effectively permit the transfer a deduction into a future year under ss. 132.11(6) and (7) provided that doing so would not be conrary to s. 132.11(8).

Administrative Policy

7 March 1995 External T.I. 5-950409 -

The capital gains refund to mutual fund trusts under s. 132(1) does not reduce the Quebec refundable abatement provided under s. 120(2).

21 September 1992 T.I. (Tax Window), No. 24, p. 20 ¶2183)

The purchase and redemption of units of a mutual fund trust by an investment dealer for the sole purpose of increasing the capital gains refund to the trust would be subject to the application of GAAR.


Hugh Chasmar, "Mutual Fund 'Switch Funds'", Taxation of Corporate Reorganizations, Canadian Tax Journal, Vol. 46, No. 1, 1998, p. 172.

Subsection 132(4) - Definitions

Capital Gains Redemption

Administrative Policy

2002 Ruling 2001-009107 - Mutual fund trust - capital gains

A of formula to redeemed unitholder reduced by any amount of allocated capital gains

The trust agreement respecting a mutual fund trust is amended to provide that where units of the fund are redeemed, a portion of the redemption proceeds will be treated as the redeeming unitholders' share of the fund's net realized capital gains in the year up until the date of redemption, and that the balance of the net capital gains realized by the fund will be allocated to unitholders at the end of the year.

Rulings that the fund may deduct from its income the capital gains distributions made to redeeming unitholders, that the proceeds of disposition of the redeemed unitholder of the redeemed units will be the amount by which the proceeds paid exceeds the amount treated as a capital gains distribution, and that the aggregate of such proceeds of disposition will be the amount referred to in A of the formula.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) distribution of capital gains on unit redemptions 128


Brian C. Weatherby, "Mutual Funds", 1985 Conference Report, C. 45

Overview of mechanism, p. 43-14

As a result of the capital gains redemptions provision, a mutual fund trust becomes entitled to receive a refund of the tax paid on its taxable capital gains. Paragraph 132(1)(a) determines the amount of the refund to be the lesser of

17 per cent of the trust's capital gains redemptions for the year, and

the trust's refundable capital gains tax on hand at year-end.

Refundable Capital Gains Tax On Hand

Administrative Policy

7 August 2013 Internal T.I. 2013-0497961I7 - Refundable Capital Gains Tax On Hand

Respecting what happens to the balance of the "Refundable Capital Gains Tax On Hand" ("RCGTOH") of a mutual fund trust ("MFT") when the MFT failed in the taxation year to meet the prescribed conditions (respecting dispersal of units) in s. 132(6)(c), CRA indicated that:

  • provided the MFT satisfied all the conditions in s. 132(6.2), it would remain an MFT for purposes of s. 132 (including the RCGTOH definition) during that year;
  • when it failed at the beginning of the subsequent taxation year to satisfy s. 132(6)(c), the balance of its RCGTOH "would be frozen in time"; and
  • if it succeeded at the beginning of and during all of a later taxation year to again satisfy s. 132(6)(c), such frozen balance would be reinstated for that later taxation year.


Hugh G. Chasmar, Suzanie M.L. Chua, "Reorganizations of Investment Funds", 2001 Canadian Tax Journal, Issue No. 2

In practice, generally no excess to include in RCGTOH

The distributions of a mutual fund trust or mutual fund corporation are generally calculated precisely so that the tax otherwise payable by the fund on the capital gains retained will be fully offset by the capital gains refund. Occasionally, a fund will pay an amount of tax in respect of its capital gains that exceeds its capital gains refund for the year. Such excess is included in the fund's refundable capital gains tax on hand (RCGTOH) account. The balance in the RCGTOH account at the end of a year is carried forward and included in determining the amount of the capital gains refund for the following year or years. The RCGTOH at the end of a particular year is added to the RCGTOH of the fund at the commencement of the following year and is reduced by the capital gains refund for the prior year.

If the balance in the transferor's RCGTOH account at the end of the deemed year-end will exceed the amount of its capital gains refund for that year, the excess will be added to the transferee's RCGTOH account as of the beginning of the next taxation year.

Subsection 132(6)


In order for a unit trust to qualify as a mutual fund trust, its only undertaking must be the investing of its funds in property or a real estate undertaking described in s. 132(6)(b)(ii). In addition, it must satisfy the requirements of Regulation 4801 respecting sufficient dispersal in the ownership of its units.

Meaning of “undertaking”

The word “undertaking” likely was used because use of the word “business” would have raised the usual issues as to whether a passive operation of earning income from property, or a non-commercial operation, was included, and use of the word “enterprise” (which appears in dictionary definitions of “undertaking”) might have raised similar difficulties. Although, use of “business” or “enterprise” for this reason might have been inappropriate, “undertaking” likely has the same sense of a set of activities constituting an integrated operation, business or enterprise and, except potentially where there is an adventure in the nature of trade (as discussed below) likely does not include isolated activities. The contrary interpretation would undercut the likely purpose of the provision. For example, charitable givings or tax or regulatory filings by a mutual fund trust would not by themselves be an activity of investing funds, but would generally be considered to be part and parcel of its undertaking of investing.

The word “undertaking” in s. 132(6) contrasts to the word "activity" in s. 149(1)(o.2). The French version uses the word "activité" in both provisions – a word which is similar to “activity” but which, depending on the context, can be translated as “operation,” “practice,” or “business” (which are also senses in which the word “activity” can be used.)

In Income Tax Technical News No. 34 (27 April 2006) CRA cited some of the Canadian constitutional case law on the meaning of “undertaking (including Beauport, Lount and Northern Telecom), which generally treats an undertaking as comprising all the activities that comprise the working of the undertaking. See, for example, Lount where an installation for the transmission of TV signals to hotel guests was not an "undertaking" because no separate charge was made for this service. See also Baytrust. This approach is consistent with the definition in s. 248(1) of “business,” which refers inter alia to a profession, calling, trade, manufacture “or undertaking of any kind whatever.” This definition implicitly treats the concept of undertaking as being approximately coterminous with that of “business.” (See also Drumheller and Timmins.)

Inclusion of adventures in the nature of trade

The definition of “business” also includes an adventure or concern in the nature of trade. This may represent the principal or only exception to the proposition that an undertaking represents an aggregation of related or linked activities making up a collective whole. A single “adventure” of earning a fee or profit can constitute an adventure in the nature of trade and, thus, a (deemed) business (see e.g., Manley). There is a concern that an activity that is thereby deemed to be a business could consequently be considered to represent an undertaking that was separate from a (more passive) investment undertaking. In Income Tax Technical News No. 34 (27 April 2006), CRA states that the payment of a guarantee fee by a subsidiary to the parent mutual fund trust might give rise to a non-qualifying undertaking of the trust.


CRA considers that while the provision of guarantees for a fee would represent a services activity that was inconsistent with having only an investment undertaking, a unit trust generally can still satisfy the investment undertaking requirement if the provision of a guarantee is an integral part of the trust's investment undertaking. This requirement generally will be satisfied where the trust guarantees obligations of a direct or "grandchild" subsidiary in order to assist the subsidiary in financing its business. In 2004-0068221E5, 2008-0273501R3 and 2010-0386081R3, CRA countenanced guarantees respecting obligations of grandchild or great-grandchild entities where the indirect interest of the mutual fund trust was less than 100%.

In Income Tax Technical News No. 34 and in other interpretations, CRA effectively indicated that there should be a high degree of integration between the giving by the mooted mutual fund trust of a guarantee and its investing undertaking. Depending on what is meant by “high,” this very well may be articulating a standard that is too stringent. A guarantee that is given without a fee likely could not constitute an adventure in the nature of trade or an undertaking by itself, so that the relevant question would almost always be whether the giving of the guarantee occurred as part of the investment undertaking (or real estate undertaking described in s. 132(6)(b)(ii)) of the mooted mutual fund trust, or instead occurred as part of some other enterprise or integrated operation of the trust.

In order for the giving of a guarantee to form a part of a non-permitted undertaking of the mooted mutual fund trust, it would not be sufficient to find that its giving was not highly integrated with the trust’s “good” investing (or real estate) undertaking: the guarantee would also need to have a sufficient connection with the non-qualifying undertaking. Furthermore, this way of looking at the question assumes a negative answer to the very issue at hand, i.e., it assumes that there already is some other non-qualifying undertaking to which the giving of the guarantee could be assimilated. Obviously, if the mooted mutual fund trust instead gives a guarantee to support the expansion of a sardine plant carried on by it through a general partnership (i.e., a partnership that cannot benefit from the insulating effect of s. 253.1), that guarantee would relate to what is already by assumption a non-qualifying undertaking of the trust. However, in the situation where the only mooted activities of the trust are the giving of guarantees for obligations incurred by entities in which it is invested, it is difficult to conceive of how that would give rise to a separate enterprise or other undertaking – so that in default of any other reasonable alternative, the giving of the guarantees would form part of the investing undertaking.

Directors of subsidiaries

Although CRA has not stated that a unit trust through its trustees will be considered to be engaged in the non-qualifying undertaking of a corporate subsidiary where its trustees are identical to the directors of that subsidiary, it has required in the context of various rulings that a majority of the directors of the subsidiary not be trustees of the trust (see e.g., Income Tax Technical News No. 34 and 2013-0492731R3).

Speculative trading

The entering into of futures contracts and forward purchase contracts can constitute investing even if these transactions are on income account.

See Also

Ontario Hydro v. Ontario (Labour Relations Board), [1993] 3 S.C.R. 327

nuclear power undertaking included labour relations

The regulation of labour relations was found by the majority to be an integral part of Ontario Hydro's nuclear power generating enterprise, which previously had been declared under s. 92(10)(c) of the Constitution Act, 1867 to be a work within federal jurisdiction. After referring to an argument that earlier cited decisions were confined to "undertakings" in ss. 92(10)(a) and (b) and not to works in s. 92(10)(c), La Forest J indicated (at p. 368) that it was not necessary for him to engage in a consideration of the possible differences in scope between an "undertaking" and a "work" given that the latter meant "a work as a going concern," so that both concepts extended to management-labour relations.

Lount Corp. v. A.-G. of Canada (1985), 19 DLR (4th) 304 (FCA)

signal receivers were incidental to whole hotel undertaking

The owners and operators of a Holiday Inn in Winnipeg used television receiving equipment located on the premises to transmit programming to televisions in the guests' suites. After quoting the statement in R. v. Communicomp Data Ltd. (1975), 53 DLR (3d) 673 at 680, 60 OR (2d) 680 that "the matter becomes an 'undertaking' when there is a commercial aspect about it," Urie J found (at p. 314) that this installation was not a broadcasting receiving "undertaking" for purposes of the Radio Act (Canada) as no separate charges were made to the room occupants, and the installation instead was "merely an incidental amenity provided as part of the whole hotel undertaking."

Words and Phrases

Northern Telecom v. Communications Workers, [1980] 1 S.C.R. 115

scope of commercial undertaking turns on normal going-concern activities

The jurisdiction of the Canada Labour Relations Board to determine whether the Communications Workers of Canada could be certified as bargaining agent for supervisors employed by Northern Telecom Ltd. ("Telecom") in its western Ontario installation division turned on whether that installation department was part of any work, undertaking or business within federal legislative authority. This question, in turn, rested upon determining whether the nature of the relationship between Telecom and the telephone companies its served (notably, Bell Canada, viewed as having a communications undertaking within federal jurisdiction), including the importance of the installation work done for Bell Canada and the physical and operational connections between the installation department and the core federal undertaking of Bell Canada, were such as to make the installation department part of that undertaking.

Dickson J stated (at pp. 138-139):

In determining whether a particular subsidiary operation forms an integral part of the federal undertaking, the judgment is, as was said in Arrow Transfer, a "functional, practical one about the factual character of the ongoing undertaking". Or, in the words of Mr. Justice Beetz in Montcalm, to ascertain the nature of the operation, "one must look at the normal or habitual activities of the business as those of 'a going concern', without regard for exceptional or casual factors" and the assessment of those "normal or habitual activities" calls for a fairly complete set of factual findings.

As Telecom had not brought any evidence to reveal the nature of the corporate and business relationship between it and Bell Canada, its appeal was dismissed.

Baytrust Holdings Ltd. v. IRC, [1971] 1 WLR 1333 (Ch D)

undertaking denotes business or enterprise

On of the taxpayers ("Nitralloy"), which was a subsidiary of holding company ("Thos. Firth") which carried on a steel manufacturing business through other wholly-owned subsidiaries of Thos. Firth, was found not to have acquired a part of the undertaking of Thos. Firth for purposes of s. 55 of the Finance Act 1927 (UK) when Thos. Firth transferred minority shareholdings in two companies ("British Acheson" and "High Speed") to it in consideration for treasury shares. After referring to a submission of taxpayer's counsel that "if a company's undertaking is the totality of its assets, any part of its assets must be a part of its undertaking," Plowman J stated (at pp. 1353-4):

I am unable to accept that argument. The word "undertaking," in my judgment, denotes the business or enterprise undertaken by a company, and while Thos. Firth's holdings of British Acheson and High Speed shares were no doubt acquired in the course of Thos. Firth's business, they were not, in my judgment, a part of that business. A greengrocer's business is not doubt to sell fruit, but the pound of apples which you can buy can hardly be described as a purchase of part of the greengrocer's business.

Words and Phrases

Town of Beauport v. Quebec Railway, Light & Power Co. / Quebec Railway, Light & Power Co. v. Town of Beauport, [1945] S.C.R. 16

"undertaking" comprised the whole of the company's works

A declaration in the 1895 federal incorporating Act of the appellant that its undertaking was a work for the general advantage of Canada (thereby bringing such undertaking under federal jurisdiction) applied to the subsequently acquired bus line enterprise of the appellant. In response to a submission that a bus line was not a physical thing and, therefore, not capable of being part of an undertaking, Rinfret J quoted with approval (at p. 24) a statement that "'undertaking' is not a physical thing, but is an arrangement under which, of course, physical things are used", and then stated that "the word 'undertaking' as used in the statute comprises the whole of the works of the company...."

Words and Phrases

Administrative Policy

24 March 2015 External T.I. 2012-0470991E5 F - Mutual fund trust

day trading included in investment undertaking

Would a mutual fund trust that was a "day trader" using margin have an investment undertaking? CRA stated (TaxInterpretations translation):

[W]e generally are of the view that day trading, i.e, the acquisition and sale of securities in a single session, constitutes the investment of funds in property within the terms of subparagraph 132(6)(b)(i).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) flow-through to unitholder of capital gain designated by MFT 175
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose s. 39(4) presumption establishing expense non-deductibility 60
Tax Topics - Income Tax Act - Section 39 - Subsection 39(5) - Paragraph 39(5)(a) election can be made by leveraged day-trading MFT 175
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares capital v. income character determined at trust level 88

2013 Ruling 2013-0492731R3 - qualifying disposition -mutual fund trust

MFT's trustee not to be a director of a sub

The elimination of the sub trust of an open-end listed mutual fund trust (the "Fund") was to be accomplished by the subtrust transferring its assets (being units of subsidiary real estate partnerships and the shares of the GPs thereof) under s. 107.4 to a newly-formed subsidiary unit trust ("MFT") of the REIT, with a small percentage of MFT's units then being distributed to the REIT unitholders in order to qualify MFT as a mutual fund trust. MFT then will be merged into the REIT under s. 132.2.

The proposed transactions specify that the MFT's Canadian-resident trustee will not be a director of any of the GPs.

See detailed summary under s. 107.4(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(1) elimination of REIT sub trust through s. 107.4 transfer to new "in house" MFT and s. 132.2 merger of MFT into REIT 580
Tax Topics - Income Tax Act - Section 132.2 - Subsection 132.2(1) - Qualifying Exchange elimination of REIT subtrust through s. 107.4 transfer to new "in house" MFT and s. 132.2 merger of MFT into REIT 89

2011 Ruling 2010-0386081R3 - Guarantee provided by MFT to sub-partnership

guarantee of secured grandchild LP borrowing

The taxpayer is a listed mutual fund trust which holds all of the non-exchangeable LP units in a subsidiary LP which, in turn, holds interests in subsidiary limited partnerships, including Sub-Partnership as well as the shares of the GP thereof. Sub-Partnership will borrow in order to finance the acquisition of additional rental properties or refinance existing borrowings, with the lenders obtaining insurance one of whose conditions is that the taxpayer guarantee such borrowings, and with such borrowings being secured by properties of Sub-Partnership.

The provision of such guarantees by the taxpayer for no consideration would not, in and by themselves, disqualify the taxpayer from satisfying the requirements of s. 132(6)(b).

2008 Ruling 2008-0273501R3 - Guarantee by a MFT

guarantee of grandchild lease incurred for financing reasons

A mutual fund trust holds all the units of a subsidary trust which in turn holds the share of the general partner and the Class A units of a limited partnership (the "LP"). There also are subordinated exchangeable units of the LP which are exchangeable into units of the mutual fund trust. In order to finance the expansion of its business, the LP sells a property to a third party, and leases the property back from the third party.

The agreement of the fund as guarantor (and for no fee) to bind and oblige itself solidarily with LP for the full performance by LP of all its obligations under the lease agreement does not cause the fund to lose its mutual fund status.

2008 Ruling 2008-0271251R3 - Arrangements related to dealer's commission

joint obligation for deferred sales charges

A non-resident third party which does not have any office in Canada (the "Arranger") agrees to fund the payment of dealer commissions for sales of units of a mutual fund trust on the basis that the Arranger will receive deferred sales charges on the redemption of the fund units (which the fund agrees to withhold from the redemption proceeds and pay as directed by the Arranger) and also a monthly "Earned Basic Fee" for a specified number of years and calculated on the fund NAV from time to time. Although the fund and its manager are jointly and severally liable to pay the Earned Basic Fee, as between them they agree that the manager will be responsible for their payment, so that the contingent liability of the fund for the Earned Basic Fees is similar to that of a guarantor.

Ruling that this effective guarantee by the fund will not preclude it from qualifying under s. 132(6)(b) as a mutual fund trust.

2007 Ruling 2007-0226891R3 - MFT issues guarantee notes issuedby whollyownedLP

guarantee of internal notes

A guarantee, for no fee, by a mutual fund trust of notes of a limited partnership held by a subsidiary trust of the mutual fund trust would not cause it to lose its mutual fund trust status.

Income Tax Technical News, No. 34, 27 April 2006

majority of MFT trustees not on subsidiary board/guarantees re non-wholly owned subs scrutinized

CRA has accepted that a trust was not engaged in a separate non-qualifying undertaking in situations where trustees did not form the majority of the board of directors of a subsidiary corporation and did not control the activities or decisions of the corporation.

Guarantees provided by mutual fund trusts in respect of the debt of an entity that is not wholly-owned by the trust, or of the debt of an entity in which a wholly-owned subsidiary has an interest, would have to be closely scrutinized in light of all the circumstances to determine whether it gave rise to a separate undertaking.

2006 Ruling 2004-0097111R3 - REIT providing a guarantee on co-owned property

secondary guarantee of indirect subsidiary LP mortgage obligations

A REIT through an subsidiary trust is the limited partner of a partnership that directly and indirectly owns and leases real property, and whose general partner is controlled by the REIT. Previous owners of various of those properties hold LP units of the partnership that participate in its profits based on distributions made by the REIT on its units, and are exchangeable into REIT units. As a condition to obtaining financing for a property to be developed jointly by the partnership and a third party ("X Corporation"), the REIT, its subsidiary trust, X Corporation and one or more members of the X Corporation group are required to guarantee the mortgage obligations issued to Lender in the name of the nominee corporation for the development property. Furthermore, Lender will receive insurance in respect of the mortgages from a third party insurer (therefore facilitating a lower interest rate on those mortgages) provided that the REIT provides such guarantee. No guarantee fee will be charged by the REIT.

In the summary of Reasons, the Directorate states that "it is reasonable to conclude...that the degree of integration between the investment of the funds and the guarantee is sufficiently high that the guarantee will not be considered to be a separate undertaking." It rules that the provision by the REIT of the guarantee will not by itself cause the REIT to not qualify under s. 132(6)(b).

2006 Ruling 2006-0191881R3 - Witholding Tax Exemption

loan guarantees

Ruling that a guarantee given by an income fund of a loan made to an indirect "Finco" subsidiary of the Fund and of a loan made on similar terms by Finco to an indirect subsidiary general partnership of the Fund would not cause the Fund to fail to meet the requirements of s. 132(6)(b).

30 August 2004 External T.I. 2004-006085 -

guarantee of subtrust borrowings: high degree of integration

In indicating that a trust which guaranteed (a) the obligations of a subtrust under the subtrust's guarantee of a borrowing of a partnership of which the subtrust was a majority limited partner, and (b) such borrowing, did not thereby become disqualified under s. 132(6)(b), the Directorate stated:

"In determining whether some activities of an entity are part of its core undertaking, the practical and functional relationship of each activity to such core undertaking must be assessed ... Just like a cotton strand loses its identity and becomes part of a cable when twisted round other strands, a guarantee becomes part of such undertaking where all the operations of the trust, including the provision of the guarantee, mesh together for that result. Absent exceptional circumstances, such degree of integration would be expected to exist where for no consideration a mutual fund trust guarantees a debt incurred by a wholly-owned subsidiary to finance its commercial operation. ... However, a guarantee provided by a mutual fund trust in respect of the debt of an entity not wholly-owned by the trust or of the debt of an entity in which a wholly-owned subsidiary has an interest, would have to be closely scrutinized in light of all the relevant circumstances."

2004 Ruling 2003-005422 -

Ruling that the giving of a guarantee by an open-ended unit trust that is a REIT on mortgages held on properties beneficially owned by an operating partnership below the REIT would not, by itself, disqualify the REIT from meeting the requirements of s. 132(6)(b).

15 April 2003 External T.I. 2002-016767 -

guarantee fee may taint

A mutual fund trust that is not engaged in the business of lending money or guaranteeing loans will not violate the requirements of s. 108(2)(b) and subsection 132(6) of the Act merely by guaranteeing a loan that is contracted by a subsidiary. However, the payment of a fee by the subsidiary with respect to the guarantee might taint the trust.

16 August 2000 Ruling 2000-000751

securities lending

Ruling that the lending of securities by a unit trust under a securities lending arrangement would not by itself cause its undertaking to cease to be investing of its funds.

1999 Ruling 991832 [investment undertaking in 2-tier structure]

investment undertaking in 2-tier structure

The only assets of an inter vivos trust (the "MFT") are (as to a cost of 85%) interest-bearing promissory notes ("First Notes") with a term of 25 years owing by another inter vivos trust ("CT") carrying on a business that was purchased from a public corporation and units of CT which may be redeemed on demand for interest-bearing notes (the "Second Notes") of CT payable after one year. The MFT units are redeemable on demand for cash up to a specified aggregate amount applicable in each calendar month, with redemptions for amounts in excess of that maximum being by way of an in-specie redemption through the distribution of CT units and First Notes, provided that where MFT unitholders are RRSPs or the like, Second Notes rather than CT units are distributed in the event of an in-specie redemption.

The MFT will be considered to be an open-ended trust for purposes of s. 108(2)(a), its only undertaking will be considered to be the investing of its funds in CT units and the First Notes, the MFT units will not be considered to be foreign property (provided that the MFT continues to hold less than 20% of its property in the CT units), and GAAR will not apply.

2 July 1998 T.I. 972867 [investing includes derivatives and short selling]

investing includes derivatives and short selling

The requirement that its undertaking be the investing of its funds would not be violated as a result of short selling, writing naked call option, acquiring derivatives (including swaps), or making secured loans of its securities. This will include situations where such speculative activities are engaged in for non-hedging purposes.

16 June 1997 External T.I. 5-970017 -

investing in shares of Opco

The requirement that its undertaking be the investing of funds will be satisfied where a trust's only activity is purchasing and holding all the issued shares of a corporation engaged in an active business.

31 March 1994 T.I. 933701 [commodity futures are investing but may be on income account]

commodity futures are investing but may be on income account

Although the acquisition of commodity futures contract by a mutual fund trust will be considered to be investing for purposes of s. 132(6)(b), it is the opinion of the Department that a mutual fund trust or (a corporation) which invests primarily in futures would be engaged in transactions considered to be adventures in the nature of trade.

1996 Ruling 960994 [futures and forwards]

futures and forwards

An activity of entering into exchange-traded futures contracts and forward purchase contracts would constitute "the investing of its funds in property".

5 January 1995 Income Tax Technical News, No. 6

futures, forwards and options

Respecting the requirements in ss.131(8)(b) and 132(6)(b) that the only undertaking of the corporation or trust be the investing of its funds and property other than real property, RC stated that "buying, selling or otherwise taking a position in futures contract, forward contracts and options on futures contracts (based on, among other things a commodity, a commodity index, a foreign currency, a stock index or a bond index) are activities that will generally fall within the meaning of that phrase".

27 October 1994 Internal T.I. 7-942158 -

stock index futures

The acquisition of a stock index futures contract would constitute the investing of funds.

22 June 1994 T.I. 941347 [commodity futures contracts]

commodity futures contracts

Entering into a commodity futures contract constitutes the investing of funds.

31 March 1994 T.I. 933701 [investing undertaking can be on income account]

investing undertaking can be on income account

Transactions with respect to commodity futures contracts by a mutual fund trust are considered to be investing notwithstanding that the resulting gains or losses would be on income account if the mutual fund trust invests primarily in futures.

8 March 1991 T.I. (Tax Window, No. 2, p. 25, ¶1189)

The disposition by a mutual fund corporation of all its investments, the distribution of all its assets and its winding-up will not disqualify the corporation as a mutual fund corporation for the year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 131 - Subsection 131(8) 33

25 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 29, ¶1107)

A mutual fund trust is not precluded from investing in mortgages, or from acquiring real property on the security of a mortgage, provided that its activities with respect to the real estate do not include participation in decisions concerning real estate development.


D. Cannon, "Income Trusts: The Interest (Deduction) Continues - A Review of Westshore Terminals Income Fund and Superior Propane Income Fund", 1997 Corporate Management Tax Conference Report, c. 4.

D. Williamson, "Real Estate Investment Trust", 1997 Corporate Management Tax Conference Report, c. 5.

David M. Williamson, "Recent Transactions - Income Fund Trust", Current Issues in Resource Taxation, Canadian Tax Foundation, 1997, p. 1D:10.

J. Brussa, "Royalty Trusts, Income Trusts and the Search for Yield", 1996 Conference Report 19:9-10.

Weatherby, "Mutual Funds", 1985 Conference Report, C. 43.

Paragraph 132(6)(b)

Subparagraph 132(6)(b)(i)

Administrative Policy

Income Tax Technical News No. 34 27 April 2006

guarantee must be highly integrated with trust’s core investment undertaking/limited overlap with subsidiaries' boards

Would an income trust (that is not engaged in the business of lending money or guaranteeing loans) still satisfy s. 132(6)(b)(i) after having guaranteed a debt of a corporation held indirectly by a limited partnership or a debt of the limited partnership, for example, where it has guaranteed the obligations of a corporation wholly owned by a majority-owned limited partnership? CRA responded:

The agreement to provide a guarantee is an undertaking. If the guarantee stands on its own as a service to third parties [citing Melford], it would not qualify for purposes of that subparagraph. In determining whether the provision of the guarantee is part of the core undertaking [citing inter alia Beauport, Lount and Northern Telecom] of the trust, the CRA considers the degree of integration between the guarantee and the core investment undertaking. As subparagraph 132(6)(b)(i) provides that the “only” undertaking of the trust must be the investing of its funds in property as specified therein, the degree of integration between the guarantee and the investing of funds is subject to a high standard.

… [T]he payment of a fee by the subsidiary with respect to th[e] guarantee might taint the trust.

In … 2004-006822, the CRA was satisfied that the guarantee described therein would not disqualify the mutual fund trust under subparagraph 132(6)(b)(i), even though it was provided to a corporation which was not wholly owned by the trust because the particular facts indicated that the guarantee formed part of the core investment undertaking of the trust. Guarantees provided by a mutual fund trust in respect of the debt of an entity not wholly owned by the trust, or of the debt of an entity in which a wholly owned subsidiary has an interest, would have to be closely scrutinized in light of all the relevant circumstances.

Where the guarantee is structured in such a way that third parties benefit from such service, the mutual fund status might be lost where the resulting service or benefit conferred on third parties constitutes an undertaking which does not mesh completely with the investing of its funds.

CRA noted also that in published rulings, the mutual fund trustees did not constitute a majority of the directors of the boards of corporate subsidiaries and did not control the decisions of those boards.

6 April 2004 2004-0068221E5 - Debt Guaranteed by a Mutual Fund Trust

guarantee of notes of sub of grandchild LP with exchangeable units held by 3rd-parties

A mutual fund trust (the "Fund") wholly-owns a second unit trust (the "Trust"), which owns 70% of the limited partner interest in a limited partnership. A corporation is the general partner. The other limited interests in the partnership are owned by third parties, who can sell those interests to the Fund or convert them into Fund units. The limited partnership wholly owns Holdco", which wholly owns Opco (also Canadian-resident). Notes and debentures issued to be public by Holdco are guaranteed by Opco, the partnership and the Fund. No guarantee fees are paid. CRA stated:

The guarantee … is provided by the Fund solely to enable Holdco to access the financial markets by issuing a short form prospectus in order to benefit from the expediency and other advantages stemming from that procedure. In light of all the facts described above, the guarantee should be viewed as incidental to, or part of, the Fund's investment.

[P]rovided that all the conditions of section 253.1 … are met and that the Fund is not engaged in the business of lending money or guaranteeing loans …the requirements of subsection 132(6) … are not violated by the mere fact that the Fund provides the guarantee … .

2004 2003-0054221R3 - "investing of funds" and guarantees

permitted guarantees of mortgages of grandchild LP

The REIT wholly owns a unit trust (the “Trust”) which wholly-owns directly and indirectly a real estate limited partnership through holding the limited partnership interest therein and holding the sole corporate beneficiary of the unit-trust general partner (“Trust2”) of the partnership. CRA ruled that the REIT’s guarantee of mortgages on such properties (without any fee being charged and provided in order to to obtain insurance on the mortgages ) would not be considered an undertaking other than investing funds in property.

Subparagraph 132(6)(b)(ii)

Administrative Policy

29 July 2019 External T.I. 2018-0784701E5 - Rent from real/immovable properties - furnishings

renting furnished apartments gave rise to rents

All of the rent generated from a rental unit that was fully-furnished with “furnishings typically … found in a residence” would qualify as “rent from real or immovable properties.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 122.1 - Subsection 122.1(1) - Rent from Real or Immovable Properties rent for fully-furnished apartments is all rent 117

Subsection 132(6.1) - Election to be mutual fund

Administrative Policy

29 March 2001 External T.I. 2001-007182 -

A trust which was formed in September 2000, had its first year end on December 15, 2000 and did not satisfy the unit distribution requirements in Regulation 4801 until June 2001 would not be eligible for the election under s. 132(6.1) because on the 91st day after its first taxation year, the distribution requirements were not satisfied.

Subsection 132(7) - Idem [Retention of status as mutual fund trust]

See Also

Covert et al. v. Minister of Finance of Nova Scotia, [1980] CTC 437, [1980] 2 S.C.R. 774

The testator left the residue of his estate to an Alberta corporation which was a wholly-owned subsidiary of another Alberta corporation. The Alberta parent's shares were owned by the testators 12 grandchildren resident in Nova Scotia. S.2(5) of the Succession Duties Act (Nova Scotia) provided that where a non-resident corporation by reason of the death of a deceased acquired or became "beneficially entitled" to property of the deceased each of the shareholders of the corporation was deemed to be a successor of property of the deceased.

In finding that this provision applied notwithstanding the interposition of the subsidiary between the Alberta parent and the estate, Martland J. stated (at p. 448):

"In my view, the corporation is no less 'beneficially entitled' when the property is held by its wholly-owned subsidiary as when it is held in trust for it. Its legal entitlement is even more immediate as it does not have to call upon a third party to perform its obligation as trustee. It only has to exercise its rights as sole shareholder of the subsidiary."

Words and Phrases
beneficially entitled
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Drafting Style 78

Administrative Policy

2006 Ruling 2006-0174351R3 - re-organization of income trust to royalty trust

Ruling that a net profits interest granted by a partnership to a mutual fund trust would not be taxable Canadian property, so that s. 132(7) would be satisfied even if the trust became majority-owned by non-residents.

23 November 2004 External T.I. 2004-005627 -

Given that taxable Canadian property can include shares, units and partnership interests in some circumstances, oil and gas income trusts may derive their value substantially from taxable Canadian property.

17 September 2004 External T.I. 2003-004888 -

In response to a submission that a trust should have a reasonable period of time to take steps to correct a situation giving rise to more than 50% non-resident ownership, e.g., the purchase of a large block of units by a non-resident, the Directorate indicated that:

"It is impossible to indicate at what moment the trust is maintained for the benefit for non-residents but, certainly, if the trust does not take appropriate action, it is likely that the trust would be maintained primarily for the benefit of non-residents at that moment."

28 November 2003 External T.I. 2003-003097 -

General discussion of consequences of an income or royalty trust not satisfying the 50% test in s. 132(7).

20 November 2002 External T.I. 2002-015363 -

Non-residents who had sold a business to a Canadian corporation owned by a unit trust in consideration for notes and shares of the corporation had the right to exchange such notes and shares for units of the unit trust provided that this did not result in non-residents owning more than 49% of the units of the trust. "As the Canadian Customs and Revenue Agency would not normally consider the benefit of providing liquidity to the investors in a corporation to have the same weight as the benefit of being a unitholder of the trust, the fact that the number of exchange rights issued may exceed the number of units of the trust currently held by residents of Canada would not necessarily result in the application of subsection 132(7). However, it would be a factor in the determination."


David W. Ross, "Non-Resident Unitholders - Impact on Status", Resource Sector Taxation, 2004, p. 76.