2014-0546831E5 Electing mutual fund trust's income

Principal Issues: A mutual fund trust elects under subsection 132.11(1) to use a December 15 taxation year (electing MFT). Electing MFT acquires a beneficial interest in another trust (underlying trust) after the electing MFT's December 15, 201x taxation year, but before the end of the calendar year: 1. If the underlying trust makes an income distribution after December 15, but before the end of its December 31, 201x taxation year, will the income be included in the electing MFT's December 15, 201x taxation year, or will it be included in the electing MFT’s subsequent December 15 taxation year? 2. Would the response in (1) differ, if the underlying trust had also elected under subsection 132.11(1) to have a December 15 taxation year?

Position: 1. The electing MFT must include the income paid or payable by the underlying trust in its December 15, 201x taxation year. 2. The result is the same.

Reasons: 1. Electing MFT is a beneficiary of the underlying trust and the underlying trust's December 31 taxation year ends in the calendar year after the electing MFT's December 15 taxation year; therefore, subsection 132.11(3) applies. 2. Subsection 132.11(4) and paragraph 132.11(5)(c) will apply such that the top electing MFT will be deemed to be a beneficiary of the underlying trust on December 15, and each amount that is paid or becomes payable by a the underlying trust in the last 16 days of the calendar year will be deemed to be paid or to have become payable on December 15.

Author: King, William
Section: 132.11(1); 132.11(3); 132.11(4); 132.11(5)(c)

XXXXXXXXXX                                                                                                                                                           2014-054683
                                                                                                                                                                                    W. King
May 17, 2016

Dear XXXXXXXXXX: 

Re:  Electing mutual fund trust's income from another trust — subsection 132.11(3)

We are writing in response to your email correspondence regarding a mutual fund trust which had elected under subsection 132.11(1) to have a December 15 taxation year-end (“electing MFT”).  You noted that subsection 132.11(3) requires the electing MFT to include in its income for its December 15 taxation year income from an underlying trust’s December 31 taxation year.

You provided the following two scenarios and have asked us in which taxation year the electing MFT is required to include in its income, a distribution made by the underlying trust.

1.    The electing MFT first acquires a beneficial interest in the underlying trust after the electing MFT’s December 15, 201x taxation year-end, but, before the end of the particular calendar year.  The underlying trust distributes income to its beneficiaries on its December 31, 201x taxation year-end.  You have asked whether subsection 132.11(3) would require the inclusion of the income in the electing MFT’s December 15, 201x taxation year, or whether it could be included in the electing MFT’s subsequent taxation year.

2.    Similar to 1 above; however, in this scenario the underlying trust had also elected under subsection 132.11(1) to have a December 15 taxation year end for income tax purposes.

Our Comments:

This technical interpretation provides general comments about the provisions of the Income Tax Act (the Act) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

With regard to the two scenarios, we provide the following comments.

Scenario 1

In considering the preamble to subsection 132.11(3), the electing MFT is a beneficiary under another trust a taxation year of which ends in a calendar year after December 15, and the taxation year of the electing MFT ends on December 15 of the year by virtue of subsection 132.11(1). Accordingly, subsection 132.11(3) applies where the electing MFT first acquires a beneficial interest in another trust after December 15 but before the end of the calendar year.  The income distributed to the electing MFT will be included in its December 15, 201x income and will not be included in its subsequent taxation year.

Scenario 2

Subsection 132.11(3) will not apply to the top electing MFT where the underlying MFT has also elected to have a December 15 taxation year end because there would not be “another trust a taxation year of which … ends in a calendar year after December 15”.  However, as you noted, subsection 132.11(4) and paragraph 132.11(5)(c) would apply.

Subsection 132.11(4) provides that for purposes of specific provisions in the Act including 132.11(5), and 104(6) and (13), an amount that is paid or became payable in the last 16 days of a calendar year in respect of an electing MFT’s taxation year ending on December 15 of a calendar year is deemed to have been paid or to have become payable at the end of that taxation year.  In our view, that would apply to deem an amount paid or payable by the underlying electing MFT to the top electing MFT, after the end of a particular taxation year of the underlying trust that ends on December 15 but before the end of that calendar year, to have been paid or payable at the end of December 15.

Paragraph 132.11(5)(c) will apply in this scenario such that where a beneficiary (top electing MFT) was not a beneficiary at the end of December 15, the top electing MFT is deemed to have been a beneficiary of the underlying trust on December 15 and, as such, is required to include in its income any amount that is deemed by subsection 132.11(4) to be paid or payable to it from the underlying trust, by virtue of subsection 104(13).

Therefore, where the top electing MFT acquires units of another electing MFT after December 15, the top electing MFT would be required to include in its December 15 taxation year, income distributions made by the underlying electing MFT after December 15 and before the end of the calendar year.

We trust our comments will be of assistance.

Yours truly,

Steve Fron, CPA, CA
Manager, Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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