Reporting US mutual fund capital gains distributions to CRA

NickH · Post by **NickH** » Sat Feb 25, 2012 10:53 am

After reading several other threads on this board and reading a document from RBC DS, I have learned that capital gains distributions from US mutual funds are not eligible for the 50% inclusion rate in Canada.

Does anyone have a solid source for this rule? Preferably a law, regulation, or official CRA publication.

Does anyone know which line number to report the distribution? I had it on line 176, but I suppose it goes on line 121?

JGCA · Post by **JGCA** » Sat Feb 25, 2012 12:17 pm

Not only are capital gains taxed 100% as ordinary income but so are dividends ( no bump up not tc) if any tax though was witheld this is part of the gross income you pick up but do get the FTC fot this.

If the mutual fund is a US corp then all the income you receive is view as US source dividend income regardless of how it was characterized by the fund and would again not be eligible for teh div tax cr. IN VERY rare instance if teh Mutual fund were operating as a partnership in the US not a corp, then by theory the flow out of income should retain its original form once it is received by the CND investor.

You can delcare it on line 121 as dividend income from US in CND funds.

THe tax section to explain this is contained in ITA 94.1, also refier to ITR:6900)

nelsona · Post by **nelsona** » Sat Feb 25, 2012 1:08 pm

As to reference, a dividend has to be eligible. Since your dividend doen't meet the definition of eligible, then it is ineligible by default.

JGCA · Post by **JGCA** » Sat Feb 25, 2012 1:46 pm

Not quite, in Canada we now have both eligible and ineligible dividends that both are allowed dividend tax credits at different rates. In this case the dividends are NOT allowed any dividend tax credits since they are from the US these are better off being termed excluded rather than ineligible since there now is the distinction of eligble and non eligible dividend income in Canada.

nelsona · Post by **nelsona** » Sat Feb 25, 2012 4:48 pm

Thanks.

JGCA · Post by **JGCA** » Sat Feb 25, 2012 5:32 pm

On the contrary, we all thank you very much for taking time to answer all questions wherein we all learn from you. Especially now during tax season I myself amd already in it full swing.

NickH · Post by **NickH** » Sun Feb 26, 2012 5:16 pm

JCGA, are you sure that US mutual funds are taxed under Section 94.1? A US mutual fund meets the criteria in (1)(a) and (b), but the tax due on fund income would not be significantly less (within the meaning of 94.1(1)) if the fund assets were held directly by the shareholder. Additionally, 94.1 prescribes a penalty regime which has not been discussed here.

I think that section was designed to combat abusive foreign investment entities as described in http://www.cch.ca/newsletters/TaxAccoun ... /Index.htm

JGCA · Post by **JGCA** » Sun Feb 26, 2012 10:02 pm

Sec 94.1 covers a lot of FAPI areas including the offshore deemed recognition of funds held in offshore trusts as the one you mention, however the thrust of sec 94.1 is to classify all foreign income including those of trusts as income the wording in 94.1 that does this is as follows
" Where property is in an offshore investment fund there shall be added to the adjusted cost base of the property amounts deemed to be included in income in respect of the property" this provision will deem all income to be of one type no distinction is allowed as to cap gain, div or otherwise.

This also goes hand in hand with sec 53(1)(m) , but look at ITR 6900 also.