Peter K. Noack (613) 957-8963
Attention: XXX
December 5, 1986
Dear Sirs:
This is in reply to your letter of October 1 concerning the financial reporting for tax purposes by a mutual fund trust which will invest in securities comprising the Standard &Poor 500 Composite Stock Price Index.
For marketing reasons, it is proposed that the fund account for transactions in U.S. dollars, including the:
1) issuance of units; 2) redemption of units; 3) purchase and sale of securities; 4) receipt of income; and 5) distributions of income and capital gains.
Your are requesting our assistance on a number of problems described in your letter that arise from the proposed accounting treatment to ignore translation of transactions conducted in U.S. dollars into equivalent Canadian dollars.
Distribution of Income
Your Proposal
The fund will report its U.S. dollar income, including its realized U.S. dollar net gains, and income distributions on the annual T3 trust and T3 supplementaries in Canadian dollars using the same rate of exchange for the translation of income and income distributions. U.S. dollar financial statements will be filed with the T3 return.
Our Comments
References in the Income Tax Act ("Act") to amounts, unless otherwise stated, are references to sums in the currency of Canada. Income statements to be filed with a T3 return as part of the prescribed information must be prepared in Canadian dollars.
The Department will accept any method used to determine foreign exchange gains or losses on income transactions provided that method is, under the circumstances, in accordance with generally accepted accounting principles (paragraph 7 of Interpretation Bulletin 95R). Paragraph 8 of the bulletin discusses the translation of foreign currency transactions into the Canadian dollar equivalent.
Assuming the unit in the mutual fund trust will be capital property of the unitholder, pursuant to subsection 52(6) of the Act, a unitholder acquires the right to receive his share of the income of the trust at a cost equal to the amount that became so payable. Payment of the income will not result in a capital gain or loss on the disposition of the right as long as the amount paid to the unitholder equals the amount that became so payable to him. In consequence, one-half of the amount of any foreign exchange gain, accruing after the amount became payable and until the date of payment, will have to be taken into account in computing the unitholder's income for the year of the payment.
Foreign Exchange Gains and Losses - Securities Transactions
Your Proposal
Net capital gains will be calculated and distributed in U.S. dollars ignoring foreign exchange gains and losses.
Our Comments
Subsection 39(2) of the Act applies to any fluctuation of a foreign currency relative to Canadian dollars that results in a gain being made or a loss being sustained, including any gain realized in the interval between the time where an amount becomes payable to a unitholder and the time when distribution of such an amount is made, as we mentioned hereinabove. Paragraph 13 of IT-95R comments on when the Department considers that a taxpayer has made a gain or sustained a loss.
As much as we can appreciate the difficulties in translating U.S. dollar transactions into Canadian dollar equivalents, we are unable to comment favourably on your proposals, because they are inconsistent with our interpretation of the reporting requirements of section 150 of the Act and the specific requirements of subsection 39(2) of the Act.
Yours truly,
André Dulude
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch