On December 11, Ontario's Ministry of Finance issued a comfort letter to address
the unintended effects of the new provincial surtax which have
caused a mismatch of a mutual fund trust's capital gains refund
and the Ontario surtax payable on capital gains retained in the
Mutual fund trusts retaining dividends have historically taken
advantage of a dividend tax credit and capital gains tax refund to
reduce both the basic personal tax payable by individual investors
as well as the surtax for a trust on retained taxable dividends and
realized capital gains. Under the relevant changes to Ontario's
Taxation Act, 2007
(the "Ontario Act"), however, the dividend tax credit
would not have applied to the new surtax, resulting in mutual fund
trusts having to pay the surtax on retained dividends.
In order to avoid the surtax, trusts would have been forced to
distribute the income to unitholders. While such income would have
been taxed at a lower rate than if retained by the trust, overall,
the income would have imposed a higher tax burden on investors.
Fortunately, and prior to year-end deadlines, the Ministry of
Finance has issued the comfort letter to allow mutual fund trusts
to be entitled to an Ontario capital gains refund of surtax for a
taxation year ending in 2014, equal to the amount of the
trust's surtax for the year under the following
The tax payable by the trust for the year is equal to, or less
than, the product of the trust's taxed capital gains for the
year multiplied by the highest tax rate for the year; and
The trust's Ontario capital gains refund of basic tax for
the year under subsection 105(1) of the Ontario Act is equal to the
lesser of the amounts in respect of the year calculated under
paragraphs (a) and (b) in formula item F in subsection (4) (that
is, the amount from line 7 of the trust's form T184 for the
year is equal to the amount from line 1).
The Ministry of Finance is also recommending amendments to the
Ontario Act to permanently address the issue and provide greater
certainty going forward.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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