MUTUAL FUND TAX MEASURES

The government has decided to address the fact that non-residents can escape Canadian tax on dispositions of "taxable Canadian property" (TCP) by investing in mutual funds which hold TCP rather than by acquiring it directly.

Taxable distributions, by mutual fund trusts or corporations, of gains on TCP realized after March 22, 2004 will be subject to withholding tax.

A special new withholding tax of 15% will also apply to certain previously tax-free distributions to non-residents. Such distributions are those made after 2004 by Canadian mutual funds that are listed on a prescribed Canadian or foreign stock exchange if the value of the fund is principally attributable to Canadian real estate or Canadian resource property. Non-residents who are subject to this new tax and incur losses on the disposition of units of such funds, can utilize such losses to recover the special tax otherwise payable. These losses can be carried back three years and forward indefinitely but only to recover the special tax.