Mutual fund trusts are required to distribute their net income and net realized capital gains to unitholders each year. These distributions are reported to the unitholder on a T3 Statement of Trust Income Allocations and Designations slip. The unitholder must report these amounts on their tax return for the year the distribution is received, regardless of whether the distribution was taken in cash or reinvested in additional units. This ensures that the income and gains earned within the trust are taxed in the hands of the investor annually.

A. Only 50% of a capital gain is included in taxable income (the taxable capital gain), not 100%.

B. While the distribution itself is not a disposition of the investor's units, the capital gain distributed is still a taxable event for the unitholder.

C. Tax on capital gains distributions is not deferred; it is payable for the year in which the distribution is made by the fund.

1. Canadian Securities Institute. (2023). Investment Funds in Canada Course Textbook. Chapter 12: Taxation of Mutual Funds, Section 3: How Mutual Funds are Taxed, pp. 12-10 to 12-12.

2. Canada Revenue Agency. (n.d.). T4013 T3 Trust Guide. Section: "Completing the T3 slip, Statement of Trust Income Allocations and Designations".

3. Hashmi, A., & Ang, A. (2021). Taxation of Investment Income in Canada. Canadian Tax Journal, 69(3), 745-778. (Discusses flow-through nature of trusts and T3 reporting).