Which statement about a net capital loss incurred by a mutual fund trust is CORRECT?

Under Canadian tax law, a mutual fund trust cannot flow through or distribute a net capital loss to its unitholders. Instead, the trust itself must handle the loss. The trust is permitted to carry a net capital loss back for up to three taxation years to recover taxes paid on capital gains in those years. Crucially, it can also carry the net capital loss forward indefinitely to offset any net capital gains realized in future years.

A. Mutual fund trusts are prohibited from passing capital losses on to their unitholders.

B. The carry-forward period for a net capital loss is indefinite. The three-year limit applies to the carry-back period.

D. The carry-back period is limited to three years, not indefinitely.

1. Canadian Securities Institute. (2023). Investment Funds in Canada (IFC). Chapter 13: Taxation of Mutual Funds, Section 13.2, "How Mutual Funds are Taxed", subsection on "Taxation of the Mutual Fund".

2. Canada Revenue Agency. (2023). T4013 T3 Trust Guide. Chapter 3, "Capital gains and losses". This guide details the tax treatment of capital losses within a trust, specifying the 3-year carry-back and indefinite carry-forward rules.