Hot Tips – Heads Up! Owners Of Mutual Fund Corporations

This spring an announcement was made, changing deferral for Mutual Fund Corporation shares, known as multi-class funds or “switch funds”. See the February 2007 article in Canadian MoneySaver archives; titled “Hot Tips on Mutual Funds”.

Prepare To Pay Tax When You Sell After January 1, 2017!

Deferral of capital gains is to be eliminated under S. 51; and application of S. 85, 85.1, 86 and 87 may not be available. These sections have to do with various tax-free rollovers.

1) Transfer of property to corporation by shareholders

http://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-85.html

2) Share-for-share exchange

http://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-85.1.html

3) Exchange of shares by a shareholder in course of reorganization of capital

http://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-86.html

4) Amalgamation

http://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-87.html

The federal budget set the effective date as after September 2016; then revised it to after January 1, 2017.

Where Can I Learn More?

Budget 2016 notes

http://www.budget.gc.ca/2016/docs/tm-mf/si-rs-en.html#_Toc445892219

Draft Legislation

http://www.fin.gc.ca/drleg-apl/2016/ita-lir-0716-eng.asp

Explanatory Notes on Taxation of Switch Fund Shares. See Clause 2, page 4

http://www.fin.gc.ca/drleg-apl/2016/ita-lir-0716-n-eng.pdf

Why This Change?

The result should be fair treatment of all mutual fund holders, whether they own shares or units.

It closes a loophole, where deferral was an accidental benefit of provision in the Income Tax Act for convertible corporate shares found in S. 51; and tax free provisions in the Income Tax Act S. 85, 85.1, 86 and 87.

How Will It Affect Me?

Switches that result in gains and losses will no longer be deferred until the eventual sale out of the mutual fund corporation.

Gains (or losses) previously deferred affected the calculation of Adjusted Cost Base (ACB) at each switch. You had a choice to claim or not. ACB at the end of day, January 1, 2017 will be used to calculate the gains and losses on dispositions after January 1, 2017.

Of Course, There Must Be Exceptions

Yes, exceptions will be made if the shares received in exchange differ only in respect of management fees or expenses when the switch is between different series of shares within the same class.

The explanatory notes to the budget describe two exceptions:

1) Shares are exchanged to change from voting to non-voting

2) Shares are exchanged within a Class, for example, when someone qualifies to transfer from Series A to Series B of Class C where net asset value is the same

Warning For Shareholders And Tax Preparers

Mutual Fund Corporations or brokers may report ACB. They can’t know what you filed for tax purposes. Even if you advised them you reported losses, which are advantageous to carry back against capital gains for three years, they likely did not make the changes. Their statement fine print says it’s up to you to calculate your own ACB. Hire an accountant and be prepared to produce all account statements since inception.

What Can I Do?

Interested parties are invited to provide comments on the draft legislative proposals by September 27, 2016. Please send your comments to fin.legislation-taxation-legislation-taxation.fin@canada.ca or write to:

Tax Policy Branch
Department of Finance
90 Elgin Street
Ottawa, Ontario K1A 0G5

Eileen Reppenhagen, Certified QuickBooks ProAdvisor writes about, and presents webinars/workshops on keeping records for tax purposes. Find more information at www.taxdetective.ca