In its spring budget, the federal government announced an end to the ability to switch between classes of a mutual fund corporation without triggering a disposition for tax purposes. Those provisions permitted taxable investors to defer recognition of any capital gain on their investment until they disposed of the mutual fund corporation shares altogether. The rules allowed switches between classes of a mutual fund corporation to be treated as tax deferred share exchanges. Under the proposed changes, any such class to class switch will now be treated, for tax purposes, like other fund to fund switches, or for that matter any other rebalancing of the securities in an investment portfolio.
On June 29, 2016, the Department of Finance released for consultation the draft legislation which will implement the new rules (the relevant provisions are helpfully titled “Taxation of Switch Fund Shares”). The draft legislation contains some exemptions, so that a switch between series of the same class will continue to be tax deferred. In addition, share exchanges taking place in the course of a reorganization or amalgamation will continue to be eligible for rollover treatment. Issuers will need to carefully consider the legislation with their tax counsel to ensure that any such exchange or disposition will meet the conditions for deferral.
Department officials have provided additional relief in terms of transition. When the budget announcement was made, a six month transition period was contemplated, with the new rules coming into force in October 2016. The draft legislation has extended this timeline, so that the new rules would not apply until after 2016. Comments must be submitted by September 27, 2016.