For several decades, corporations have been subject to the Income Tax Act’s “loss streaming” rules, which restrict a corporation’s ability to carry forward losses and certain credits following an acquisition of control of the corporation. In the absence of these rules, a profitable corporation would be able to acquire a corporation with accrued losses, amalgamate with it, and carry the accrued losses forward to shelter future income. The loss streaming rules limit the effectiveness of this kind of transaction in a number of ways, including by preventing a corporation from carrying forward capital losses after an acquisition of control, and by only allowing non-capital losses to be carried forward and deducted against income from the same business or a similar business as the business which generated the losses.

While these rules historically applied only to corporations, recent legislative changes have extended their applicability to trusts. We would like to draw readers’ attention to a number of consequences of the amendments, particularly as they may affect investment fund trusts.

The new “Loss Restriction Rules” 

The extension of the loss-streaming rules to trusts was announced by the Minister of Finance in Budget 2013. Legislation implementing the necessary changes (the Loss Restriction Rules) was enacted on December 12, 2013, retroactively to March 21, 2013. Although the Loss Restriction Rules are targeted at preventing a very specific type of transaction, they will apply broadly to all trusts. Significantly, they could have important implications for the everyday operation of investment funds that are structured as trusts.

The Loss Restriction Rules apply where a trust is subject to a “loss restriction event”. A loss restriction event occurs where a person becomes a majority-interest beneficiary of the trust or a group becomes a majority-interest group of beneficiaries of the trust. A majority-interest beneficiary of a trust is a beneficiary (including a partnership) that, together with all affiliated persons, has an interest in the income or capital of the trust that is greater than 50% of the fair market value of all the interests in the income or capital of the trust. Generally speaking, a majority-interest group of beneficiaries is a group of beneficiaries that, if all their interests were aggregated, would hold greater than 50% of the fair market value of all the interests in the income or capital of the trust, provided that this threshold would still be met if any member of the group were not a member of the group. Several other supporting and interpretive rules exist, including rules intended to prevent transfers between certain affiliated persons from giving rise to a loss restriction event. A loss restriction event will not be triggered when a person ceases to be a majority-interest beneficiary. 

Consequences of the new rules

When a trust becomes subject to a loss restriction event, several consequences will occur which can have material significance for an investment fund:

  • Expiry and use of certain losses: on a loss restriction event, any accrued net capital losses of a trust will expire and any net capital losses realized after the event cannot be carried back to a time before the event. As well, the trust will be forced to immediately recognize any accrued by unrealized losses on non-depreciable capital property. If the trust changes its business subsequent to the loss restriction event, it may be unable to deduct business losses accrued prior to the loss restriction event.   
  • Deemed year-end: on a loss restriction event, the current taxation year of the trust will be deemed to end at the beginning of the day on which the event occurred. From a compliance perspective, the trust will need to make its regular end-of-year filings at the end of the short taxation year. This will include filing its T3 Return and issuing T3 slips to unitholders within 90-days of the deemed year end. A mutual fund trust which is subject to a loss restriction event in its first taxation year will also need to ensure that it files the election to be a mutual fund trust from the beginning of its first taxation year in its tax return for the short taxation year. The short taxation year will also shorten the amount of time that the trust has to meet the requirements to qualify as a mutual fund trust, since the requirements must be met within 90-days of the end of the trust’s first taxation year (provided the proper election is filed). As well, investment funds will need to consider whether their automatic distribution mechanism (which generally distributes all income remaining at the end of a taxation year to unitholders to ensure that the fund itself does not become liable to tax) will apply to cause a distribution after a short taxation year. Similarly, assuming that the additional distribution is normally made in units, it will be necessary to ensure that the distribution is automatically followed by a consolidation of units or a recalculation of the net asset value of the outstanding units, as appropriate.        
  • Mergers: the new rules will create complexities in the context of mergers (both taxable and tax-deferred) between trusts, and may restrict the ability to carry forward losses of one or more of the predecessor trusts.


The Loss Restriction Rules are detailed and complex, and could have significant implications for investment funds that operate as trusts and that become subject to a loss restriction event.  For existing funds, managers should consider whether, based on subscriptions, trades and redemptions of units, a person or group of persons could acquire more than 50% of the capital or income entitlements of the trust.  To be proactive, on the creation of a trust, measures may need to be taken regarding ownership restrictions (similar to restrictions commonly found in a declaration of trust for a mutual trust which prohibit non-residents from owning a majority of the trust units) to ensure that a loss restriction event can be avoided.  In addition, managers should take measures to ensure that, should the trust become subject to a loss restriction event, it will be able to deal with the resulting administrative requirements.