NEW RULES FOR “SWITCH FUNDS”

October 7, 2016
All Tax Articles
NEW RULES FOR “SWITCH FUNDS”

Mutual funds can be structured either as trusts or corporations. Most are trusts, but a significant number are corporations.

If you own units in a mutual fund trust and wish to exchange those units (old units) for units in another mutual fund (new units), even if within the same “group” of mutual funds, you will have a deemed disposition of the old units at their fair market value. This may result in a capital gain or capital loss.

On the other hand, a mutual fund corporation can issue different classes of shares in the corporation, with each class representing a different class of investment. Under various corporate “rollover” provisions in the Income Tax Act, you can exchange shares in one class for shares in another class without tax consequences. In street parlance, these types of funds are called “switch funds”, since you can switch between funds without triggering any tax.

Unfortunately, the 2016 federal Budget put an end to the favourable tax treatment of switch funds. Under the Budget changes, if you exchange your shares of one class for shares of another class of the mutual fund corporation, you will have a deemed disposition of the former shares at fair market value. (There are some limited exceptions.)

This change effectively levels the playing field between mutual fund trusts and mutual fund corporations.

The changes will apply to exchanges or dispositions of shares occurring after 2016.

This letter summarizes recent tax developments and tax planning opportunities from a third-party affiliate; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this blog post, which are appropriate to your own specific requirements. Please feel free to get in touch with Lee & Sharpe to discuss anything detailed above, we would be pleased to help.
Adam H. Sharpe

Hello, my name is Adam Sharpe, I am a partner at Lee & Sharpe.

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