Goodbye to tax-free switches in corporate class funds

By Andrew Rickard | March 23 2016 01:58PM

The Liberals are putting an end to the tax deferral benefit available in mutual fund corporations.

Investors typically buy shares in mutual fund corporations, also known as switch funds, because the structure allows them to rebalance their portfolios and sell units in one class and buy units of another without triggering a taxable event. The budget says that this benefit is going to be eliminated for dispositions that take place after September 2016.

Disposition at fair market value

"To ensure the appropriate recognition of capital gains, Budget 2016 proposes to amend the Income Tax Act so that an exchange of shares of a mutual fund corporation (or investment corporation) that results in the investor switching between funds will be considered for tax purposes to be a disposition at fair market value," reads the Supplementary Information document provided alongside the budget. "The measure will not apply to switches where the shares received in exchange differ only in respect of management fees or expenses to be borne by investors and otherwise derive their value from the same portfolio or fund within the mutual fund corporation (e.g., the switch is between different series of shares within the same class)."

Industry expresses concerns

In its response to the budget, the Investment Funds Institute of Canada (IFIC) expressed concerns about the implications this measure will have for the mutual fund industry and its clients. "The announced policy holds potential impact for a large number of investors, including some of modest means," said IFIC president and CEO Joanne De Laurentiis. "We will be analysing the potential impact and seeking further discussions with Finance Canada in the months ahead."