The Liberal Government’s first Budget last March had bad news for owners of certain investment vehicles, specifically corporate class mutual funds and linked notes.
It appears there may be a three month delay in the implementation of negative tax changes on the corporate class mutual funds. This just puts off the tax changes to January 1, 2017, but at least there will only be one tax treatment in one tax year. I base this on one line from a July 29, 2016 CRA Explanatory Note that says, “These rules apply to transactions and events that occur after 2016.” (www.fin.gc.ca/drleg-apl/2016/ita-lir-0716-eng.asp)
Kudos to the government and CRA for coming to their senses about having a major tax change effective September 30, as originally announced. It makes no sense to have such a change take place part way through a tax year instead of at year-end, except in the rare event when they wanted to catch us unaware so they make a change effective midnight on Budget night.
This is not one of those cases, so I still have to ask, what were they thinking?
At any rate, let’s look at how this might affect you, if you own any corporate class mutual funds, which the government calls “switch funds”. These are funds that are legally organized as corporations (instead of trusts), with different classes of shares.
Each class of shares can provide ownership of a different underlying mutual fund, invested in a different asset category. These may range from risk-free money market funds, through bonds to stocks, which can be further subdivided by country, style of management, etc.
The big advantage was tax deferral. An investor could switch from one class to another without triggering a capital gain. The exchange of shares was done at original cost, not current market value.
For example, therefore, investors could be exposed 100% to equities while they are young, gradually moving to a balanced approach as they got older, and then even to a very conservative portfolio if they wished, as they moved into retirement, all without triggering taxable capital gains.
The 2016 Budget eliminates this opportunity, and means that any gain at the time of the switch must be declared, and half of that will be taxable..
Institutions create these products for retail clients, who don’t have the scale or expertise to be able to do this directly on their own.
The financial institutions believe that the Budget changes are unfair, because it puts these accessible structures and small investors at a disadvantage to larger investors, who can continue with the tax deferral benefits if they are able to put together an identical structure by using options on their own. (This argument cannot be made by the manufacturers of CCFs.)
I understand from industry sources that much lobbying has taken place to roll back the changes on at least some of these notes, and now to delay the changes the end of the calendar year.
Stay posted… we don’t yet know the last word on the timing of the linked notes changes. In the meantime, if you may be affected by any of these things, talk to your investment and tax advisors. You still have a chance to adjust your asset allocation in corporate class mutual funds, and to sell certain linked notes for capital gains treatment, rather than fully taxable income treatment.
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is a Certified Financial Planner and senior advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.