The federal government is proposing to extend the rules governing mutual fund mergers in this year's budget to facilitate the reorganization of a mutual fund corporation that's structured as a switch corporation (also known as corporate class funds) into multiple mutual fund trusts, on a tax-deferred basis.
In addition, the government is proposing to allow insurers to effect tax-deferred mergers of segregated funds to provide consistent treatment of mutual fund trusts and seg funds. (The rules for segregated funds would parallel the mutual fund merger rules.)
The Income Tax Act contains specific rules to facilitate the reorganization of certain investment funds on a tax-deferred basis. However, these rules currently apply in only a limited number of circumstances.
Here's a closer look at the proposals:
Reorganization of mutual fund switch corporation into mutual fund trusts
Canadian mutual funds can be in the form of a trust or a corporation. Although most mutual funds are structured as mutual fund trusts, some are structured as mutual fund corporations. Switch corporations are mutual fund corporations with multiple classes of shares, in which typically each class is a distinct investment fund.
In last year's budget, the government made certain changes that eliminated a tax benefit associated with switch funds, sometimes known as corporate-class funds. As a result of this change, mutual fund switch corporations are now seeking to reorganize as multiple mutual fund trusts on a tax-deferred basis.
The Income Tax Act contains special rules to facilitate the merger of mutual funds on a tax-deferred basis, under which two mutual fund trusts can be merged or a mutual fund corporation can be merged into a mutual fund trust. These rules permit mutual funds to be tax-efficiently reorganized so as to achieve economies of scale and avoid the duplication of expenses. However, these rules do not provide for the reorganization of a mutual fund corporation into multiple mutual fund trusts.
This measure will apply to qualifying reorganizations that occur on or after Budget Day.
Read: Budget 2017
Segregated fund mergers
Seg funds are life insurance policies that have many of the characteristics of mutual fund trusts. Unlike mutual fund trusts, income tax rules do not permit seg funds to merge on a tax-deferred basis.
It's proposed that, for non-capital losses that arise in taxation years that begin after 2017, a seg fund be able to carry over those losses and apply them in computing its taxable income for taxation years that begin after 2017. The use of these losses will be subject to the normal limitations for the carrying forward and back of non-capital losses. As is the case with the mutual fund merger rules, the use of these losses will be restricted following a seg fund merger.
To ensure that the life insurance industry has an opportunity to provide comments on these proposed rules, this measure will apply to mergers of seg funds carried out after 2017 and to losses arising in taxation years that begin after 2017.