Moore
October 2016 Newsletter

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.

Last modified on October 13, 2016 12:00 am