Canada: Government Releases Revised Transitional Rules For 2013

Last Updated: July 19 2013
Article by Carl Irvine, Michael Friedman, Ryan Morris and David Wentzell


In the 2013 Federal Budget, the Government targeted a category of transactions, dubbed "character conversion transactions", which the Department of Finance ("Finance") contended inappropriately used "derivative forward agreements" ("DFAs") to convert investment returns that would otherwise be taxable as ordinary income into capital gains, only half of which would be subject to tax (the "Character Conversion Proposals") (for further information on the original Character Conversion Proposals, please see our earlier bulletin: "Budget 2013: Deconstructing Derivatives – Capturing "Character Conversion Transactions").

Subsequent to the release of the 2013 Federal Budget, Finance indicated that the Character Conversion Proposals were intended to offer grandfathering relief in respect of certain DFAs ("Existing DFAs") entered into before March 21, 2013 (the "Budget Date"), provided (i) the terms of such Existing DFAs were not extended, and (ii) the notional amounts of such Existing DFAs were not increased (i.e., "upsized"). In addition, Finance further indicated that the Character Conversion Proposals were intended to be interpreted as providing taxpayers with a 180 day grandfathering period in respect of the first DFA entered into after March 20, 2013 - in effect, deferring the full application of the Character Conversion Proposals for at least 180 days after the Budget Date. However, the limited grandfathering relief offered under the original Character Conversion Proposals, and the uncertainty that arose in interpreting the scope of the proposals, raised concerns about whether investment funds that were parties to DFAs would have sufficient time to transition their Existing DFAs into new investment structures, and whether funds that had upsized their DFAs (or would upsize their DFAs in the normal course of their administration) would continue to be entitled to grandfathering relief.

Proposed new grandfathering rules

In response to concerns raised by the investment fund community, Finance released a backgrounder on July 11, 2013 (the "Backgrounder"), which outlined changes to the Character Conversion Proposals that the Government intends to introduce that will extend the grandfathering relief to be offered in respect of certain DFAs until the end of 2014, and will permit some "upsizing" of Existing DFAs, albeit in very restricted circumstances.

The most significant change announced by Finance in the Backgrounder is an extension of the grandfathering relief to be offered in respect of the duration of Existing DFAs. Specifically, the terms of Existing DFAs may now generally be extended until the end of 2014, and new DFAs that are entered into as part of a series of agreements that includes an Existing DFA may now generally be entitled to grandfathering relief, provided the series concludes, and the last DFA in the series is settled, prior to 2015. However, in both cases, grandfathering relief will only be available where the DFAs comply with certain "growth limits" (as discussed below). The effect of this change is to generally give taxpayers until at least the end of 2014 to unwind their existing DFAs (provided they comply with the newly announced "growth limits").

Existing DFAs that were originally scheduled to terminate after 2014 will continue to be entitled to grandfathering relief after 2014 (provided the terms of such agreements are not extended). However, such DFAs must comply with the newly announced "growth limits". Moreover, under the new proposals set out in the Backgrounder, grandfathering relief will now ultimately expire on March 21, 2018 (i.e., 5 years after the Budget Date), regardless of the termination date of the Existing DFA.

As noted above, grandfathering relief will only be available for Existing DFAs that adhere to special "growth limits", as more particularly set out in the Backgrounder. In order to adhere to the newly announced "growth limits", the "notional amount" of an Existing DFA (i.e., the value of the relevant reference asset under the DFA) after March 20, 2013 cannot exceed the total of:

(a)    its notional amount immediately before the Budget Date (the "Original Notional Amount");

(b)    any net increases in the notional amount of the DFA after March 20, 2013 that arise as a consequence of changes in the value of the underlying reference asset of the DFA (and not new investments in the DFA);

(c)    the amounts of any settlements of the DFA that occurred after March 20, 2013, which are immediately "reinvested" in the DFA or "invested" in a replacement DFA;

(d)    the amount of any cash held by the taxpayer immediately before the Budget Date that can reasonably be considered to have been committed to the DFA before the Budget Date;

(e)    any increase in the DFA after March 20, 2013 arising from the investment of the proceeds from the exercise of an over-allotment option in respect of an offering of securities where the option was granted before the Budget Date; and

(f)    increases in the notional amount not described above, up to a maximum of 5% of the Original Notional Amount, where the increases occurred after March 20, 2013 and before July 11, 2013.

Finally, the Backgrounder provided that the scope of the available grandfathering relief would be extended to accommodate the merging of investment funds that are each parties to Existing DFAs. In considering the combination of such funds, special consideration will need to be devoted to the implications of the merger where the scheduled termination dates of Existing DFAs of the predecessor funds are not substantially similar.1


Although some of the proposed changes set out in the Backgrounder, particularly the extension of the grandfathering period for many Existing DFAs, are welcome, the extended relief announced by Finance in the Backgrounder is ultimately rather narrow.

The proposed "growth limits" were clearly intended to limit, with narrow exceptions, new investments in Existing DFAs. For example, the ability to increase the notional amount of an Existing DFA by up to 5% of the Original Notional Amount, as described in paragraph (f) (above), only applies to increases that occurred before July 11th, 2013. We understand that this provision was intended principally to provide relief for funds that upsized their DFAs shortly after the Budget Date and before Finance issued supplementary guidance as to the scope of the Character Conversion Proposals. Since many funds with Existing DFAs stopped accepting new investments following the Budget Date, this change likely provides only limited relief.

We also note that the description of the applicable "growth limits" in the Backgrounder may invite interpretations that differ from the scope of the limitations that may have been intended by Finance. For instance, the Backgrounder states that the "growth limits" will accommodate increases in the notional amount of a DFA by "the amounts of any settlements of the [DFA] after March 20, 2013 that are reinvested in the [DFA]... or are invested in a replacement [DFA]". While one could interpret this statement as permitting a fund that has previously partially pre-settled a DFA in order to facilitate a redemption of units to subsequently reinvest in the DFA, provided the notional amount of the DFA does not increase beyond the Original Notional Amount, we understand that the Backgrounder was not intended to be interpreted in this manner. Rather, we understand that the relevant legislation will ultimately provide that an increase in the notional amount of a DFA by an amount equal to an earlier settlement (or an investment in a replacement DFA) will only be permitted where the increase (or reinvestment) immediately follows the earlier settlement (as described in paragraph (c), above).

We understand that draft legislation reflecting the latest proposed amendments described in the Backgrounder will likely not be released until the end of the summer. Accordingly, caution should be exercised in applying the relief announced in the Backgrounder to the circumstances of a particular investment fund.

1 Finance is proposing to permit the upsizing of DFAs arising as a result of a merger of investment funds, provided (i) the term of the "surviving" DFA does not exceed the term of either of the predecessor DFAs, and (ii) the notional amount of the "surviving" DFA does not exceed the combined notional amounts of the predecessor DFAs.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2013 McMillan LLP

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Carl Irvine
Ryan Morris
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions