Canada: The New Trust Loss Restriction Rules And Investment Funds

Last Updated: January 28 2014
Article by Craig J. Webster, Laura M. White and Stephanie Wong

Most Read Contributor in Canada, September 2016

In the 2013 federal budget, the Canadian government announced its intention to extend the tax loss restriction rules to trusts. Previously, loss restriction rules applied only to corporations when control was acquired. The new trust loss restriction rules were enacted on December 12, 2013, with retroactive effect beginning after March 20, 2013. Investment funds (including pooled funds, mutual funds and exchange-traded funds) are not exempt from the application of the rules.

This bulletin describes the new trust loss restriction rules and identifies implications for the investment fund industry. The rules present some significant operational challenges.

Trust Loss Restriction Rules

The trust loss restriction rules will apply each time a trust is subject to a "loss restriction event", which will occur each time a person (including a partnership) becomes a "majority-interest beneficiary" of the trust and each time a group of persons becomes a "majority-interest group of beneficiaries" of the trust. The rules are found in new section 251.2 of the Income Tax Act (Canada) ("ITA").

A "majority-interest beneficiary" of a trust is a person whose beneficial interest in the income (or capital) of the trust, together with the beneficial interests of any affiliated persons in the income (or capital) of the trust, is greater than 50% of the fair market value of all the beneficial interests in the income (or capital) of the trust. A "majority-interest group of beneficiaries" is a group of persons each of whom has a beneficial interest in the trust such that (i) if one person held the beneficial interests of all of the members of the group, that person would be a majority-interest beneficiary of the trust, and (ii) if any member of the group were not a member of the group, the majority-interest beneficiary test in (i) would not be met. For this purpose, "person" includes a partnership.

The rules will not be triggered when a person ceases to be a majority interest beneficiary. Also, an acquisition of a beneficial interest in a trust by a person affiliated with a majority-interest beneficiary will not trigger the rules. There are a number of other special interpretive rules, deeming rules and anti-avoidance rules included in section 251.2 of the ITA. Some technical anomalies have been identified.

Consequences of Loss Restriction Rules

A loss restriction event triggers the following tax consequences for a trust:

  • The current taxation year of the trust will generally be deemed to end at the beginning of the day on which the loss restriction event occurred.
  • The trust will be deemed to dispose of any non- depreciable capital property with an accrued loss for its fair market value. The trust may elect in its tax return to realize capital gains on property with accrued gains.
  • Any undeducted net capital losses and non-capital property losses of the trust for taxation years before the loss restriction event will be extinguished. Net capital losses and non-capital property losses of the trust realized after the loss restriction event cannot be carried back to before the loss restriction event.
  • Any undeducted non-capital business losses of the trust for taxation years before the loss restriction event can be carried forward, subject to certain restrictions.

Implications for the Investment Fund Industry

The loss restriction rules can be expected to have a significant and adverse impact on investment trusts ("Funds") from an operational, compliance and tax perspective.

  1. Unexpected Event — Many times a loss restriction event will not be anticipated and cannot be controlled. The event can occur because of subscriptions, redemptions or trades (or a combination). Further, the deemed year-end effectively occurs on the day before the triggering subscriptions/redemptions/trades.
  2. Distributions for Deemed Year-End Required — To avoid a tax liability, a Fund must calculate and distribute its net income and net realized capital gains for the short (and potentially unexpected) taxation year. The declaration of trust for a Fund traditionally provides for an automatic distribution at the natural year-end of a Fund. It may (or may not) provide for the automatic distribution on a deemed year-end.
  3. Potential Pricing Error — If an automatic distribution and reinvestment on a deemed year-end is not immediately followed by an automatic consolidation of units, the net asset value per unit of the Fund will be overstated. There will be a pricing error.
  4. T3 Returns Required for Deemed Year-End — The Fund will be required to file a T3 return within 90 days of the deemed year-end. This will be important because of the need to elect to realize capital gains in order to use capital losses.
  5. T3 Slips Must be Issued for Deemed Year-End — The Fund will be required to issue T3 slips to investors within 90 days of the deemed year-end, unless administrative relief is obtained.
  6. Timeframe for Qualifying as a "Mutual Fund Trust" — The time frame for a Fund to qualify as a "mutual fund trust" under the ITA will be shortened if a loss restriction event occurs after the time the Fund is created and before the first natural year-end of the Fund. This will be a very real issue for exchange traded Funds and other Funds that are not seeded by the Fund's initial unitholder. The Fund will have 90 days after the deemed year-end to qualify. The Fund would have to ensure that the election to be regarded as a "mutual fund trust" since inception is included in the tax return for the deemed year-end.
  7. Taxable Mergers — In the context of a taxable merger, the rules will operate to extinguish losses of a continuing Fund that is smaller than the terminating Fund.
  8. Tax-Deferred Mergers — Some technical anomalies may exist between the qualifying exchange rules and the new loss restriction rules.
  9. Fund Structuring — Certain Fund structures will be prone to the serial application of the loss restriction rules with the resulting year-end compliance and repeated extinguishment of losses. These Fund structures include pooled Funds with a small number of investors, Funds that have a few large investors, certain fund-on- fund structures and reference Funds. These Fund structures may be less viable in the future.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.