Measures introduced in the 2016 federal budget
proposed that exchanging units of one corporate class fund for
another would no longer be tax deferred, starting October 1, 2016.
This proposal was highlighted in our post-budget release titled
2016 Federal Budget impact on investors. Draft legislation
was released on July 29, 2016, which extended the effective date of
this change to January 1, 2017.
Canadian mutual funds can be in the legal form of a
trust or a corporation. While most funds are structured as mutual
fund trusts, some are also structured as mutual fund corporations
(otherwise known as corporate class mutual funds or 'switch
For those investing outside of their registered
plans, one of the key benefits of corporate class mutual funds was
the ability to exchange shares of one class of the mutual fund
corporation for shares of another class on a tax deferred basis.
Investors were essentially able to switch between funds without
triggering capital gains or losses. A capital gain (or loss) did
not have to be reported recognized as ported until the holding in
the corporation was disposed of.
In the July 29 draft proposals, exchanges of shares
within the corporate class structure that occur after 2016 will be
considered a fair market value disposition for tax purposes. This
will eliminate the tax deferral and trigger a capital gain if the
investment has risen in value at the time of the switch.
There are two exceptions to the new rules where tax
deferred switching will continue to be allowed if:
the exchange of shares is the result of the mutual fund
corporation undergoing a capital reorganization or amalgamation,
provided all shares of a particular class are exchanged;
the shares exchanged are from the same share class but are from
a different series (e.g., T-series, A-series). In this situation,
the underlying investments remain the same, but the series is
distinguished by different fees or other share attributes. To
qualify for this exception, the different series of the share class
must be recognized as a single investment fund under Canadian
If you hold corporate class mutual fund investments
as part of your non-registered portfolio, you should review your
holdings and consider if you need to make any strategic asset
allocation changes before the end of 2016.
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.
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