Canada Revenue Agency Rules On Novel Mutual Fund Trust Reorganization

On June 30, 2026, the Canada Revenue Agency (CRA) published a favourable advance income tax ruling¹ on a novel trust reorganization that may provide greater flexibility to reorganize mutual fund trusts to implement “fund-on-fund” structures.

The fund family that was the subject of the ruling had five original mutual fund trusts with different investment mandates (the Original Funds). The manager of the Original Funds (the Manager) wanted to establish an aggregator top fund (the Aggregator Fund) that would invest in each of the Original Funds and permit certain unitholders of those funds to transition to the Aggregator Fund on a tax-deferred or “rollover” basis. The purpose of the reorganization was to simplify the administration associated with the rebalancing of investments in the Original Funds for the participating unitholders to their target investment allocations.

The reorganization was accomplished through two successive fund splits under subsection 107.4(1) of the Income Tax Act (Canada) (the Tax Act) that resulted in five new mutual fund trusts (the New Fund As) holding units in the Original Funds, followed by a merger under subsection 132.2 of Tax Act of the New Fund As with the Aggregator Fund. Non-participating unitholders remained direct unitholders in the Original Funds; participating unitholders became unitholders of the Aggregator Fund that in turn became a unitholder of each of the Original Funds.

Two aspects of the reorganization are of particular interest:

• The first aspect is that by combining two successive fund splits under subsection 107.4(1) of the Tax Act, participating unitholders in each of the Original Funds effectively rolled their units in those funds into new upper tier holding trusts. Had the reorganization stopped at this step (and the final merger was not completed), participating unitholders would have become unitholders of their respective New Fund As that in turn had become unitholders of their respective Original Funds, which was equivalent to the participating unitholders of one particular fund rolling their units into a corresponding new top fund (i.e., to create a fund-on-fund structure).
• The second aspect is the final merger, which combined all the ownership interest in the New Fund As in the Aggregator Fund, and thereby allowed the participating unitholders to hold a single investment through the Aggregator Fund.

Mechanically, the reorganization involved the following steps.

As a preliminary step, the Manager settled the New Fund As, which corresponded to the Original Funds, and caused four of the New Fund As to settle four new funds (the New Fund Bs). The Manager also settled the Aggregator Fund.

Next, pursuant to subsection 107.4(1) of the Tax Act, each of the Original Funds implemented a partial split, whereby each of the Original Funds transferred to its corresponding New Fund A an undivided co-ownership interest in all of its assets commensurate with the portion of units held by the participating unitholders and, in exchange, each New Fund A issued units to the participating unitholders. The units of the Original Funds held by the participating unitholders were cancelled.

At this point in the reorganization, the participating unitholders ceased to be unitholders of the Original Funds and they became unitholders of the corresponding New Fund As. The non-participating unitholders remained unitholders of the Original Funds and they continued to hold the same undivided co-ownership interests in the Original Funds as they did at the outset of the reorganization. As a result of this partial split, the New Fund As obtained an undivided co-ownership interest in all the assets formerly owned by the Original Funds commensurate with the portion of units held by the participating unitholders in the Original Funds at the outset of the reorganization.

This first step in the reorganization followed the usual use of subsection 107.4(1) of the Tax Act. The ruling addressed some of the practical challenges with mutual fund trusts using this provision, such as how to settle the New Fund As, New Fund Bs and the Aggregator Fund (paragraphs 12 and 14); how to avoid creating liabilities in the period leading up to the split date (paragraph 15); how to address liabilities (paragraph 16); how to flush out income and capital gains realized up to the split date (paragraph 17); how to address net asset value (paragraph 18); and how to effect the transfer (paragraph 19). As a practical matter, the first step on its own would not have been a viable longer-term solution because the undivided co-ownership interests in all the assets owned by the Original Funds had been split, and it would have been nearly impossible for the Manager to operate on that basis.

In the second step of the reorganization, all the assets of four of the New Fund As (i.e., the undivided co-ownership interest in the assets formerly held by the Original Funds) were transferred to the applicable New Fund Bs under subsection 107.4(1) of the Tax Act. In exchange, the New Fund Bs issued additional units to the applicable New Fund As. Participating unitholders remained unitholders of the applicable New Fund As.

In the third step of the reorganization, all the assets of the New Fund Bs (i.e., the undivided co-ownership interests in the assets formerly held by the Original Funds) were transferred to the applicable Original Funds under subsection 107.4(1) of the Tax Act. None of the New Fund Bs received consideration for the asset transfers; however, each of the Original Funds issued additional units to the applicable New Fund As, such that the value of the units issued to the New Funds As was equal to the undivided co-ownership interests in the assets formerly held by the Original Funds. The outstanding units of the New Funds Bs were cancelled for no consideration, and the New Fund Bs were terminated.

At this point in the reorganization, the undivided co-ownership interests in the assets of the Original Funds that the participating unitholders held at the outset of the reorganization had caught up with each other and merged back to being complete interests; each non-participating unitholder continued to hold the same units in the Original Funds that such unitholder held at the outset of the reorganization; each participating unitholder held units of the applicable New Fund As; and the applicable New Fund As held units of the Original Funds equal to the ownership interest of the participating unitholders at the outset of the reorganization.

Finally, the New Fund As merged with the Aggregator Fund. Pursuant to section 132.2 of the Tax Act, each New Fund A transferred all its assets to the Aggregator Fund and, in exchange, the Aggregator Fund issued units to the New Fund As. The New Fund As subsequently redeemed all their units in exchange for transferring to the participating unitholders units of the Aggregator Fund, and then the New Fund As were terminated.

Summary

This favourable ruling issued by the CRA permitted a reorganization of mutual fund trusts whereby holdings of the participating unitholders were transferred to a holding trust on a tax-deferred basis. In so doing, the Manager’s administrative burden was significantly reduced by allowing the rebalancing of the holdings of the participating unitholders to be completed within the Aggregator Fund on a consolidated basis.

While this ruling may provide greater flexibility to reorganize mutual fund trusts by imposing a holding trust above the mutual fund trusts on a tax-deferred basis, there are challenges with implementing such a reorganization, including that the principal stock exchanges must be closed at the time the reorganization is being implemented to ensure that there is no change in relative fair market value as the steps are undertaken; and transfer agents and custodians must be willing to accommodate transfers of undivided co-ownership interests in securities.

Footnote

1. CRA document no. 2023-0962031R3.

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