Budget 2017: What It Means To The Investment Management Industry

On March 22, 2017 ("Budget Day"), the Liberal government released its second budget ("Budget 2017"). While Budget 2017 may be known more for the anticipated tax measures that it did not contain rather than the ones that it did, consistent with recent federal budgets, several tax measures were directed at the investment management industry and its investors. It is clear from the government's statements in the budget papers that many of these tax measures were introduced to promote greater consistency and tax neutrality across investment fund vehicles and registered plans. These measures and other tax proposals announced in Budget 2017 that may be of interest to the investment management industry are summarized below.

Switch Corporation Wind-Ups

The Liberal government's first budget in 2016 ("Budget 2016") addressed what it perceived to be unfair tax advantages in multi-class mutual fund corporations or "switch corporations". As a result, effective January 1, 2017, investors in switch corporations are no longer able to exchange or "switch" shares of one class (or mutual fund) for shares of another class (or mutual fund) on a tax-deferred basis. This amendment to the Income Tax Act (Canada) (the "Tax Act") eliminated one of the main advantages for taxable investors of investing in a class of a switch corporation versus a mutual fund trust; particularly where similar investment strategies are available to investors in corporate and trust form.

Department of Finance ("Finance") officials have not been amenable to requests from the investment fund industry to permit switch corporations to wind-up individual classes (or mutual funds) that may be less suited to a corporate structure on a tax-deferred basis, or expand the availability of tax-deferred class to class mergers within a switch corporation.1 However, in response to requests from the investment fund industry, Budget 2017 does extend the existing tax-deferred "qualifying exchange" rules that are applicable to mutual fund trust mergers to a complete wind-up of a switch corporation.

In order to meet the proposed new "qualifying exchange" definition, all or substantially all2 of a switch corporation's (the "transferor") property must be transferred to one or more mutual fund trusts (the "transferees"). This requirement may raise a technical concern for switch corporations that are structured in whole or in part as "fund-of-funds" since all or substantially all of the property held by the transferor corporation are units of the transferee trusts. In similar trust-on-trust mergers, the Canada Revenue Agency ("CRA") has taken the position that the definition of a "qualifying exchange" will not be met.3 Given the number of switch corporation "fund-on-fund" structures, it is expected that Finance and/or CRA will provide the investment fund industry with some clarity on this issue in the near future.

Another technical issue that may pose challenges is that all of the shareholders of the switch corporation must be redeemed within 60 days following the transfer of all or substantially all of the switch corporation's property to the mutual fund trusts. While this time frame works for mergers of mutual fund trusts, concerns have been expressed by members of the investment fund industry that it may be too short of a...