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Mutual Fund Trusts — New Relief for Allocation Rules

Mutual Fund Trusts — New Relief for Allocation Rules

Many mutual fund trusts may welcome new relief to the allocation to redeemer restrictions previously announced in the 2019 federal budget.

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In the budget, Finance proposed restrictions on mutual fund trusts related to the allocation of capital gains or income or both to redeeming unitholders (sometimes referred to as the "allocation to redeemers" methodology). Finance released revised draft legislation for comment on July 30, 2019 that includes the allocation to redeemer restrictions previously announced in the budget as well as two relieving changes. Specifically, Finance has now introduced a reasonable efforts safe harbor for computing a redeemer's cost amount, and a one-year deferral in the coming into force date for restricting exchange traded funds (ETFs) allocating capital gains to redeemers.

Finance's proposed deferral to the application of the rules for ETFs will apply to the capital gains measures under the allocation to redeemers legislation, and is based on the premise that ETFs are unable to benefit from the legislation as proposed, unlike conventional mutual funds. Thus, ETFs really only have the "capital gains refund" mechanism (CGRM) to manage the risk of double taxation within the fund and at the redeeming unitholder level, despite certain drawbacks associated with this mechanism. Finance will accept comments on the draft legislation until October 7, 2019.

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