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Canada: Proposed relief from allocation rules, mutual fund trusts

Canada: Proposed relief from allocation rules

The Department of Finance in the 2019 budget 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).

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The Department of Finance in late July 2019 released a revised version of draft legislation that includes two relief measures—in addition to the allocation to redeemer restrictions. The two relief provisions would provide:

  • A “reasonable efforts” safe harbor for computing a redeemer's cost amount
  • A one-year deferral in the effective date for restricting exchange traded funds, allocating capital gains to redeemers

The proposed deferral to the application of the rules for exchange traded funds would apply to capital gains measured under the allocation-to-redeemers proposed legislation. The deferral would be based on the premise that exchange traded funds are unable to benefit from the legislation (as proposed), unlike conventional mutual funds. Thus, exchange traded funds would in fact only have the “capital gains refund” mechanism to manage the risk of double taxation within the fund and at the redeeming unitholder level, despite certain drawbacks associated with this mechanism. 

Finance is accepting comments until 7 October 2019.

Read an August 2019 report [PDF 182 KB] prepared by the KPMG member firm in Canada

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