Firms offering products that follow tax-efficient strategies are assessing the impact of the proposals
Two firms are reviewing certain funds they offer that could potentially be impacted by tax changes proposed during this week’s federal budget.
Among other priorities, the government’s budget 2019 sought to address inequality in Canada’s tax system through an array of proposed changes. That includes closing a loophole that lets mutual fund trusts use “a method of allocating capital gains or income to their redeeming unitholders … [that] inappropriately defers tax or converts fully taxable ordinary income into capital gains taxed at a lower rate.”
A succeeding bullet point discusses improvements to “existing rules meant to prevent taxpayers from using derivative transactions to convert fully taxable ordinary income into capital gains taxed at a lower rate.”
Following the announcement, Horizons ETFs announced that it is assessing the potential impact of proposed changes on a range of its ETFs; its statement listed more than 40 that could be affected. The firm said the changes would not apply to the ETFs until after their 2019 taxation years — ending either December 15 or December 31, depending on the fund.
“If the ETFs were to continue to carry on operations after their 2019 taxation years in the same manner as they do currently, the proposed legislative changes could potentially result in taxable distributions to the unitholders of the ETFs in respect of periods after their 2019 taxation years,” Horizons said. It is consulting with legal and tax advisors, as well as other industry participants, and is pursuing alternatives to mitigate any potential future tax impact on the ETFs or their unitholders.
BMO Nesbitt Burns also issued its own announcement, saying that it is assessing the impact of proposed changes on certain investment funds that it manages, namely:
- BMO Advantaged S&P/TSX Capped Composite TACTIC Fund
- BMO Advantaged Equal Weight Banks TACTIC Fund
- BMO Advantaged Equal Weight Oil & Gas TACTIC Fund
- BMO Advantaged Laddered Preferred Share TACTIC Fund
- BMO Advantaged Canadian Q-Model Fund
- BMO Advantaged U.S. Q-Model Fund
“If the proposed amendments were enacted as proposed, certain derivative agreements that the Funds have entered into will likely be treated as ‘derivative forward agreements’ for tax purposes,” the firm said. For the TACTIC funds, there may be a non-refundable tax payable, while the Q-Model funds could see an increase in the amount of taxable distributions to be made to their unitholders.
“The proposed amendments should not apply to existing derivative agreements of a Fund until after December 31, 2019 provided that the Fund satisfies the conditions for transitional relief,” the firm said. It added that to benefit from such relief — which will last until December 31 — it suspended the distribution of the funds until further notice.
