2017 Budget Overview: Specific Tax Provisions for Investors

Review specific tax provisions for investors announced by the Government in the 2017 Federal Budget.

CAPITAL GAINS INCLUSION RATES – good news, there are no changes here!  The 50% inclusion rate remains untouched in this budget for now at least.

CANADA SAVINGS BONDS – These investments will be phased out in 2017.

MUTUAL FUNDS – Mutual funds can be structured in a trust or a corporation.  Switch corporations are defined as mutual fund corporations with multiple classes of shares where each class is usually a distinct investment fund.   Mergers of two mutual funds into a trust or from a trust to a corporation can be done on a tax deferred basis; this treatment will continue.  However effective budget day, the reorganization of a mutual fund corporation into a multiple mutual fund trusts will also be allowed on a tax deferred basis in respect of each class of shares, if all or substantially all of the assets in the class are transferred. Also the shareholders must all be unitholders of the mutual fund trust.

SEGREGATED FUND MERGERS – Tax deferred mergers will be allowed to parallel the mutual fund rules above for mergers after 2017. As well for non-capital losses that arise in taxation years that begin after 2017, a segregated fund is able to carry over those losses and apply them to its taxable years that begin after 2017.

DERIVATIVES – Timing of recognition of capital gains and losses will change.   The value of derivatives comes from the value of an underlying interest, making its taxation complex.  An election will allow taxpayers to “mark to market” all eligible derivatives.  In addition a specific anti-avoidance rule will target straddle transactions .  A stop loss rule will defer the realization of any loss on the disposition of a position up to the unrealized gain on an offsetting provision.   Further detail will be provided in future editions of KBR.

ANTI-AVOIDANCE RULES EXTENDED TO RESPS AND RDSPs

For transactions occurring after March 22, 2018, the anti-avoidance rules that currently apply to RRSPs, RRIFs and TFSAs will apply to RESPs and to RDSPs.  These rules include the advantage rules, prohibited and non-qualifying investment rules.

Where the plans currently hold what are now prohibited investments, plan holders may elect by April 1, 2018 ordinary tax on investment income distributions rather than pay the advantage tax on such distributions.

Swap transactions will be allowed until the end of 2021 if undertaken to ensure that the plans comply with the new rules by removing investments that are now prohibited or give rise to advantages under the new rules.

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