The 2013 federal budget included proposed changes to character conversion transactions, which are used in certain mutual funds to effectively convert income to capital gains for tax purposes.
These changes are expected to remove the tax advantages of mutual funds designed to employ these transactions. Specifically, the budget notes the returns produced under these structures will be treated as income, as early as 180 days following March 21, 2013.
While definitive legislation has not yet been released, Fidelity is taking steps to protect investors. It says increasing the size of existing character conversion transactions isn’t permitted, so it’s closing its capital yield funds to additional investments, effective April 2, 2013.
It notes the fundamental benefits of mutual fund corporations remain, however. Tax-deferred switching is still advantageous, as well as the ability to potentially reduce taxable distributions.
The funds that will be closing to additional investments are:
- Fidelity Premium Fixed Income Capital Yield Private Pool Class
- Fidelity Premium Tactical Fixed Income Capital Yield Private Pool
- Fidelity Corporate Bond Capital Yield Class
- Fidelity U.S. Monthly Income Capital Yield Fund
- Fidelity American High Yield Capital Yield Fund
- Fidelity Tactical Fixed Income Capital Yield Fund
- Fidelity Canadian Bond Capital Yield Fund
The Budget’s proposal also impacts two corporate class mutual funds managed by Sentry Investments.
Both the Sentry Enhanced Corporate Bond Capital Yield Class and Sentry Tactical Bond Capital Yield Class currently employ forward contracts. As a result, the company is temporarily closing both offerings to new and additional purchases, effective Friday, April 5, 2013.
The funds will continue to utilize their forward contracts in respect of existing assets for a period of approximately 180 days, as this is permitted under the Budget proposal.
Sentry will also examine the full context of the 2013 proposals so it can provide further updates regarding the two funds.