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The government has clarified its position on character conversion transactions.

In the 2013 budget, the government announced it will no longer allow funds to use derivatives to convert income into capital gains. These transactions are called character conversion transactions.

As of March 21, 2013, fund managers had 180 days to unwind their agreements.

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The federal government is proposing to provide additional time for institutions to unwind pre-budget derivative forward agreement structures.

In a release, it says agreements entered into before March 21, 2013 could apply until the end of 2014, so long as those agreements settle before 2015.

In order to qualify for this grandfathering, the government says manufacturers must follow specific growth limits (click here and look under “Growth limits” for more detail).

If the agreement is part of a series, there’s also relief. For example, if an investment fund enters into rolling forward agreements every 30 days, the fund may continue to do so and be entitled to grandfathering, provided that the series of forward agreements concludes prior to 2015.

And, if a taxpayer entered into a 180-day derivative forward agreement on April 1, 2013 as a continuation of a series of agreements that were entered into before March 21, 2013 and the new agreement exceeded the growth limits, the taxpayer would still be entitled to 180 days of grandfathering after April 1, 2013.

The new proposed rules would also allow derivative forward agreements to increase as a result of a fund merger. But funds can only add the prior agreements together; they cannot increase the length or the value of the agreements.

For more details, read the full release.

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Originally published on Advisor.ca

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