Past federal budgets have targeted insurance strategies such as 10/8s and life insurance transfers to corporations. This year’s budget proposals were mostly silent on insurance issues, except to extend the rules for mutual fund mergers to segregated funds.
The Income Tax Act allows mutual fund issuers to merge funds on a tax-deferred basis, which means no capital gains tax is triggered. (Budget 2017 extends this tax deferral to the merger of a mutual fund corporation into multiple trusts. Previously, the rule applied only to a merger into a single mutual fund trust.)
Segregated funds that merge after 2017 will be allowed the same tax deferral.
“It’s a good move,” says Wilmot George, vice-president of tax, retirement and estate planning at CI Investments in Toronto. “It’s good to have greater consistency with the regular mutual fund merger rules,” as well as greater flexibility for segregated fund issuers.
Like mutual fund issuers, segregated fund issuers might merge funds for greater economies of scale or to reduce managing costs.
The rules mean these issuers can merge funds without triggering capital gains, which typically occurs at the time of merger, says George. The proposal doesn’t apply to income realized prior to a merger.
And, to be clear, “this is initiated at the segregated fund level,” he says, referring to the merger. “This is not something that a client does to trigger or not trigger tax.”
Further, the budget proposes that, for non-capital losses arising in taxation years that begin after 2017, a segregated fund be allowed to carry over those losses and apply them to calculate taxable income for taxation years that begin after 2017.
“It’s a non-capital loss triggered at the segregated fund level, which the segregated fund could use to offset taxable income within the segregated fund,” explains George. That “ultimately reduces tax to the investor.”
As is customary, non-capital losses will be able to be carried back for use in any of the previous three years or carried forward for 20 years.
Investors likely won’t notice the new rules, since segregated fund mergers aren’t a daily occurrence. But it’s good news when mergers occur, says George, because they’ll likely occur at cost, “meaning no capital gains — a tax-deferred rollover.”
If a segregated fund wants to trigger gains on a merger, and “if those gains become taxable to the investor, then they would be reported on a T3 to the investor,” as usual, he says.