Canada: Mutual Fund Trusts — Revised Proposals Relating To Allocation To Redeemers

p>This year's federal budget contained proposed amendments to the Income Tax Act (Canada) (Tax Act) that targeted the "allocation to redeemers" methodology used by certain mutual fund trusts and unit trusts (the Budget Proposals). On July 30, 2019, the Department of Finance (Canada) (Finance) released draft legislation that included revisions to the proposed amendments that are relieving in nature, including an industry requested deferral for the exchange traded fund (ETF) industry (the July 2019 Revisions).

Budget Proposals

The Budget Proposals caught many in the investment fund industry by surprise. As the explanatory notes that accompanied the Budget Proposals stated, particularly as it concerned the allocation out of income to a redeeming unitholder, the abuses that Finance were targeting could have been challenged by the government based on existing rules in the Tax Act, in particular subsection 104(7.1). Instead, Finance chose to legislatively codify the allocation to redeemers methodology, which impacted all mutual fund trusts that had the ability to utilize the methodology, to avoid the "time-consuming and costly" challenges that would have resulted from going after the abuses that Finance was targeting. Of note, the Budget Proposals address mutual funds trusts for purposes of the Tax Act. The draft proposals either in their original release, or as recently amended, do not include unit trusts that have not achieved mutual fund trust status. We expect that the reason for this exclusion is that Finance had specific targets in mind when they introduced the Budget Proposals, and those targets were all mutual fund trusts.

In particular, the explanatory notes commented that some mutual fund trusts had been inappropriately using the allocation to redeemers methodology to allocate capital gains to redeeming unitholders in excess of the capital gains that would otherwise be realized by these unitholders on their unit redemptions, resulting in inappropriate tax deferral on the excess amount for remaining unitholders.

Proposed subsection 132(5.3) of the Tax Act was Finance's answer to combat this perceived abuse. This anti-avoidance provision denies a mutual fund trust a deduction for the excess capital gain allocated to redeeming unitholders over the capital gains the unitholders would have otherwise realized if two conditions are met:

  • the amount allocated to the redeeming unitholder is a capital gain; and
  • the redeeming unitholder's redemption proceeds are reduced by the allocation.

The Budget Proposals indicated this measure was to apply to taxation years of mutual fund trusts that begin after March 18, 2019. For most mutual fund trusts with December 31 taxation year-ends, these rules would have been applicable on January 1, 2020.

Industry Concerns

Almost immediately, industry members voiced concerns about the restrictive nature of the Budget Proposals. One of the concerns, that does not seem to have been addressed in the July 2019 Revisions is the fact that the inability to allocate out any income to a redeeming unitholder may be a very big concern for new "alternative mutual funds" (colloquially referred to as liquid alt funds). Liquid alt funds represent a hybrid between conventional mutual funds and privately offered hedge funds and are subject to somewhat relaxed investment restrictions. In particular, liquid alt funds and non-redeemable investment funds are now permitted to borrow up to 50 per cent of the fund's net asset value, subject to certain conditions. This leverage can be achieved through cash borrowing, short-selling and specified derivative transactions. The increased use of derivatives is expected to cause such funds to realize much more gains and losses on income versus capital account than traditional retail mutual funds. Industry members voiced concerns to Finance that under this new regulatory environment, the inability to allocate out ordinary income to redeeming unitholders may cause significant investor unfairness, particularly in circumstances where a large redemption by a unitholder will necessitate an early close-out of a derivative held on income account to fund the redemption proceeds. Making a special distribution in advance of such a redemption may not be a practical way to address the concern that remaining unitholders could bear all of the consequences of the disposition of the derivative.

Another concern addressed to Finance is that mutual funds trusts do not often have precise information on individuals' adjusted cost bases. As a result, to the extent that mutual fund trusts were utilizing the allocation to redeemers methodology, many of them were making "best guesses" at this amount or utilizing cost numbers to perform the allocation out of capital gains to redeeming unitholders.

Finally, Finance heard the concern that the Budget Proposals, if enacted as proposed, would make the methodology impracticable for most listed mutual fund trusts, particularly those in the ETF space, where redemptions are likely to be requested only by market makers that generally have a cost amount that is equal to the fair market value of their units.

Stakeholders in the investment fund industry voiced these concerns to Finance combined with submissions on the well-known inadequacies of the capital gains refund mechanism, which the allocation out to redeemers methodology is meant to address. As noted above, for the most part, the July 2019 Revisions are a welcome response to relief sought by the investment fund industry (although not a permanent solution).

July 30 Revisions

The July 2019 Revisions contain two changes to the Draft Proposals.

Determining a Beneficiary's "Cost Amount"

First, the July 2019 Revisions attempt to resolve concerns surrounding a mutual fund trust's ability to track the adjusted cost base of a redeeming unitholder's units. A trustee of a mutual fund trust is now only required to use "reasonable efforts" to determine the "cost amount" of units held by a redeeming unitholder.

In order to meet these "reasonable efforts", Finance has stated:

Generally, it is expected that a mutual fund trust will keep records of initial subscription prices paid when units are acquired and will have accurate information as to transactions involving the units to which the MFT is a party, that may affect the cost amount of the units. In the absence of such information, it is expected that the mutual fund trust would make reasonable efforts to obtain this information, for example through inquiries to third parties or through a search of relevant records.

It would not be expected that a mutual fund trust would need to make inquires regarding external factors (i.e., events that did not involve the mutual fund trust or transactions to which the mutual fund trust was not a party) unless the mutual fund trust has reason to believe that such external factors exist and could affect the cost amount of the units.

This concession will significantly decrease the compliance burden that would have been associated with tracking the adjusted cost base of mutual fund trust units, thereby ensuring that the allocation out to redeemers methodology is still a valid approach in the toolkit of non-listed mutual fund trusts to ensure unitholder fairness

Deferred Coming into Force Date

The second very welcomed change to subsection 132(5.3) is a deferral of the application of 132(5.3)(b) to mutual fund trusts that have units that are (i) listed on a designated stock exchange in Canada; and (ii) are in continuous distribution. Based on its wording, the deferral will also apply to mutual fund trusts that have ETF series or platform series. Instead of the rules applying to taxation years of such mutual fund trusts that begin after March 18, 2019, paragraph 135(5.3)(b) is now proposed to apply in respect of taxation years beginning after March 19, 2020. Paragraph 132(5.3)(b) will continue to apply to all other mutual fund trusts for taxation years beginning after March 18, 2019. This second change was largely to address the concerns of the ETF industry most recently voiced in a joint submission to Finance from the Investment Funds Institute of Canada (IFIC) and the Canadian ETF Association (CETFA). The deferral will give the ETF industry additional time to engage with Finance about possible improvements to the capital gains refund mechanism and other possible solutions that will ensure that Canadian ETF issuers remain competitive with their non-listed Canadian mutual fund trust counterparts. It is also hoped that Finance will consider the approaches of other international jurisdictions to help find a Canada-made solution for investor fairness that increases the investment fund industry's international competitiveness.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions