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The federal budget, unveiled on March 22, 2016, will have tax implications for Canadian investors who hold Corporate Class mutual funds. Previously, corporate “rollover” rules allowed an investor in one class of shares to switch to another class that tracks a different fund, without recognizing accrued gains on the original investment. The 2016 budget proposes a measure, effective for dispositions that occur after September 2016, which will treat an exchange of shares that track different funds to be a disposition at fair market value.
The measure will not apply to switches where the shares received in exchange differ only in respect of management fees or expenses, providing that the switch is between different series of shares within the same class.
Given that many of Canada’s largest mutual fund companies offer corporate class funds, this change will have a significant impact on unitholder communications. Fund companies will – at a minimum – require a fund mailing to all unitholders, and in some cases, unitholders will have to vote given the ‘material change.’
As Canada’s largest provider of technology solutions for best-in-class investor communications for the mutual fund industry, Broadridge understands the critical role of timely, efficient communication in fund companies’ business strategies. We have been involved in supporting fund mergers, investment objective changes, and fee-related proxy projects for every major independent and bank-owned fund company in Canada. Through working with 40 large fund companies, we’ve gained a perspective on the readiness of the industry to respond to regulatory changes like this. We anticipate that most fund companies will be able to leverage their existing communication channels to support the upcoming communication requirements, with the additional support of third-party providers to manage the process and expanded scope of communications.
We expect firms to ramp up these communications efforts through the late spring and summer, to be compliant with the autumn deadline established in the new rules.