Yesterday, Budget 2017 was tabled by the Liberal government. While Budget 2016 contained many significant tax changes, Budget 2017 does not. Despite having indicated in its 2015 election platform and in Budget 2016 that the Liberal government intended to eliminate a number of perceived tax advantages it considered were benefitting wealthy Canadians and not the middle class, the Liberal government deferred dealing with those perceived tax advantages, but indicated that a paper would be delivered in the coming months outlining issues and providing proposed policy changes relating to tax planning strategies being used by private corporations that provide tax advantages that may be perceived to be unfair.

Below are a summary of the tax proposals in Budget 2017 that relate to M&A.

Investment fund mergers

Merger of switch corporations into mutual fund trusts

Currently, the Income Tax Act (Canada) (the Act) contains rules that allow for certain mergers of mutual funds on a tax-deferred basis. For example, a merger of two mutual fund trusts or a merger of a mutual fund corporation and a mutual fund trust fall within these rules. However, these rules do not currently allow for the tax-deferred reorganization of a mutual fund corporation into multiple mutual fund trusts. Such a reorganization may be relevant for switch corporations, which are mutual fund corporations with multiple classes of shares, where each class of shares represents a different investment fund.

Budget 2017 proposes to expand the mutual fund merger rules to allow a mutual fund corporation that is a switch corporation to reorganize into multiple mutual fund trusts on a tax-deferred basis. For this measure to apply, in respect of each class of shares of the mutual fund corporation that is or is part of an investment fund, all or substantially all of the assets allocable to that class need to be transferred to a mutual fund trust and the shareholders of that class must become unitholders of that mutual fund trust. This measure will apply to qualifying reorganizations that occur on or after March 22, 2017.

Segregated fund mergers

Segregated funds are life insurance policies that share many similar characteristics to mutual fund trusts; however, unlike mutual fund trusts, segregated funds cannot merge on a tax-deferred basis. Budget 2017 proposes to allow for the merger of segregated funds on a tax-deferred basis to provide consistency between the treatment of segregated funds and mutual fund trusts. It is also proposed that a segregated fund be able to carry over non-capital losses that arise in taxation years that begin after 2017 and apply the non-capital losses in computing its taxable income for taxation years that begin after 2017. The use of these losses will be restricted following mergers of segregated funds. These measures will apply to mergers of segregated funds after 2017 and to losses arising in taxation years that begin after 2017.

For further reading, please see our full report on tax measures regarding Budget 2017.

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