The Portfolio Management Association of Canada (“PMAC”), through its Industry, Regulation & Tax Committee, would like to bring to your immediate attention the concerns of our membership regarding section 251.2 of the Income Tax Act (Canada) (“ITA”). This new provision (as announced in the 2013 Federal Budget) extends the application of the acquisition of control rules as they currently apply to corporations, to now also apply to trusts (the “trust loss restriction rules”) and is triggered whenever a person becomes a majority-interest beneficiary as defined in the ITA. The new trust loss restriction rules were enacted on December 12, 2013, with retroactive effect beginning after March 20, 2013.
We understand the objective of the trust loss restriction rules is to prevent arm’s length loss trading transactions that have been developed and that purport to enable one taxpayer to access the unused losses of another. Investment funds that are formed as trusts (including pooled funds, mutual funds and exchange-traded funds) are not exempt from the application of the rules and this creates a series of unintended consequences for investors, funds, investment fund managers and portfolio managers.