Draft Legislation in respect of “Designated Plan Trusts”
Summary Overview:
The proposed draft legislation set out below establishes the new concept of a “designated plan trust”. The proposed amendments closely track the statutory/regulatory language that defines a “mutual fund trust” at subsections 132(6)-(7) and section 248 of the Income Tax Act (Canada) (the “ITA”) and Income Tax Regulations 4801 and 4803(1). The primary point of difference between the two sets of provisions is that, while a “mutual fund trust” must generally have (i) a class of units that is “qualified for distribution to the public”, and (ii) at least 150 different unitholders, a “designated plan trust” must (i) have at least one “sponsoring unitholder”, which is defined as a “licenced annuities provider” (as defined at subsections 147(1) and 248(1) of the ITA) that has (A) included units of the “designated plan trust” in one or more “segregated funds” (as defined in subsection 138.1(1) of the ITA), and (B) issued “segregated fund policies (as defined in paragraph 138.1(1)(a) of the ITA) with at least 150 beneficiaries in respect of those “segregated funds”. The “sponsoring unitholder(s)” of a “designated plan trust”, together with registered pension plans, must hold at least 80% of the units of the trust (note that this figure has been set at 80% since it is anticipated that annuity-holders of a sponsoring unitholder may want to invest in the “designated plan trust”, directly, via their registered investments, or else potentially as a result of employer matching of contributions).
We expect that the Canada Revenue Agency (the “CRA”) would amend the form of the T3 return to include a field asking whether a trust is a “designated plan trust” and, if so, require the trust to complete a schedule disclosing information required to verify compliance with the conditions to qualify as a “designated plan trust” (such as the identity of its sponsoring unitholder(s), the percentage of trust units that it holds, and the identity of the trustees).
If a trust is a “designated plan trust”:
(a) units of the “designated plan trust” would become eligible for investment by RRSPs, RRIFs and other types of registered plans. This is accomplished through a minor addition to Income Tax Regulation 4900(1).
(b) it may merge with a mutual fund trust or another “designated plan trust” on a tax-deferred basis. This is accomplished through a minor addition to subsection 132.2(1) of the ITA.
(c) it will be exempt from alternative minimum tax. This is accomplished through a minor addition to section 127.55 of the ITA.
(d) it will be exempt from the mark-to-market rules. This is accomplished through a minor addition to subsection 142.2(1) of the ITA.
None of the other attributes of mutual fund trusts will apply to designated plan trusts.