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Federal Budget 2016: What Investors Should Know

On March 22, the Canadian Minister of Finance tabled the first budget of their government. In this budget, two measures affect investors: the decision to end one of the benefits of mutual fund corporations and the change in tax treatment of the sale of linked notes.

Mutual Fund Corporations

Starting October 1st, investors holding a mutual fund corporation (or investment corporation) may not switch shares of one class for shares of another class in the same company without triggering capital gains. This switch of shares will be considered a disposition at fair market value.

It should be noted that a switch between series of the same fund will not be subject to the changes described above.

That said, mutual fund corporations preserve other benefits, such as pooling of income and expenditures of all funds held in the company, which allows for the distribution of Canadian dividends and capital gains.

Linked Notes

A linked note is a debt obligation issued by a financial institution whose performance is linked to the performance of at least one security or benchmark for the term of the debt.

Currently, the return of a linked note sold at maturity is deemed to be interest income. However, the yield of a note sold early on the secondary market is treated as a capital gain, and taxed at only 50%.

In the new budget, the Minister proposes that the yield of a linked note is considered interest income and not capital gains, whether realized at maturity or reflected in a sale on the secondary market.

This applies to sales of linked notes made after September 2016.