Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
When shares of a class of a mutual fund corporation are exchanged for shares of another class of the same mutual fund corporation, is there a disposition?
Position:
Generally, yes. However, the exchange is deemed not to be a disposition if all the requirements of section 51 are satisfied. In this case, there is insufficient information to make such a determination.
Reasons:
Pursuant to section 51, when a shareholder receives no consideration other than the new shares, the exchange is deemed not to be a disposition. It is a question of fact whether the shareholder receives consideration other than the new shares.
XXXXXXXXXX 2003-000030
July 8, 2003
Dear XXXXXXXXXX:
Re: Mutual Fund Corporations - "Switch" Funds
This is in reply to your letter of January 22, 2003 wherein you requested our comments on whether a disposition results when an investor switches from a "deferred sales charge" (DSC) version of a fund to a "front end" (FE) version of the same fund of the same mutual fund corporation. You advise that the only difference between the two versions is the sales fee structure. Since the particular mutual fund corporation allows XXXXXXXXXX% of a DSC fund to be redeemed free of any redemption fees, you note that the switch from the DSC version to a FE version of the same fund would not result in any cost to the investor provided that the broker or financial planner agrees to waive the FE fees that would be normally be payable on the acquisition of the FE version. The amount of the FE fees to be charged is at the discretion of the broker or financial planner.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments.
We have premised our comments on the assumption that the mutual funds referred to in your letter represent different classes of shares of a mutual fund corporation and that a "switch" of the mutual funds is actually a redemption of shares of a particular class in exchange for shares of another class of the same mutual fund corporation.
A redemption of shares would generally result in a disposition of the shares for income tax purposes. However, where a taxpayer exchanges shares of a mutual fund corporation for capital property that is shares of another class of the same mutual fund corporation and no consideration other than the new shares is received by the taxpayer, section 51 of the Income Tax Act (the "Act") will apply to deem the exchange not to be a disposition of shares except for the purposes of subsection 20(21) of the Act. Consequently, the taxpayer can exchange the shares without triggering a capital gain or loss.
It is a question of fact whether a taxpayer receives consideration other than the new shares. This determination can only be made after a review of the particular situation including any relevant documentation. If the facts indicate that the waiver of fees can be regarded as consideration, section 51 of the Act will not apply and the exchange of shares will result in a disposition and an acquisition for income tax purposes.
While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the Agency in respect of any particular situation.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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