Effective requirement to reorganize to ensure matching portfolios before s. 86 merger of classes (p. 7)
Before subsection 131(4.1) was enacted, two funds in a multi-class mfc could undergo a tax-deferred merger: generally, section 86 was relied on to give a rollover to the terminating fund’s shareholders. Because the mfc did not dispose of any assets to a third party except as required by securities law, it might not recognize a gain on the merger. …
Subsection 131(4.1) requires…[i]n effect [that] portfolios underlying the terminating and surviving funds must be identical before the shareholders qualify for a tax-deferred rollover. Before the merger, the portfolio of each fund may be reorganized to ensure this identical nature.
S. 86 merger of classes following an amalgamation (p. 7)
[T]he three conditions in subsection 131(4.1) referred to above in respect of fund mergers must also be satisfied if two MFCs are to amalgamate on a tax-deferred basis under section 87. It should be possible to satisfy the second requirement—namely, that the old shares of each class of a predecessor MFC have the same value and portfolio composition as the new shares of a class issued by Amalco. For example, one MFC may have 20 classes, and the other MFC may have 30 classes. Immediately following the amalgamation, Amalco may have 50 classes. However, when two MFCs amalgamate, it is fairly common to combine funds that are duplicated within Amalco (for example, when each predecessor MFC has a Canadian equity fund). Those class-to-class mergers should be undertaken, in accordance with the rules discussed above, after the amalgamation of the two MFCs.
Expansion of s. 132.2 to permit division of multi-class MFC into multiple MFTs (p. 7)
[Under] proposed section 132.2…a multi-class MFC with 20 classes may transfer its assets to 20 different MFTs on a class-by-class basis….
Technical issues re expanded s. 132.2 merger rule (pp. 7-8)
All property of the various classes of the MFC must be transferred to the respective MFTs at the same time….
There may be some funds within the MFC that do not qualify for a merger or that are undesirable for inclusion in the merger—for example, small funds that are not expected to have a sufficient number of unit holders to qualify the funds as MFTs. Or a transferee MFT may have significant losses carried forward…Those funds should be removed from the MFC - in a fully taxable transaction…
Many multi-class MFCs in the marketplace are fund-of-fund structures: the only asset of many of the classes in the MFC is units of an MFT offered by the same fund manager…. A concern exists that trust units may not be transferred to that trust. … In TI 9608465, the CRA concluded that in a proposed merger of two trusts (the one trust being the “top fund” and the other being the “bottom fund” of a fund-of-fund structure), the top fund could not transfer units of the bottom fund to that fund: the proposed merger was not a qualifying exchange. The Department of Finance is aware of this issue.
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