Budget 2019 proposed new rules to combat tax strategies employed
by certain mutual fund trusts to disproportionately allocate
capital gains to redeeming unitholders under the so-called
“allocation to redeemers” methodology. (Our analysis of
this Budget measure can be found here.)
On July 30, 2019, the Department of Finance released revised
proposed amendments to the Income Tax Act (Canada) (the
“Tax Act”) to limit the circumstances
under which the "allocation to redeemers" methodology may
be employed (the “Proposed
Legislation”). The Proposed Legislation contains
welcome revisions to the original legislative proposals introduced
in Budget 2019.
Background
When a mutual fund trust unitholder redeems his or her units,
the trust often must dispose of assets to fund the redemption,
potentially causing the trust to realize accrued gains on such
asset sales. The redeeming unitholder may also realize a
corresponding gain on the redemption of his or her mutual
