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ARTICLE · 24 JULY 2013

Grandfathering Rules For Character Conversion Transactions

Borden Ladner Gervais LLP
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The Department of Finance has recently issued a long awaited News Release and Backgrounder announcing changes to the grandfathering rules for "character conversion transactions.

CanadaTax
BLG'S National Tax Group
BLG'S National Tax Group
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On July 11, 2013, the Department of Finance issued a long awaited News Release and Backgrounder announcing changes to the grandfathering rules for "character conversion  transactions".

The 2013 Federal Budget eliminated the tax benefits associated with character conversion transactions – forward sale and forward purchase agreements used by many mutual funds and other investment funds to convert the return on a portfolio of investments from fully taxable ordinary income into capital gains. Only 50% of capital gains must be included in income  for tax purposes. Grandfathering was available for a "derivative forward agreement" entered into before March 21, 2013. However, many investment funds used a series of 30-day or 90-day forward agreements to implement  their character conversion strategies. A series of "derivative forward agreements" was not grandfathered under the original Budget proposal. However, a series of agreements had a transition period of approximately

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