Finance proposes to amend the trust loss restriction event relieving provisions under the Act to mitigate certain unintended consequences.
In a recent comfort letter, Finance proposes to amend the trust loss restriction event relieving provisions in subsection 251.2(3) of the Income Tax Act, enacted on December 16, 2014, to mitigate certain unintended consequences. The proposed amendments expand the exceptions to a trust loss restriction event for investment funds where an investor becomes a majority-interest beneficiary, or where a group of persons becomes a majority interest group of beneficiaries, because another investor has redeemed units in that trust.
The comfort letter also proposes to amend the extended filing and payment due dates for a trust's deemed year-end to preclude a trust loss restriction event where there is no change in a trust's beneficiaries, as well as provide more flexibility for electing various coming-into-force dates.
A "loss restriction event" will occur under subsection 251.2(2) when a person or partnership becomes a majority interest beneficiary of the trust or a group of persons becomes a majority interest group of beneficiaries of the trust.
Generally, a majority interest beneficiary of a trust is a beneficiary who, together with persons and partnerships with whom the beneficiary is affiliated, has a beneficial interest in the trust's income or capital with a fair market value (FMV) that exceeds 50% of the FMV of all the beneficial interests in income or capital respectively, in the trust.
A majority-interest group of beneficiaries of a trust at any time means a group of persons, each of whom is a beneficiary under the trust at that time such that if one person held the interests as a beneficiary of all of the members of the group, that person would be a majority-interest beneficiary of the trust and if any member of the group was not a member, this test would not be met.
For the purpose of determining whether a particular trust is subject to a loss restriction event, a person or group of persons is deemed not to become a majority-interest beneficiary or majority interest group of beneficiaries, respectively, of the particular trust for certain transactions and events described under subsection 251.2(3) of the Act.
Relieving provisions were enacted on December 16, 2014 to address concerns raised by the investment funds industry about the trust loss restriction event rules. New paragraph 251.2(3)(f) provides that the acquisition of equity in certain types of investment trusts will not be treated as a loss restriction event of the trusts if certain conditions are met.
Specifically, paragraph 251.2(3)(f) provides that the acquisition of equity in a trust that is immediately before the acquisition an investment fund, as defined under subsection 251.2(1), will not cause a person (or group of persons) to be considered to have become a majority-interest beneficiary (or group of majority-interest beneficiaries) in the trust. This result is subject to the requirement that the acquisition is not part of a series of transactions or events under which the trust becomes a portfolio investment fund or ceases to qualify as an "investment fund" as those terms are defined in under subsection 251.2(1).
New subsection 251.2(7) provides that certain returns and payments that would otherwise be due within 90 days of a loss restriction event (as a result of a deemed year-end) can be filed or remitted within 90 days of the trust's ordinary year-end.
The new rules specify that the relieving amendments relating to the trust loss restriction events interested in these recent publications:
come into force on March 21, 2013 unless an election is made to apply the relevant relieving provisions from January 1, 2014.
Generally, an investor may become a majority-interest beneficiary of a trust by acquiring units in that trust. Alternatively, an investor may become a majority-interest beneficiary because another investor has redeemed units in that trust.
A person or group of persons is deemed not to have become a majority-interest beneficiary through the acquisition of equity of the particular trust where the conditions of paragraph 251.2(3) (f) are met. However, the exception does not address circumstances in which an investor has become a majority interest beneficiary as a result of another investor's redemption of equity in the trust.
In the comfort letter, Finance clarifies that the exception was intended to apply to redemptions and proposes to recommend an amendment to the legislation to provide that a person is deemed not to become a majority interest beneficiary, or a group of persons is deemed not to become a group of majority interest beneficiaries, of a particular trust solely because of the acquisition or disposition of equity of that trust, provided that the trust meets the conditions in paragraph 251.2(3)(f) noted above.
The specific subsections and paragraphs for which filings and payment due dates are extended in the case of a deemed year-end are included in subsection 251.2(7). Excluded from the list are returns and payments for registered investments (i.e., Part X.2 of the Act) and Form NR4, "Statement of Amounts Paid or Credited to Non-Residents of Canada", under subsection 202(8) of the Income Tax Regulations.
In the comfort letter, Finance proposes to amend the filing deadline extension to include these provisions. In addition, Finance proposes that provisions related to the application of interest on capital gains refunds for mutual fund trusts (i.e., subsection 132(2.1)) and returns and payments for tax on designated income of certain trusts (i.e., subsection 210.2(5)) will also be included in paragraph 251.2(7).
In a recent technical interpretation, the CRA confirmed that a person who is affiliated with a majority-interest beneficiary is deemed to be a majority-interest beneficiary of a trust for purposes of subsection 251.1(3) (TI 2014-0534841C6).
As a result of this interpretation, a loss restriction event may be triggered without any changes to an investment fund trust's beneficiaries. For example, if a majority-interest beneficiary of a trust gets married after March 20, 2013, the spouse is deemed to become a majority-interest beneficiary on that date, triggering a loss restriction event under paragraph 251.2(2)(b). While
Finance does not disagree with CRA's interpretation, Finance notes that the interpretation does not fully conform with the policy objectives of the trust loss restriction event rules.
Accordingly, Finance will recommend an amendment for the purposes of the trust loss restriction rules, that a majority-interest beneficiary of a trust at any time means a person or partnership that is at that time both a beneficiary, as defined under the current trust loss restriction event rules, under the trust and a majority-interest beneficiary, as defined in subsection 251.1(3)) of the trust.
The loss restriction event amendments generally apply retroactively to March 21, 2013. However, a trust can elect to defer the application of the amendments to January 1, 2014. In some cases, trusts that were subject to loss restriction events in 2014 have filed tax returns on the basis of the Act as it read before the introduction of the amendments that were enacted in December 2014.
In the comfort letter, Finance proposes an amendment to the coming-into-force rules for the trust loss restriction event amendments (including those amendments proposed in this comfort letter) such that these provisions apply as of March 21, 2013, unless a trust elects to have the amendments apply either as of the first day of the trust's first 2014 taxation year or the first day of the trust's 2015 taxation year. This election must be filed in writing by the filing due date for the trust's last 2014 taxation year.
For more information, contact your KPMG adviser.