The Ontario Securities Commission (OSC) is advising investment fund managers to considering capping funds that are affected by measures proposed in the recent federal budget to eliminate the tax advantages of so-called “character conversion” transactions.
The OSC has published a notice setting out its views on the proper response to the proposed budget measures, which impact investment funds that engage in these sorts of transactions.
The budget proposes to eliminate transactions designed to convert ordinary income into capital gains through derivatives trades; which is a strategy that a number of funds use.
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This has led numerous firms to cap their sales of these funds, and the OSC suggests that all affected firms should consider this step.
The OSC says fund managers should consider the effects of the budget measures on their investment funds, particularly in cases where the income conversion feature is an essential aspect of the fund. And, it says that, while these considerations are underway, “we ask managers to consider the need to cap their affected funds to new and additional investments.”
It also suggests that firms consider whether any disclosure to unitholders is necessary, and that they must also consider their longer-term response to the amendments, “including whether changes to their funds’ investment objectives and investment strategies will be needed or whether the funds need to be restructured, reorganized or terminated.”