BMO Nesbitt Burns cites feds’ proposed tax changes as it closes funds

Toronto-based BMO Nesbitt Burns Inc. is closing several mutual funds in anticipation of changes to the Income Tax Act proposed in the 2019 federal budget.

The firm said Thursday that it would terminate four funds on Sept. 27, citing the impact of proposed changes to derivative contract rules in the Liberal government’s March budget.

“As a result of the proposed changes to the [Income] Tax Act, the manager believes that it is no longer commercially feasible to continue the funds,” a press release said.

The changes would amend the Income Tax Act to prevent certain character conversion transactions. Through the use of derivative contracts, some investment funds attempt to reduce taxes by converting the returns of an investment that would otherwise be treated as ordinary income into tax-preferred capital gains.

The day after the March 19 budget was released, BMO Nesbitt Burns suspended the distribution of a number of funds: the four Tactic funds that are now closing, as well as the BMO Advantaged Canadian Q-Model Fund and the BMO Advantaged U.S. Q-Model Fund. It said it would stop accepting new purchase orders until it had assessed the budget proposals.

“If the proposed amendments were enacted as proposed, certain derivative agreements that the funds have entered into will likely be treated as ‘derivative forward agreements’ for tax purposes, which would increase the income of the funds and may result in non-refundable tax payable by the TACTIC Funds or an increase in the amount of taxable distributions to be made to unitholders of the Q-Model Funds,” a March 20 release said.

The budget said the measure would apply to transactions entered into on or after budget day. After Dec. 31, 2019, it would also apply to transactions that were entered into before budget day, including those that extended or renewed the terms of the agreement.

The changes to the derivative transactions were not included in the Liberals’ budget implementation bill, C-97, which passed before Parliament rose for the summer last week. MPs aren’t expected to return to Ottawa until after the federal election on Oct. 21, which means legislative changes to the act wouldn’t be introduced before then.

The following funds will be terminated on Sept. 27:

• BMO Advantaged Equal Weight Banks TACTIC Fund
• BMO Advantaged Equal Weight Oil & Gas TACTIC Fund
• BMO Advantaged Laddered Preferred Share TACTIC Fund
• BMO Advantaged S&P/TSX Capped Composite TACTIC Fund

On Thursday, BMO also said the BMO FinTech Sector TACTIC Fund would close on Sept. 27. That closure was not linked to the government’s proposed changes.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.