Character conversion transactions under fire

Bloom Investment Counsel—which manages the Bloom U.S. Advantaged Income & Growth Fund—has been affected by the 2013 Budget, and it may not be the only company.

This is because measures are being introduced that have an impact on the tax benefits of funds that use forward-purchase and sale agreements to get exposure to underlying reference portfolios.

Read: Party’s over for tax-advantaged investing

These measures are referred to in a section of the Budget document called Character Conversion Transactions, which defines them as, “Transactions [that] typically involve agreements to buy or sell a capital property at a specified future date. The purchase or sale price of the capital property…is not based on the performance of the property between the date of the agreement and the future date.”

Instead, it’s often determined by other measures such as the performance of a portfolio of investments.

The document goes on to say, “Depending on their particular facts, character conversion transactions can be challenged by the government based on existing rules in the Income Tax Act. However, any such challenge could be both time-consuming and costly, so the government is introducing specific legislative measures to ensure appropriate tax consequences apply to these transactions.”

Bloom Investment is reviewing the implications of these new rules and will provide additional details to unit holders as soon as possible.

It also intends to pay the initial distribution target of 6.00% per annum on the issue price of $10.00 per Class A Unit, or U.S.$10.00 per Class U Unit.