Feds consulting on annuities, tax changes affecting funds

The Liberal government has introduced draft legislative proposals for rules governing annuities, investment funds’ allocation to redeemers and several other measures from the 2019 budget that were not included in legislation passed before Parliament rose in June.

The Finance Department released the proposals on Tuesday for public comment ending Oct. 7.

The measures in the draft proposals were not included in the budget implementation bill, C-97, which passed before Parliament rose for the summer. MPs are not expected to return to the House of Commons until after the Oct. 21 election, so it’s unlikely that legislative changes could be passed before then.

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The measures out for consultation include the creation of advanced life deferred annuities (ALDAs), which would allow retirees to move some savings out of their registered retirement funds to an annuity deferred until age 85.

The allocation to redeemer change would prevent mutual funds and ETFs from using a method to allocate income and capital gains realized by redeeming unitholders, which could result in increased tax bills for clients.

The department is also consulting on funds’ use of derivative transactions to reduce taxes, and on rules governing Registered Disability Savings Plans (RDSP) and individual pension plans (IPPs).

The change to derivative transactions 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.

Some funds have already announced their closure in anticipation of the change.

The RDSP changes would remove the limitation on the period that a RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit (DTC). The proposals would also eliminate the requirement for medical certification that the beneficiary is likely to become eligible for the DTC in the future in order for the plan to remain open.

Regarding IPPs, the changes would make it harder to implement a plan simply to avoid tax on the commuted value of benefits from another defined benefit (DB) plan.

The draft legislative proposals also include measures related to:

• tax treatment of owners of multi-unit residential properties;
• tax rules for multi-employer plans;
• the “requirement-for-information” process for banks and credit unions;
• transfer pricing rules that apply in transactions occurring across international borders;
• foreign affiliate dumping rules; and
• tax consequences for cross-border share lending arrangements used to avoid Canadian dividend withholding tax.

The proposals would also modify measures passed in the budget implementation bill related to the accelerated investment incentive for resource expenditures and the capital cost allowance for zero-emission vehicles.

Read the full legislative proposals.

Read complete budget-day coverage from Advisor’s Edge.