Mutual fund corporations have often been structured to permit changing
funds within the group on a tax-free basis. These are commonly referred to as
“switch funds” or “corporate-class funds”, and have become popular due to the
ability to defer accumulated capital gains. Essentially, investors can switch
funds without realizing dispositions and the related taxable capital gains.
However, new legislation has been proposed to end these deferrals
commencing with exchanges on or after January 1, 2017.
Some exceptions exist, including switching between different series in the
same class of shares representing the same underlying fund (for example, due
to different commission or fee terms) and transactions where the underlying
investment is unchanged, but shares are reorganized for other bona fide
reasons (for example, changing voting rights or amalgamating funds).
Action Item: Consider rebalancing switch fund portfolios by December
31, 2016.