Newly enacted trust loss restriction rules may have unintended and adverse tax implications for investment funds established as trusts. Asset managers should consider the possible application of these rules to their funds.
The 2013 federal budget announced new trust loss restriction rules that were enacted on December 12, 2013, and apply after March 20, 2013.
These new rules will, in general, have similar tax results as an acquisition of control of a corporation, each time a trust is subject to a ‘loss restriction event.’ These results include a deemed year-end, expiry of capital losses, and restrictions on non-capital loss carryforward balances.
A trust will have a loss restriction event when a person or partnership (or group of persons or partnerships) becomes a ‘majority-interest beneficiary’ (or a ‘majority-interest group of beneficiaries’) of the trust.
A ‘majority-interest beneficiary’ of a trust is a person whose beneficial interest in the income (or capital) of the trust, together with the beneficial interests of any affiliated persons in the income (or capital) of the trust, is greater than 50% of the fair market value of all the beneficial interests in the income (or capital) of the trust.
A ‘majority-interest group of beneficiaries’ is a group of persons each of whom has a beneficial interest in the trust such that:
The loss restriction event rules can have significant consequences to funds that are structured as trusts. These include:
A fund can elect to realize accrued capital gains in order to use losses that would otherwise expire.