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A Look at Investment Funds After Budget 2012
There are many times when a seemingly small shift in the earth can give rise to significant ripple effects. The likelihood of such effects can be magnified when one small shift is combined with another. We may well see this result from the combined impact of a proposed change to subsection 100(1) of the Income Tax Act included in the recent federal budget and the recent Supreme Court of Canada decision in the Copthorne case. Although this would impact many different taxpayers, particular concern arises for investment funds in which tax-exempts are investors. Taxand Canada takes a look at how the proposed legislation change from Budget 2012 is likely to affect investment funds.
The Budget Proposal
First the Budget proposal. Buried amongst the many tax proposals in Budget 2012 is an at first, seemingly innocuous change to the preamble to section 100 of the ITA. In general terms, subsection 100(1) is a very specific anti-avoidance rule aimed at transactions that effectively result in the avoidance of the recapture of depreciation by a taxable person.
So what does this mean?
Clearly it is not "business as usual". In the past one could usually get fairly comfortable that subsection 100(1) would not apply in the case of the acquisition of an interest in a partnership by an investment fund some or all of the investors in which included tax-exempt parties. This will have to be reconsidered.
Taxand Canada discusses investment funds following Budget 2012 in greater detail
The proposed legislation may leave open solutions to these potential problems in many circumstances. It should be noted that although the description of the proposal in the Supplementary Information refers to "indirect" dispositions, that word does not appear in the related Ways and Means Motion, and it is the wording of the Ways and Means Motion that will make its way into the ITA. Accordingly, the impact of the Budget proposal may not be as significant as the description in the Supplementary Information might lead one to believe. Nevertheless, this proposal will require careful consideration.
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