Finance Minister Jim Flaherty tables the federal budget in the House of Commons on Parliament Hill in Ottawa on March 21, 2013.
Mutual fund companies have had more than a week to digest the government's proposal to clamp down on an investment strategy that delivered higher returns by reducing taxes. Several firms have said the plan unveiled in the federal budget will not affect funds until certain contracts expire – in many cases, several years down the road.
But AGF Investments Inc. and Fidelity Investments Canada ULC said Monday they would halt new investments in some funds as a result of the change.
"Until we receive clarification on these new regulations, we believe the prudent move for us is to protect existing shareholders from any potential uncertainty," Gordon Forrester, an AGF executive vice-president, said in a statement.
AGF will said Monday that it would temporarily stop all new investment in the AGF Monthly High Income Class fund as of Tuesday – the fund has $22-million in assets under management.
Fidelity Investments Canada ULC said it would close seven capital yield funds to new investment on Tuesday.
While fund managers have collectively said they need more clarity around the new proposal, some points are clear: The new rule would curtail the use of "character conversion transactions." These transactions use a kind of derivative forward purchase agreement that delivers returns as capital gains, which are taxed at a lower rate than interest income. Mutual funds are expected to feel the most pain, with some effects on closed-ended funds and exchange traded funds.
As they wait to review the legislation, some companies are predicting whether their funds will be affected, and when clients should expect changes.
Invesco Canada Ltd., for example, said the changes would likely affect its PowerShares Tactical Bond Capital Yield Class and Invesco Intactive Strategic Capital Yield Portfolio Class products. The new rules target forward contracts with terms longer than 180 days that are entered into, or extend beyond, March 2.
But until the Invesco contracts expire, in September, 2015, and May, 2017, respectively, the company doesn't think its current investors will lose out on any of the capital gains treatment of returns (provided the contracts aren't extended).
O'Leary Funds Management LP said it doesn't expect that any effect will be felt until the forward agreements' expiration date. The five funds it identified, including funds such as the O'Leary U.S. Strategic Yield Advantaged Fund, have forward contracts that expire between early 2014 and mid-2016.
Sprott said two of its investments funds – the Sprott Strategic Fixed Income Fund and Sprott Private Credit Trust – make use of "forward purchase and sale agreements to allow unitholders to receive tax-advantaged distributions." But since forward agreements on these funds don't expire until at least 2016, there's no change for investors in the funds right now.
Mackenzie Financial Corp. used even stronger language: "...there is no immediate meaningful impact on any Mackenzie Investments' fund since it appears the proposal does not affect character conversion transactions that were already in place as of the budget date."
Still, some companies said they need more information: Fiera Capital Corp. said it is reviewing the impact of possible changes and "awaits further guidance" for its Fiera Tactical Bond Yield fund.
For now, it appears investors in these tax-advantaged fund will have months, and perhaps years, to adjust to the wind down of such funds. Other investors will just have to look for alternative products if they're looking for a lower rate.