The Pension Investment Association of Canada is urging the federal government to allow for tax-free mergers of maturing target-date funds.
In a letter to the Department of Finance Canada, the PIAC said current tax rules don’t permit tax-free mergers of a target-date fund series into a terminal fund — where a target-date fund provider will eventually merge all of their maturing fund series — noting this type of transaction currently triggers capital gains for the non-registered fund investors, despite the fact the underlying investments haven’t changed, nor has the member transacted to expect this capital gain.
“Most of the providers of target-date funds in the industry structured their target-date funds to be able to accept both registered and non-registered money in order to gain sufficient economies of scale. It is our understanding based on discussions with the largest providers of target-date funds that the Canadian market is not deep enough to support separate fund series for registered and non-registered money.”
The PIAC also noted the increasing popularity of target-date funds in employer-sponsored retirement savings plans, adding the elimination of this tax would be consistent with many forms of tax-free mergers and spin-offs permitted for public corporations in Canada.