Thank you, Katie.
Investment fund companies manage many funds for insurance companies that are accessed by Canadians through group retirement savings programs or defined contribution pension plans. According to a 2017 report by Strategic Insight, Canadians invested $65 billion in pooled funds, and the main source of this investment is employer-sponsored defined contribution pension plans.
Funds grow and decline with employee population, and to manage these on a low-cost basis to optimize returns, companies need to be able to merge funds on occasion without negatively impacting the end investor. The extension of the tax-deferred merger rules to prospectus-exempt pooled funds would provide consistent tax treatment of mutual funds and segregated funds for the benefit of Canadian savers. The most common example of this is what we would call “target date” funds.
In most defined contribution pension plans, target date funds are the default investment option, so a great many middle-class Canadians own target date funds. These funds have a maturity date, which is included in the name of the fund, and use an asset allocation strategy that gets more conservative the closer you get to maturity. If someone anticipates retiring in 2030, they would invest in a fund with 2030 in the name of the fund.
At maturity, the investor typically retires, and they don't necessarily want to take a lump sum immediately. They can take that, but more typically, we would merge the fund into a broader, diversified fund through which the investor can draw down over time. This gives investors an easy-to-exercise choice of what to do with their retirement savings.
The problem is, if the target date funds hold stocks and bonds directly, we can merge the funds and defer taxes until the investor withdraws money, but if the target date fund holds pooled funds, which in turn hold stocks and bonds, the target date fund merger would give rise to immediate tax consequences, which differs from regular mutual funds and insurance company segregated fund products.