National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- investment fund manager obtaining relief from the requirement to obtain the approval of securityholders before changing the fundamental investment objectives of a non-redeemable investment fund -- exemptive relief required as a result of changes to tax law eliminating certain tax benefits associated with character conversion transactions -- manager required to send written notice at least 30 days before the effective date of the change to the investment objectives of the funds setting out the change, the reasons for such change and a statement that the fund will no longer distribute gains under forward contracts that are treated as capital gains for tax purposes -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 5.1(1)(c), 19.1.
February 17, 2016
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF SCOTIA MANAGED COMPANIES ADMINISTRATION INC. (the Filer) AND IN THE MATTER OF ADVANTAGED CANADIAN HIGH YIELD BOND FUND (the Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) for exemptive relief from the requirement to obtain prior securityholder approval before changing the fundamental investment objectives of the Fund under subsection 5.1(1)(c) of National Instrument 81 102 -- Investment Funds (NI 81-102) (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
I. the Ontario Securities Commission is the principal regulator for this Application, and
II. the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).
Terms defined in MI 11-102, National Instrument 14-101 Definitions and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer, a wholly-owned subsidiary of Scotia Capital Inc., is a corporation existing under the laws of the Province of Ontario and is registered as an Investment Fund Manager in Ontario, Quebec and Newfoundland and Labrador. The head office of the Filer is located in Toronto, Ontario.
2. The Fund is a non-redeemable investment fund established as a trust under the laws of the Province of Ontario pursuant to a declaration of trust dated March 7, 2011, as amended and restated as of March 9, 2012, March 28, 2013 and April 22, 2015, and as may be further amended and restated from time to time (the Declaration of Trust).
3. Class A units and Class F units of the Fund were qualified for distribution pursuant to a prospectus dated March 7, 2011 that was prepared and filed in accordance with the securities legislation in each of the Jurisdictions. Accordingly, the Fund is a reporting issuer in each of the Jurisdictions. Class F units are designed for clients of registered brokers, dealers and advisors with fee-based accounts and are not listed on a stock exchange but may be converted into Class A units on a weekly basis for liquidity purposes. The Class A units of the Fund are listed and posted for trading on the Toronto Stock Exchange (the TSX) under the symbol AHY.UN.
4. Neither the Filer nor the Fund is in default of securities legislation in the Jurisdictions.
5. In order to achieve its current fundamental investment objectives, the Fund is a party to a forward purchase agreement (the Forward Agreement) with a counterparty, dated March 31, 2011. Through the Forward Agreement, the Fund obtains exposure to a diversified portfolio (the Portfolio) of Canadian high yield fixed income securities (the Canadian HY Corporate Bonds) held by its reference fund (the CHY Fund).
6. The current investment objectives of the Fund are to: (i) preserve and enhance the net asset value of the Fund; and (ii) provide unitholders with quarterly tax-advantaged distributions consisting of returns of capital and capital gains, through investment exposure to Canadian HY Corporate Bonds pursuant to the Forward Agreement.
7. The fundamental investment objectives of CHY Fund are to: (i) preserve and enhance the net asset value of the CHY Fund; and (ii) to provide holders of units of CHY Fund with income and capital appreciation from the Portfolio through investment in Canadian HY Corporate Bonds.
8. Pursuant to the terms of the Forward Agreement, the counterparty will deliver to the Fund, on the scheduled settlement date of the Forward Agreement, a specified portfolio of securities of Canadian public companies that are Canadian securities as defined in subsection 39(6) of the Income Tax Act (Canada) (the Tax Act) and listed on the TSX with an aggregate value equal to the net redemption proceeds that would be received by holders on the redemption of the relevant number of units of CHY Fund.
9. Through the use of the Forward Agreement, the Fund currently provides tax-advantaged distributions to its securityholders because the Fund realizes capital gains (or capital losses) on the disposition of securities acquired under the Forward Agreement, rather than ordinary income. Ordinary income is subject to tax at a higher rate in Canada than capital gains.
10. The Forward Agreement is expected to terminate on or about March 31, 2016 in accordance with its terms (the Termination Date).
11. The Tax Act was amended in December, 2013 to implement proposals that were first announced in the March 21, 2013 federal budget regarding the income tax treatment of character conversion transactions (the Tax Changes). Under the Tax Changes, the favourable tax treatment of character conversion transactions will be eliminated after prescribed dates and the distributions paid by the Fund are no longer expected to be characterized primarily as capital gains or return of capital and instead all or a portion of the distributions paid by the Fund will be characterized as ordinary income after the Termination Date.
12. As a result of the Tax Changes, the Filer has determined that it will be more efficient and less costly for the Fund to achieve its fundamental investment objectives after the Termination Date by investing its assets using the same, or substantially the same, investment strategies and restrictions as those employed by CHY Fund prior to the Termination Date. The Filer has also determined that the Fund should directly own securities of the kind that comprise the Portfolio rather than through CHY Fund and that CHY Fund should be wound up. The Filer expects that the entire amount of the Forward Agreement will be settled and the Fund will acquire the Portfolio held by CHY Fund in accordance with applicable securities laws.
13. The Filer wishes to amend the fundamental investment objectives of the Fund to delete the references to "tax-advantaged" and the use of the Forward Agreement to obtain investment exposure to the Portfolio. Other than for the loss of tax efficiency resulting from the Tax Changes, the Fund will have the same investment attributes under its amended fundamental investment objectives as exist under its current fundamental investment objectives.
14. Following such amendment, the revised fundamental investment objectives of the Fund will be to: (i) preserve and enhance the net asset value of the Fund; and (ii) provide unitholders with quarterly distributions through investment in the Portfolio of Canadian HY Corporate Bonds.
15. The Fund has complied with the material change report requirements set out in Part 11 of National Instrument 81-106 Investment Fund Continuous Disclosure in connection with the Filer's decision to make the changes to the fundamental investment objectives of the Fund set out above.
16. The Filer expects the proposed changes to the fundamental investment objectives of the Fund to take effect on or about the Termination Date.
17. The Filer has determined that it would be in the best interests of the Fund and not prejudicial to the public interest to receive the Requested Relief.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Requested Relief is granted, provided that, at least 30 days before the effective date of the change in the investment objectives of the Fund, the Filer will send to each securityholder of the Fund a written notice that sets out the change to the investment objective, the reasons for such change and a statement that the Fund will no longer distribute gains under forward contracts that are treated as capital gains for tax purposes.