Securities Law & Instruments

Headnote

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 objective of a non-redeemable investment fund -- 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 objective of the fund setting out the change, the reasons for such change and a statement that the funds 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 12, 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 BROOKFIELD INVESTMENT MANAGEMENT (CANADA) INC. (the Filer) AND BROOKFIELD NEW HORIZONS INCOME FUND (the Fund)

DECISION

Background

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 objective 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 (for a passport application):

1. the Ontario Securities Commission is the principal regulator for this application; and

2. 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 of Canada (collectively with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 -- Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

3. The Filer is the trustee, the manager and the portfolio manager of the Fund. The Filer is registered as an investment fund manager, a portfolio manager and an exempt market dealer under the Securities Act (Ontario) and the Securities Act (Québec). It is also a registered exempt market dealer and portfolio manager under the Securities Act (Alberta); Securities Act (British Columbia); Securities Act (Manitoba); Securities Act (New Brunswick); Securities Act (Nova Scotia); and Securities Act (Saskatchewan) as well as an investment fund manager under the Securities Act (Newfoundland and Labrador).

4. The head office of the Filer is located at Brookfield Place, 181 Bay Street, Suite 300, Toronto, Ontario M5J 2T3.

5. The Fund is an investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust.

6. Neither the Filer nor the Fund is in default of securities legislation in any jurisdiction.

7. The Fund is a non-redeemable investment fund. Its units were qualified for distribution pursuant to a prospectus dated March 1, 2011 that was prepared and filed in accordance with the securities legislation of the Jurisdictions. Accordingly, the Fund is a reporting issuer or the equivalent in the Jurisdictions. The units of the Fund are listed and posted for trading on the Canadian Securities Exchange.

8. Under its current investment objective and strategies, the Fund is a party to a forward purchase and sale agreement (the Forward Agreement). The Forward Agreement provides the Fund with exposure to the returns of the securities (the Portfolio) of another investment fund, New Horizons Master Fund (the Reference Fund). The current investment objective of the Fund is as follows:

The Fund's investment objectives are: (i) to provide holders of units with tax advantaged quarterly cash distributions targeted at a rate of the average 10-Year Canadian Government Bond Yield plus 4.00%; and (ii) to preserve the net asset value of the Fund.

9. The fundamental investment objective of the Reference Fund is as follows:

The Fund's investment objective is to preserve the net asset value of the Fund.

10. Through the use of the Forward Agreement, the Fund provides tax-advantaged distributions to securityholders because the Fund will realize capital gains (or capital losses) on the disposition of securities acquired under the Forward Agreement, rather than ordinary income. Ordinary income is subject to taxation at a higher rate in Canada than capital gains.

11. The Forward Agreement is expected to expire and terminate on April 1, 2016 (the Forward Expiry Date).

12. The Income Tax Act (Canada) 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 a prescribed date (the Effective Date). The Effective Date for the Fund will be the Forward Expiry Date.

13. Due to the Tax Changes, the Forward Agreement would no longer be able to, over the long term, provide material tax efficiency to securityholders of the Fund.

14. The Filer has determined that, as a result of the Tax Changes, it would be more efficient and less costly for the Fund to seek to achieve its fundamental investment objective after the Effective Date by investing its assets directly in the same, or substantially the same, assets as those held by the Reference Fund.

15. The Filer wishes to amend the investment objectives of the Fund to remove all references to the use of the Forward Agreement to gain exposure to the Reference Fund, to delete references to "tax-advantaged" and to clarify that the Fund will invest directly in securities similar to those held by the Reference Fund.

16. Following such amendment, the revised investment objective of the Fund will be as follows:

The Fund's investment objectives are: (i) to provide holders of units with quarterly cash distributions targeted at a rate of the average 10-Year Canadian Government Bond Yield plus 4.00%; and (ii) to preserve the net asset value of the Fund.

17. The Filer will also make conforming changes to the investment strategies and investment restrictions of the Fund to reflect the Fund's direct investment in the Portfolio.

18. The Filer expects to effect an inter-fund transfer of the Portfolio assets of the Reference Fund to the Fund in accordance with applicable securities laws, or an exemption therefrom. The Reference Fund will be wound up as soon as practicable after the transfer of its Portfolio assets.

19. The Filer will comply 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 investment objectives of the Fund set out above.

20. 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.

Decision

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.

"Darren McKall"
Manager,
Investment Funds and Structured Products Branch
Ontario Securities Commission