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 the fund – relief required as a result of changes to federal budget eliminating certain tax benefits associated with character conversion transactions – Filer 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 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
May 5, 2017
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
LOGiQ ASSET MANAGEMENT LTD.
IN THE MATTER OF
CANADIAN 50 ADVANTAGED PREFERRED SHARE 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) exempting the Fund from the requirements in section 5.1(1)(c) of National Instrument 81 102 – Investment Funds (NI 81-102) to obtain the approval of securityholders before changing the fundamental investment objectives of the Fund (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 and territories of Canada (collectively with Ontario, the Juris-dictions).
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.
This decision is based on the following facts represented by the Filer:
1. The Filer is the portfolio adviser and manager of the Fund. The Filer is registered as a portfolio manager and an exempt market dealer under applicable securities legislation in Alberta, British Columbia, Manitoba, New Brunswick, New-foundland and Labrador, Nova Scotia, Ontario and Quebec. It is also registered as an investment fund manager under the Securities Act (New-foundland and Labrador), the Securities Act (Ontario) and Securities Act (Quebec). The head office of the Filer is located at 77 King Street West, Suite 2110, Toronto, Ontario M5K 1G8.
2. The Fund is an investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust.
3. Neither the Filer nor the Fund is in default of securities legislation in any jurisdiction.
4. The Fund is a non-redeemable investment fund. Its units were qualified for distribution pursuant to a prospectus dated April 24, 2012, 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 each Jurisdiction. The units of the Fund are listed and posted for trading on the Toronto Stock Exchange (the TSX).
5. The current investment objectives of the Fund are to provide tax-advantaged quarterly cash distributions consisting primarily of returns of capital and low-cost exposure to the total return approximating that of the BMO Capital Markets 50 Preferred Share Index (the Portfolio). The Fund gains exposure to the returns of the securities of the Portfolio by entering into forward contracts (the Forward Agreement) under which the Fund provides tax-advantaged distributions to security-holders because the Fund realizes capital gains (or capital losses) on the disposition of securities acquired under the Forward Agreement rather than ordinary income (the Character Conversion Transactions).
6. The Portfolio is managed by BMO Asset Management Inc. (the Portfolio Manager).
7. 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). The Tax Changes apply to Character Conversion Transactions entered into or amended after March 20, 2013.
8. In response to the Tax Changes, it was anticipated that the Forward Agreement would no longer be able to, over the long term, provide material tax efficiency to securityholders of the Fund. A press release was issued on March 27, 2013, notifying securityholders of the Tax Changes and of the expiry date of the Forward Agreement. Further to the March 27, 2013 press release, the Filer wishes to change the fundamental investment objectives of the Fund (the Objective Changes), and has determined that, upon expiry and termination of the Forward Agreement, the Fund will own its portfolio of investments directly rather than gaining exposure to the Portfolio through the Forward Agreement.
9. The Portfolio Manager has agreed to act as portfolio manager of the Fund after the Effective Date.
10. The Forward Agreement with respect to the Fund is expected to expire and terminate on May 18, 2017. The existing investment objectives of the Fund are expected to continue in effect until on or about May 18, 2017 and the Objective Changes will take effect as soon as reasonably practicable thereafter (the Effective Date).
11. 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 objectives after the Effective Date by investing its assets directly in the same, or substantially the same, assets as those held by the Portfolio.
12. The Filer wishes to effect a change (the Change) to the fundamental investment objectives of the Fund to delete references to “tax-advantaged” and to clarify that the Fund will invest directly in securities similar to those held by the Portfolio.
13. Following such a Change, the revised investment objectives of the Fund will be to provide:
(i) quarterly cash distributions; and
(ii) exposure to the total return approxi-mating that of the BMO Capital Markets 50 Preferred Share Index.
14. The Filer 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 investment objectives of the Fund set out above.
15. The Fund will issue a press release before the effective date of the Objective Changes that sets out the revised investment objective, the reasons for changing the fundamental investment objective, and a statement that the Fund will no longer distribute gains under forward contracts that are treated as capital gains for tax purposes.
16. 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.
Investment Funds and Structured Products Branch
Ontario Securities Commission