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 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 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.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 5.1(1)(c), 19.1.

September 7, 2017

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
PICTON MAHONEY ASSET MANAGEMENT
(the Filer)

AND

IN THE MATTER OF
PICTON MAHONEY TACTICAL 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 of the principal regulator (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 (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 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:

1.             The Filer is a general partnership that was established under the laws of the Province of Ontario and is registered as an investment fund manager in Ontario, Québec and Newfoundland and Labrador, as a portfolio manager in British Columbia, Manitoba, Newfoundland and Labrador, Ontario, Prince Edward Island, Quebec and Saskatchewan, as an exempt market dealer in Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Ontario, Prince Edward Island, Quebec and Saskatchewan and as a commodity trading manager in Ontario. 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 September 26, 2012.

3.             Class A units and Class F units of the Fund were qualified for distribution pursuant to a prospectus dated September 27, 2012 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 PMB.UN.

4.             Under its current investment objectives and strategies, the Fund is a party to a forward agreement dated October 18, 2012 (the Forward Agreement). The Forward Agreement provides the Fund with exposure to the returns of a diversified portfolio of income producing securities (the Portfolio) held by its reference fund, Income Strategies Trust (IS Trust). The current investment objectives of the Fund are to:

(i)            provide unitholders with sustainable tax-advantaged monthly distributions;

(ii)           preserve capital and mitigate risk with less volatility and less correlation to high-yield and equity markets; and

(iii)          maximize total return to unitholders through distributions and capital appreciation.

5.             None of the Filer, the Fund or IS Trust is in default of securities legislation in any Jurisdiction.

6.             Through the use of the Forward Agreement, the Fund provides tax-advantaged distributions to its unitholders 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.

7.             The Forward Agreement is expected to terminate on or about October 18, 2017 in accordance with its terms (the Termination Date).

8.             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 derivative forward agreements (the Tax Changes). Under the Tax Changes, the favourable tax treatment of derivative forward agreements will be eliminated after a prescribed date (the Effective Date). The Effective Date for the Fund will be the Termination Date.

9.             As a result of the Tax Changes, the Forward Agreement will no longer be able, following the Termination Date, to provide the same material tax efficiency to unitholders of the Fund. As a result, the Filer has determined that, upon termination of the Forward Agreement, the Fund should invest in a portfolio of investments directly rather than obtaining exposure to the portfolio through IS Trust, and IS Trust will be wound up. Following the Termination Date, the Fund will invest directly in the same or substantially the same securities currently held in the portfolio of IS Trust and the Filer intends to continue to pursue the Fund’s investment strategy directly without the Forward Agreement or IS Trust.

10.          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 using the same, or substantially the same, investment strategies as those employed by IS Trust prior to the Termination Date. The Filer will also continue to manage the portfolio of the Fund in as tax-efficient a manner as possible.

11.          The Filer wishes to amend the investment objectives of the Fund to delete the references to “tax-advantaged” distributions and to remove all references to the use of the Forward Agreement to gain exposure to IS Trust. Other than for the loss of tax efficiency resulting from the Tax Changes, the Fund will have the same investment attributes under its amended investment objectives as its current investment objectives.

12.          Following such amendment, the revised investment objectives of the Fund will be to:

(i)            provide unitholders with monthly distributions;

(ii)           preserve capital and mitigate risk with less volatility and less correlation to high-yield and equity markets; and

(iii)          maximize total return to unitholders through distributions and capital appreciation.

13.          The Filer has complied with the material change reporting 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.

14.          The Filer expects the proposed changes to the fundamental investment objectives of the Fund to take effect on or about the Termination Date.

15.          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 to 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 objectives, 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.

“Vera Nunes”
Manager,
Investment Funds and Structured Products Branch
Ontario Securities Commission