May 19, 2015
In the Matter of the Securities Legislation of Ontario (the “Jurisdiction”)
and
In the Matter of Lysander Funds Limited (the “Filer”)
and
In the Matter of Canso Credit Income Fund (the “Fund”)
DECISION
Background
The Ontario Securities Commission (the “Decision Maker”) 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 (for a passport application):
the Ontario Securities Commission is the principal regulator for this application; and
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:
The Filer is the manager of the Fund and is registered as an investment fund manager in Ontario, Quebec and Newfoundland and Labrador, and an exempt market dealer in Ontario. The head office of the Filer is located in Richmond Hill, Ontario.
Canso Investment Counsel Ltd. (“Canso”) is the portfolio manager of each of the Fund and the Reference Fund (as defined herein) and is registered as a portfolio manager and an exempt market dealer in each of the Jurisdictions.
The Fund is an investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust.
Neither the Filer, Canso nor the Fund are in default of securities legislation in any Jurisdiction.
The Fund is a non-redeemable investment fund. Its units were qualified for distribution pursuant to a prospectus dated July 28, 2010, that was prepared and filed in accordance with the securities legislation of all the provinces of Canada. Accordingly, the Fund is a reporting issuer or the equivalent in each province of Canada. The units of the Fund are listed and posted for trading on the Toronto Stock Exchange under the symbol PBY.UN.
Under its current investment objectives and strategies, the Fund may enter into character conversion transactions. The Fund is a party to a forward purchase and sale agreement dated July 16, 2010 (the “Forward Agreement”). The Forward Agreement provides the Fund with exposure to the returns of the securities of another investment fund, Canso Credit Trust (the “Reference Fund”). The current investment objectives of the Fund are as follows:
“The investment objectives of the Fund are, through exposure to the Canso Credit Trust Portfolio: (i) to maximize total returns for Unitholders, on a tax-advantaged basis, while reducing risk; and (ii) to provide Unitholders with attractive monthly tax-advantaged cash distributions, initially targeted to be $0.50 per Unit per annum, representing an annual yield of 5.00% based on the original issue price of $10.00 per Unit. To achieve exposure to the Canso Credit Trust Portfolio, the Fund will enter into the Forward Agreement with the Counterparty. The Fund will pre-pay the purchase price under the Forward Agreement, and the Counterparty will agree to deliver to the Fund on the Forward Termination Date (or earlier in whole or in part at the request of the Fund) the Canadian Securities Portfolio with an aggregate value equal to the redemption proceeds of the relevant number of units of Canso Credit Trust, net of any amount owing by the Fund to the Counterparty.”
Through the use of the Forward Agreement, the Fund provides tax-advantaged distributions to its 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 tax at a higher rate in Canada than capital gains.
The Forward Agreement is expected to terminate on or about June 30, 2015, in accordance with its terms (the “Termination Date”).
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 Termination Date.
As a result of the Tax Changes, it is anticipated that the Fund will no longer be able, after the Forward Agreement matures, to provide the same material tax efficiency to securityholders of the Fund. As a result, the Filer has determined that, upon the termination of the Forward Agreement, the Fund should own its portfolio of investments directly rather than through the Reference Fund, and the Reference Fund will be wound up.
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 of the Reference Fund. Canso will also continue to manage the portfolio of the Fund in as tax-efficient a manner as possible.
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 and to delete references to “tax-advantaged” and “attractive” distributions and the Fund’s initial indicative yield. 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 exist under its current investment objectives.
Following such amendment, the revised investment objectives of the Fund will be as follows:
“The investment objectives of the Fund are: (i) to maximize total returns for Unitholders while reducing risk; and (ii) to provide Unitholders with monthly cash distributions, by taking long and short positions in a portfolio of primarily corporate bonds and other income securities.”
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.
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 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.
“Darren McKall” Darren McKall Manager, Investment Funds and Structured Products Ontario Securities Commission
SEDAR PROJECT NO. 2316702