July 31, 2015
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
CI INVESTMENTS INC.
(the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for a decision:
(a) pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), exempting the Public Funds (as defined below) from subsection 2.2(1) and 4.1(2) of NI 81-102 (the NI 81-102 Relief);
(b) exempting each Fund from the restriction in the Legislation which prohibits an investment fund from knowingly making an investment in a person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder and the restriction in the Legislation which prohibits an investment fund, its management company or its distribution company, from knowingly holding such an investment (the Substantial Security Holder Relief);
(c) exempting each Fund from the requirement in the Legislation that requires the filing of a report with the securities regulatory authority that discloses every transaction of purchase or sale of securities between an investment fund and any related person or company (the Substantial Security Holder Reporting Relief); and
(d) pursuant to section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) exempting the Filer from paragraph 13.5(2)(a) of NI 31-103 (the NI 31-103 Relief),
in each case to permit each Fund to purchase and hold securities of U.S. Blocker Corporations (as defined below) and not file reports in respect of such investments (together, the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for the application; and
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon:
(i) in respect of the NI 81-102 Relief, by each Public Fund in each other Applicable Jurisdiction in which it is a reporting issuer;
(ii) in respect of the Substantial Security Holder Relief and the Substantial Securityholder Reporting Relief, by each Fund in each other Applicable Jurisdiction;
(iii) in respect of the NI 31-103 Relief, by the Filer in each of the other provinces of Canada.
Interpretation
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. The following additional terms shall have the following meanings:
“Applicable Jurisdiction” means a province or territory of Canada.
“Existing Funds” means the Existing Pooled Funds and the Existing Public Funds.
“Existing Pooled Fund” means an existing mutual fund that is not a reporting issuer under the securities legislaton of any Applicable Jurisdiction and for which the Filer is the manager.
“Existing Public Fund” means an existing mutual fund that is a reporting issuer under the securities legislation of an Applicable Jurisdiction and for which the Filer is the manager.
“Funds” means the Existing Funds and the Future Funds.
“Future Funds” means the Future Pooled Funds and the Future Public Funds.
“Future Pooled Fund” means a future mutual fund that is not a reporting issuer under the securities legislaton of any Applicable Jurisdiction and for which the Filer is the manager.
“Future Public Fund” means a future mutual fund that is a reporting issuer under the securities legislation of an Applicable Jurisdiction and for which the Filer is the manager.
“OSA” means the Securities Act (Ontario).
“Public Funds” means the Existing Public Funds and the Future Public Funds.
The representations by the Filer respecting each Future Fund are made as of the date such Future Fund relies upon the Requested Relief.
Representations
This decision is based on the following facts represented by the Filer:
The Filer is a corporation incorporated under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
The Filer is registered:
(a) under the securities legislation of all the provinces of Canada as a portfolio manager;
(b) under the securities legislation of Ontario, Québec, and Newfoundland and Labrador as an investment fund manager;
(c) under the securities legislation of Ontario as an exempt market dealer; and
(d) under the Commodity Futures Act (Ontario) as a commodity trading counsel and a commodity trading manager.
The Filer is the manager of each Fund.
The Filer is a wholly-owned subsidiary of CI Financial Corp. which also indirectly wholly-owns Assante Capital Management Ltd. (ACM). ACM is registered under the securities legislation of all the Applicable Jurisdictions as an investment dealer. By operation of securities legislation, ACM is deemed to own the securities of the Filer which are owned by CI Financial Corp. Accordingly, the Filer is a dealer-manager and each Public Fund is a dealer-managed investment fund.
Each Fund is either:
(a) a trust formed under the laws of the Province of Ontario and governed by an amended and restated master declaration of trust dated as of April 2, 2007 (as amended from time to time, the Declaration of Trust); or
(b) one or more classes of shares (in such case, a Corporate Fund) of CI Corporate Class Limited (the MFC), a corporation subsisting under the laws of the Province of Ontario.
Each Fund is a “mutual fund” (as such term is defined under the OSA). Each Existing Public Fund is a reporting issuer under the securities legislation of one or more Applicable Jurisdictions and each Future Public Fund will be a reporting issuer under the securities legislation of one or more Applicable Jurisdictions. Each Public Fund is subject to the requirements of both National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and NI 81-102.
Each Existing Pooled Fund is not, and each Future Pooled Fund (together with the Existing Pooled Funds, the Pooled Funds) will not be, a reporting issuer under the securities legislation of any Applicable Jurisdiction. Each Pooled Fund is subject to the requirements of neither NI 81-101 nor NI 81-102.
The Filer and each Fund is not in default of securities legislation in any Applicable Jurisdiction, except with respect to the Filer’s management of certain Existing Pooled Funds, being a group of pooled funds available to institutional and other accredited investors, which, among other securities, invest in other mutual funds. Through inadvertence, the Filer has caused those Existing Pooled Funds to invest in other mutual funds contrary to a prohibition in securities legislation, and is in the process of resolving this issue with its principal regulator and is seeking an exemption to permit this investment strategy to continue on a go-forward basis.
The investment objectives and strategies of each Fund permit it to invest a portion of its assets, directly or indirectly, in securities of U.S. companies. Some U.S. companies are structured as either a U.S. limited liability corporation which has elected to be taxed as a pass-through entity or as a U.S. limited partnership (in either case, a U.S. pass-through issuer). As such, the income of each U.S. pass-through issuer is allocated to and taxed in the hands of the securityholders of the U.S. pass-through issuer rather than being subject to tax on the U.S. pass-through issuer itself. In this respect, the U.S. taxation of U.S. pass-through issuers is similar to the Canadian taxation of limited partnerships.
It is currently expected that most, if not all, of the investments by the Funds described herein will be in U.S. pass-through issuers that are preparing to undertake initial public offerings.
If a Fund invests directly in securities of a U.S. pass-through issuer, on the disposition of those securities the Fund will realize a capital gain (or a capital loss) to the extent that its proceeds of disposition are more than (or less than) the Fund’s cost of that investment for tax purposes. When this occurs, the Fund will be subject to tax in the United States (comprised of federal tax plus state income tax) on the amount of the capital gain, as well as subject to an additional U.S. branch profits tax on the after-tax amount of the capital gain. The Fund also will be subject to Canadian tax on one-half of the amount of such capital gain. The end result is that the Fund will be subject to a certain amount of double-taxation on the same capital gain.
In order to reduce the double-taxation of capital gains described above, the Filer proposes that each Fund instead hold its investment in a U.S. pass-through issuer through a corporation incorporated and domiciled in the United States (each a U.S. Blocker Corporation) formed for that sole purpose. Using this structure:
(a) the investment will include terms requiring that best efforts are made to have the U.S. Blocker Corporation and the U.S. pass-through issuer complete a merger as part of the initial public offering of the U.S. pass-through issuer, or effect a sale that includes a sale of the U.S. Blocker Corporation, which will trigger a capital gain for the Fund from the disposition of its securities of the U.S. Blocker Corporation; and
(b) no U.S. tax will be payable by the Fund in respect of any capital gain it realizes from the disposition of its securities of the U.S. Blocker Corporation described above.
As a result, the total taxes payable, directly or indirectly, by the Fund or a taxable investor in the Fund will be reduced significantly.
Prior to the disposition of its investment in a U.S. pass-through issuer, a Fund may receive an allocation of income from the U.S. pass-through issuer. The amount of U.S. and Canadian tax on such income that the Fund will bear will depend upon whether such investment is held directly by the Fund or in a U.S. Blocker Corporation.
If a Fund invests directly in securities of a U.S. pass-through issuer, it will be subject to income tax in the United States on the amount of income it is allocated by the U.S. pass-through issuer (comprised of a federal tax and state income tax), as well as subject to an additional U.S. branch profits tax on the after-tax amount of the income. Further, the Fund will be subject to Canadian tax. The end result is that the Fund will be subject to a certain amount of double-taxation on the same income.
If the Fund instead holds its investment in a U.S. pass-through issuer through a U.S. Blocker Corporation:
(a) the U.S. Blocker Corporation, rather than the Fund, will pay U.S. income tax on the income allocated by the U.S. pass-through issuer; and
(b) the Fund will be subject to a U.S. withholding tax on the amount paid by the U.S. Blocker Corporation to the Fund, which will be significantly lower than the amount of U.S. branch profits tax that otherwise would be payable.
As a result, the total taxes payable, directly or indirectly, by the Fund or a taxable investor in the Fund will be reduced significantly.
In addition to the tax savings described above, the use of a U.S. Blocker Corporation will simplify the federal and state tax returns (U.S. Tax Returns) required to be filed each year with the United States Internal Revenue Service and state taxation authorities in respect of the investments of the Funds in U.S. pass-through issuers, as described below.
If a Fund directly holds its investment in a U.S. pass-through issuer, the Fund’s U.S. Tax Returns will need to include information relating to all of the Fund's income and assets, rather than merely its income derived from the U.S. pass-through issuer. In the case of a Corporate Fund, this will require that the U.S. Tax Returns detail all of the income and assets of the MFC since the MFC, rather than the individual Corporate Fund, will be considered the taxpayer required to file the U.S. Tax Return.
If, instead, a Fund’s investment in a U.S. pass-through issuer is held in a U.S. Blocker Corporation, the U.S. Tax Returns will be filed by the U.S. Blocker Corporation and will detail only its income and assets from the specific investment in the U.S. pass-through issuer.
Each U.S. Blocker Corporation will be a corporation formed under the laws of the State of Delaware and will have its head office in the State of Delaware. All of the directors and officers of each U.S. Blocker Corporation will be directors and/or officers of the Filer. Each U.S. Blocker Corporation will restrict its activities to owning and holding securities of one U.S. pass-through issuer. For greater certainty, different U.S. Blocker Corporations will hold securities of different U.S. pass-through issuers.
All of the outstanding securities of each U.S. Blocker Corporation will be owned by the Funds which are seeking to make an investment in the U.S. pass-through issuer held by the U.S. Blocker Corporation. Each U.S. Blocker Corporation will have no assets other than its investment in its U.S. pass-through issuer and cash to pay United States tax on the income allocated to it by its U.S. pass-through issuer. Each U.S. Blocker Corporation will have no liabilities other than its liability to pay United States tax on the income allocated to it by its U.S. pass-through issuer. Accordingly, there is no risk that a U.S. Blocker Corporation will become insolvent and thereby expose its assets to potential seizure by creditors.
Each Fund may invest in more than one U.S. Blocker Corporation for purposes of making investments in more than one U.S. pass-through issuer. No more than 10% of the net assets of each Fund will be invested in any single U.S. Blocker Corporation or, directly or indirectly, in any single U.S. pass-through issuer.
The shares of each U.S. Blocker Corporation held by the Funds will be treated by the Funds as illiquid assets. Therefore, the securities of U.S. Blocker Corporations held by a Fund, together with other illiquid assets held by the Fund, will not exceed 10% of the Fund’s net asset value.
Though each Fund will indirectly bear additional costs resulting from use of U.S. Blocker Corporations (mainly in the form of incorporation and maintenance costs of the U.S. Blocker Corporation, as well as the costs of preparing its annual financial statements), the costs savings resulting from the reduction of double-taxation described above are expected to significantly exceed such additional costs.
Each Public Fund is expected to own more than 10% of the voting and equity securities of each U.S. Blocker Corporation in which it invests. As well, each U.S. Blocker Corporation will exist solely to achieve the objectives for the Public Funds described above. Accordingly, absent the NI 81-102 Relief, each investment by a Public Fund using a U.S. Blocker Corporation will contravene paragraph 2.2(1)(a) of NI 81-102 and may contravene paragraph 2.2(1)(b) of NI 81-102.
The directors and officers of each U.S. Blocker Corporation will be comprised solely of individuals who are directors, officers and/or employees of the Filer and/or an affiliate of the Filer. Some or all of such individuals are expected to have one or more of the relationships described in paragraphs (a) through (c) of subsection 4.1(2) of NI 81-102. Accordingly, absent the NI 81-102 Relief, each investment by a Public Fund using a U.S. Blocker Corporation will contravene subsection 4.1(2) of NI 81-102. Further, the Public Funds will not be entitled to rely upon the exemption contained in subsection 6.2(2) of National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) because purchases of securities of the U.S. Blocker Corporations will not be made on an exchange as required by subparagraph 6.2(1)(a)(ii) of NI 81-107.
Each Fund, either individually or together with other Funds, will own 100% of the voting securities of each U.S. Blocker Corporation through which it makes an investment in a U.S. pass-through issuer and therefore will be a “substantial security holder” (as that term is defined in the OSA) of the U.S. Blocker Corporation. Accordingly, absent the Substantial Security Holder Relief, each Fund will be prohibited by paragraph 111(2)(b) and subsection 111(4) of the OSA and the equivalent securities legislation in the other Applicable Jurisdictions, from making and holding, respectively, investments in U.S. Blocker Corporations.
The directors and officers of each U.S. Blocker Corporation will be comprised solely of individuals who are directors, officers and/or employees of the Filer and/or an affiliate of the Filer. Some or all of such individuals are expected to be a “responsible person” of the Funds as defined in section 13.5(1) of NI 31-103. Accordingly, absent the NI 31-103 Relief, each investment by a Fund using a U.S. Blocker Corporation will contravene paragraph 13.5(2)(a) of NI 31-103. Further, the Funds will not be entitled to rely upon the exemption contained in subsection 6.2(2) of NI 81-107 because:
(a) in the case of a Public Fund, purchases of securities of U.S. Blocker Corporations will not be made on an exchange as required by subparagraph 6.2(1)(a)(ii) of NI 81-107; and
(b) in the case of a Pooled Fund, NI 81-107 does not apply to the Pooled Funds.
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:
(a) each U.S. pass-through issuer is arm’s length from the Filer and the Funds;
(b) no U.S. pass-through issuer is an investment fund;
(c) for each Fund, the product of:
(i) the number of votes attached to all of the voting securities of the U.S. pass-through issuer held by the U.S. Blocker Corporation; and
(ii) the percentage of outstanding shares of the U.S. Blocker Corporation owned by the Fund,
does not exceed 10% of the votes attached to all of the outstanding voting securities of the U.S. pass-through issuer;
(d) for each Fund, the product of:
(i) the number of equity securities of the U.S. pass-through issuer held by the U.S. Blocker Corporation; and
(ii) the percentage of outstanding shares of the U.S. Blocker Corporation owned by the Fund,
does not exceed 10% of all of the outstanding equity securities of the U.S. pass-through issuer; and
(e) the number of votes attached to all of the voting securities of the U.S. pass-through issuer held by the U.S. Blocker Corporation does not exceed 20% of the votes attached to all of the outstanding voting securities of the U.S. pass-through issuer.
As to the the NI 81-102 Relief and the NI 31-103 Relief
“Raymond Chan”
Raymond Chan
Manager, Investment Funds and Structured Products Ontario Securities Commission
As to the Substantial Security Holder Relief and the Substantial Security Holder Reporting Relief
“Monica Kowal” “Timothy Moseley”
Name: Monica Kowal Name: Timothy Moseley
Title: Vice-Chair Title: Commissioner
Ontario Securities Commission Ontario Securities Commission