CI Investments Inc. (Re), 2017 CanLII 72429

October 24, 2017

(the Jurisdiction)

and

(the Manager)

and

(the Terminating Funds)

Background

The principal regulator in the Jurisdiction has received an application from the Manager on behalf of the Terminating Funds for a decision under the securities legislation of the Jurisdiction (the Legislation) approving the proposed mergers described below (the Mergers) of the Terminating Funds into the Continuing Funds (defined below) pursuant to paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) (the Approval Sought).

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 Manager has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:

Continuing Fund means each of CI G5|20 2040 Q4 Fund, CI G5|20 2040 Q1 Fund, CI G5|20i 2035 Q1 Fund and CI G5|20i 2035 Q2 Fund;

Fund or Funds means, individually or collectively, the Terminating Funds and the Continuing Funds;

IRC means the independent review committee of the Funds; and

Tax Act means the Income Tax Act (Canada).

Representations

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

The Manager

1. The Manager is a corporation subsisting under the laws of Ontario with its head office located in Toronto, Ontario. The Manager is registered:

(a) under the securities legislation of all provinces of Canada as a portfolio manager;

(b) under the securities legislation of Ontario, Québec, and Newfoundland and Labrador as an investment fund manager;

(d) under the Commodity Futures Act (Ontario) as a commodity trading counsel and a commodity trading manager.

The Manager is the investment fund manager and portfolio adviser of each Fund.

The Funds

Each Fund is a mutual fund governed by a declaration of trust dated June 28, 2013, as amended.
The Manager and each Fund is not in default of securities legislation in any Jurisdiction.
Each Fund is a reporting issuer under the securities legislation of each Jurisdiction and is subject to the requirements of NI 81-102.
Each Fund is a tactical balanced fund with a globally diversified and actively managed investment portfolio, and seeks to preserve unitholders’ retirement payment stream against volatile markets by providing them with a guaranteed monthly cash flow, while also providing potential for capital appreciation.
Units of a Fund were only available for purchase during a specified issue period, which was typically the three-month period following the date of the final prospectus of the Fund (the Issue Period). After the Issue Period has completed, units of a Fund were no longer available for purchase.
During its Issue Period, each Fund was authorized to issue an unlimited number of Class A units, Class F units and Class O units. At the end of its Issue Period, each Fund had outstanding, and continues to have outstanding, Class A units, Class F units and Class O units. Units of a Fund are redeemable daily at a price equal to the unit’s net asset value (NAV).
Each of CI G5|20 2039 Q1 Fund, CI G5|20 2039 Q4 Fund, CI G5|20 2040 Q1 Fund, CI G5|20 2040 Q2 Fund, CI G5|20 2040 Q3 Fund, CI G5|20 2040 Q4 Fund, CI G5|20 2041 Q1 Fund and CI G5|20 2041 Q2 Fund (each, a G5|20 Fund) has a targeted lifespan of 25 years, comprised of an initial 5-year accumulation phase (the Accumulation Phase) followed by a 20-year cash flow phase in which guaranteed monthly distributions are paid (the Distribution Phase).
Each of CI G5|20i 2034 Q2 Fund, CI G5|20i 2034 Q3 Fund, CI G5|20i 2034 Q4 Fund, CI G5|20i 2035 Q1 Fund, CI G5|20i 2035 Q2 Fund, CI G5|20i 2035 Q3 Fund and CI G5|20i 2035 Q4 Fund (each, a G5|20i Fund) has a targeted lifespan of 20 years, during each month of which the G5|20i Fund pays guaranteed monthly distributions.
Therefore, the only significant difference between the G5|20 Funds and the G5|20i Funds is that the G5|20 Funds have an Accumulation Phase before moving into the Distribution Phase, whereas the G5|20i Funds go immediately into the Distribution Phase at the end of the Issue Period.
Over the course of the Distribution Phase, investors in a Fund are guaranteed to receive at least the amount they invested in a Fund as return of capital (the Guaranteed Distributions). The total amount of Guaranteed Distributions on units paid over the life of a Fund is equal to the greater of (i) the amount originally paid for the units by an investor, and (ii) the NAV per unit on the last date of the Accumulation Phase (for G5|20 Funds) or on the last day of the Issue Period (for G5|20i Funds) (the Guaranteed Asset Value).
The Guaranteed Asset Value may increase over the life of a Fund if the NAV per unit on certain dates is higher than the then current Guaranteed Asset Value. In this way, investors in a Fund may lock in higher Guaranteed Distributions if the NAV of the Fund continues to increase during its life.
BMO Nesbitt Burns Inc. has the obligation to ensure that the Guaranteed Distributions are made to investors, and its parent company, Bank of Montreal, has guaranteed its obligations in this regard.
If significant declines in interest rates or the performance of a Fund occur, which decrease the spread between the NAV of the Fund and the present value of its future liabilities¹ to a prescribed spread, the assets of the Fund will be shifted into a portfolio consisting of fixed income securities issued by the Canadian federal and/or provincial governments and cash equivalents (the Protection Portfolio). Once a Fund’s assets are moved into the Protection Portfolio, the possibility of future capital appreciation is extremely limited.

Background to the Mergers

In order to qualify as a “mutual fund trust” under the Tax Act, a mutual fund must have, among other things, at least 150 holders of one class of units. As the Funds were launched with three classes (Class A, F and O) for a limited time, this divided a finite number of unitholders among three classes. Further, each G5|20 Fund was launched concurrently with a G5|20i Fund, which further split the number of investors between the two Funds. As a result, the Funds had a lower number of unitholders in any one class of units at launch than would have been ideal for purposes of remaining a “mutual fund trust” throughout each Fund’s life.
As units of the Funds are no longer available for sale, there is no mechanism by which additional investors can be brought into a Fund. In other words, unlike with conventional mutual funds, the Funds are not able to increase the number of unitholders by issuing more units to the public.
Given these facts, and that units of the Funds are redeemable daily, since their launch the number of unitholders in the Funds has declined such that certain Funds have fallen below 150 unitholders in one class and others risk falling below 150 unitholders by the end of 2017. As stated above, when a Fund falls below 150 unitholders, the Fund no longer qualifies as a “mutual fund trust” under the Tax Act, which has negative tax consequences for the Fund and its unitholders.
Accordingly, the Manager believes it is in the best interest of the Funds and their unitholders to effect the Mergers in order to combine the multiple Funds into fewer larger mutual funds to ensure that the Funds do not lose “mutual fund trust” status. Further, the Mergers must be completed by December 15, 2017 (the Funds’ taxation year-end), as that is the date when multiple Funds will lose their “mutual fund trust” status if they have less than 150 unitholders. Additionally, following the Mergers, each Continuing Fund will have more assets, thereby allowing more efficient management of portfolio risk due to economies of scale and the fact that exchange-traded derivatives are more efficiently used when the assets of a mutual fund are larger.

Details of the Mergers

The Manager intends to merge each Terminating Fund into the Continuing Fund shown opposite its name in the table below:

Terminating Fund

Continuing Fund

CI G5|20 2039 Q1 Fund CI G5|20 2040 Q3 Fund CI G5|20 2041 Q1 Fund CI G5|20 2041 Q2 Fund

CI G5|20 2040 Q4 Fund

CI G5|20 2039 Q4 Fund CI G5|20 2040 Q2 Fund

CI G5|20 2040 Q1 Fund

CI G5|20i 2034 Q2 Fund CI G5|20i 2034 Q3 Fund CI G5|20i 2034 Q4 Fund

CI G5|20i 2035 Q1 Fund

CI G5|20i 2035 Q3 Fund CI G5|20i 2035 Q4 Fund

CI G5|20i 2035 Q2 Fund

In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, the Mergers were announced in a press release and material change report each dated September 28, 2017, each of which has been filed on SEDAR.
As required by National Instrument 81-107 Independent Review Committee for Investment Funds, the Manager presented the terms of the Mergers to the IRC for its review. The IRC determined that the Mergers, if implemented, will achieve a fair and reasonable result for each of the Funds.
The Manager is convening a special meeting (each, a Meeting) of the unitholders of each Terminating Fund in order to seek the approval of the unitholders to complete the Mergers, as required by paragraph 5.1(1)(f) of NI 81-102. The Meetings will be held on or about November 21, 2017. In connection with the Meetings, the Manager will send to such unitholders a management information circular (a Circular) and a related form of proxy.
The Circular will contain prospectus-like disclosure concerning each Continuing Fund, including information regarding its fees and expenses, and investment objective and investment strategy, and a summary of the principal differences between each Terminating Fund and its corresponding Continuing Fund. The Circular will also disclose that unitholders of the Funds may obtain the most recently filed financial statements and management reports of fund performance of the Funds from the Manager upon request or on SEDAR at www.sedar.com.
The Manager has also produced communications regarding the Mergers tailored to financial advisors so that financial advisors are equipped to appropriately explain the Mergers to their clients that are unitholders of the Funds.
The Manager has concluded that the Mergers will not be material to the Continuing Funds, as the Mergers will have no impact to the NAV per unit of the Continuing Funds or the Guaranteed Distributions paid to unitholders of the Continuing Funds, and the investment objectives and strategies of the Continuing Funds will not be affected by the Mergers. Accordingly, approval of the unitholders of the Continuing Funds for the Mergers will not be sought.
If all required approvals for a Merger are obtained, it is intended that the Merger will occur after the close of business on or about November 24, 2017 (the Effective Date). The Manager therefore anticipates that each unitholder of a Terminating Fund will become a unitholder of its Continuing Fund after the close of business on the Effective Date. Each Terminating Fund will be wound-up as soon as reasonably possible following its Merger.
The cost of effecting the Mergers (consisting primarily of legal and regulatory fees, proxy solicitation, and printing and mailing, as applicable) will be borne by the Manager.
No sales charges will be payable by unitholders of the Funds in connection with the Mergers.
Units of the applicable Continuing Funds received by unitholders of the Terminating Funds as a result of the Mergers will have the same sales charge option and, for units purchased under a deferred sales charge option, the same remaining deferred sales charge schedule, as their units in the Terminating Funds.
Unitholders of each Terminating Fund will continue to have the right to redeem their units of the Terminating Fund at any time up to the close of business on the business day before the Effective Date. Following each Merger, any optional plans which were established with respect to the Terminating Fund will be re-established in comparable plans with respect to its Continuing Fund unless unitholders advise otherwise.

Merger Steps

The specific steps to implement each Merger are as follows:

(a) The value of the Terminating Fund’s investment portfolio and other assets will be determined at the close of business on the Effective Date in accordance with the constating documents of the Terminating Fund.

(b) Each of the Terminating Fund and the Continuing Fund will declare, pay and automatically reinvest a distribution to its unitholders of net realized capital gains and net income, if any, to ensure that it will not be subject to tax for its current tax year. Immediately thereafter, units of the Fund will be consolidated so that, except in the case of unitholders that are not residents of Canada, the number of units of the Fund held by a unitholder after the consolidation is the same as before the distribution.

(c) The Terminating Fund will transfer substantially all of its assets to the Continuing Fund. In return, the Continuing Fund will issue to the Terminating Fund units of the Continuing Fund having an aggregate NAV equal to the value of the assets transferred to the Continuing Fund.

(d) Each Continuing Fund will not assume liabilities of the applicable Terminating Fund and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date.

(e) Immediately thereafter, units of the Continuing Fund received by the Terminating Fund will be distributed to unitholders of the Terminating Fund in exchange for their units in the Terminating Fund on a dollar-for-dollar and class-by-class basis.

(f) The Terminating Fund will be wound up within 30 days following its Merger.

The result of each Merger will be that investors in each Terminating Fund will cease to be unitholders of the Terminating Fund and will become unitholders of the equivalent class of the corresponding Continuing Fund.

Benefits of the Mergers

In the opinion of the Manager, the Mergers will be beneficial to unitholders of the Funds for the following reasons:

(a) as a result of the greater number of unitholders in each Continuing Fund, the Continuing Funds will continue to qualify as “mutual fund trusts” under the Tax Act and will avoid the negative tax consequences of losing that status;

(b) in the case of the Mergers of certain G5|20i Funds, the Continuing Fund has a later termination date than the corresponding Terminating Fund, which means that unitholders of the Terminating Fund will receive Guaranteed Distributions for a longer period of time as a result of the Merger than if they remained in the Terminating Fund;

(c) following the Mergers, each Continuing Fund will have more assets, thereby allowing more efficient management of portfolio risk due to economies of scale and the fact that exchange-traded derivatives are more efficiently used when the assets of a mutual fund are larger; and

(d) the Manager will only proceed with a Merger if, immediately following the Merger, each unitholder of the applicable Terminating Fund will be entitled to an aggregate amount per Guaranteed Distribution that is equal to or higher than the unitholder’s entitlement immediately prior to the Merger.

The Manager considers that each Terminating Fund will be merged into a Continuing Fund that has substantially similar investment strategies and valuation procedures.
The annual management fee and fixed administration fee paid by each Fund are identical.

Reasons for Approval Sought

Regulatory approval of the Mergers is required because each Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular,

(a) a reasonable person may not consider the investment objectives of each Terminating Fund to be substantially similar to the investment objectives of its corresponding Continuing Fund;

(b) none of the Continuing Funds has a current prospectus in any jurisdiction of Canada;

(c) other than the Mergers of CI G5|20 2039 Q1 Fund, CI G5|20 2040 Q3 Fund and G5|20 2041 Q1 Fund into CI G5|20 2040 Q4 Fund (collectively, the Non-Taxable Mergers), no Merger will be a “qualifying exchange” or a tax deferred transaction under the Tax Act; and

(d) as the Continuing Funds are not in distribution, the materials that will be sent to unitholders of a Terminating Fund will not include the most recently filed fund facts document for the applicable Continuing Fund.

While all the Funds generally have identical investment objectives, the objectives of each Fund include reference to the Fund’s Distribution Phase. Given each Fund was launched at a different date, this means that each Fund’s Distribution Phase is different. As a result of the different Distribution Phases, a reasonable person may not consider the investment objectives of each Terminating Fund and its corresponding Continuing Fund to be substantially similar.
Similarly, as units of the Continuing Funds are no longer being distributed, the Continuing Funds do not have fund facts documents which could be sent to unitholders of the applicable Terminating Funds, and the Circular cannot include a statement that unitholders of the Terminating Funds may obtain the current prospectus or the most recently filed fund facts documents of the Continuing Funds by contacting the Manager.
The Mergers of CI G5|20 2039 Q1 Fund, CI G5|20 2040 Q3 Fund and G5|20 2041 Q1 Fund into CI G5|20 2040 Q4 Fund are being effected on a tax-deferred basis. This means that unitholders of each of those Terminating Funds will not realize a taxable event in respect of their investment as a result of these Mergers.
In respect of the Merger of CI G5|20 2041 Q2 Fund into CI G5|20 2040 Q4 Fund, CI G5|20 2041 Q2 Fund is currently not a “mutual fund trust” under the Tax Act, as it does not have at least 150 holders in at least one class of its units. Accordingly, it is not possible to effect a merger of CI G5|20 2041 Q2 Fund on a non-taxable basis.
In respect of the other Mergers that are being effected on a taxable basis, each Continuing Fund has loss carryforwards for tax purposes that will be lost if these Mergers are implemented on a tax-deferred basis. Consequently, these Mergers will be effected on a taxable basis so that such Continuing Funds will preserve their unutilized loss carryforwards for use to shelter income and capital gains realized by the Continuing Funds in future years. Further, investors in these Terminating Funds that hold units of the Terminating Funds in non-registered accounts are generally in a loss position. As a result, by effecting these Mergers on a taxable basis, these investors will generally not realize capital gains.
Other than as described above, the Mergers comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

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 Approval Sought is granted provided that the Manager obtains the prior approval of the unitholders of the Terminating Funds for the Mergers.

“Vera Nunes”

Vera Nunes

Manager, Investment Funds and Structured Products Branch

Ontario Securities Commission

Footnotes

A Fund’s liabilities are comprised of the Guaranteed Distributions, management fees, administration fees, taxes and other fees and expenses payable by the fund (as projected by BMO Nesbitt Burns Inc.) if the fund went in the Protection Portfolio on that day.