Portland Investment Counsel Inc. (Re), 2020 CanLII 19800

March 10, 2020

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 PORTLAND INVESTMENT COUNSEL INC. (the Manager)

and PORTLAND CANADIAN FOCUSED FUND PORTLAND ADVANTAGE FUND PORTLAND VALUE FUND PORTLAND 15 OF 15 FUND

(each, a Terminating Fund, and collectively, the Terminating Funds)

DECISION

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 (each a Merger, and collectively the Mergers) of each of the Terminating Funds into the applicable Continuing Fund (each as 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):

1. the Ontario Securities Commission is the principal regulator for this application; and

2. 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 or Continuing Funds means, individually or collectively, Portland Canadian Balanced Fund and/or Portland 15 of 15 Alternative Fund;

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

Income Tax Act means the Income Tax Act (Canada);

IRC means the independent review committee for the Funds;

Representations

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

The Manager and the Funds

1. The Manager is a corporation incorporated under the laws of Ontario. The Manager is registered as:

(a) in the provinces of Alberta, Newfoundland and Labrador, Ontario and Quebec in the category of investment fund manager;

(b) in each of the provinces and territories of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Ontario, Prince Edward Island, Québec and Saskatchewan as an adviser in the category of portfolio manager;

(c) in each of the provinces and territories of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Québec and Saskatchewan as a dealer in the category of exempt market dealer; and

(d) in Ontario as a dealer in the category of mutual fund dealer.

2. The Manager is the manager of each Fund.

3. Each Terminating Trust Fund and each Continuing Trust Fund is an open-end mutual fund governed by a declaration of trust.

4. Neither the Manager nor the Funds are in default of securities legislation in any jurisdiction.

5. Each Fund is a reporting issuer under the securities legislation of each jurisdiction and is subject to the requirements of NI 81-102 and National Instrument 81-101 Mutual Fund Prospectus Disclosure.

6. Each Fund follows the standard investment restrictions and practices established under the securities legislation of the Jurisdictions, except to the extent that the Funds have received an exemption from the securities regulatory authority of a jurisdiction to deviate therefrom.

7. Each Fund is currently able to distribute its securities in all the Jurisdictions pursuant to a simplified prospectus and annual information form dated April 18, 2019, as amended.

Reason for Approval Sought

8. Regulatory approval of the Mergers is required because none of the Mergers satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. In particular,

(a) in respect of each Merger, a reasonable person may not consider the Terminating Fund to have a substantially similar fundamental investment objectives as its corresponding Continuing Fund;

(b) none of the Mergers will be a “qualifying exchange” within the meaning of section 132.2 of the Income Tax Act (Canada) (the Income Tax Act) or a tax-deferred transaction under subsection 85(1), 85.1(1), 86(1) or 87(1) of the Income Tax Act; and

(c) in respect of Merger 2 and Merger 3, the portfolios of the Terminating Funds, may require a significant realignment prior to the Merger.

9. Other than the criteria described in paragraph 8, each Merger complies with all the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

The Proposed Mergers

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

Terminating Fund

Continuing Fund

“Merger 1”

Portland Canadian Focused Fund

Portland Canadian Balanced Fund

“Merger 2”

Portland Advantage Fund

Portland Global Dividend Fund (to be renamed Portland 15 of 15 Alternative Fund)

“Merger 3”

Portland Value Fund

Portland Global Dividend Fund (to be renamed Portland 15 of 15 Alternative Fund)

“Merger 4”

Portland 15 of 15 Fund

Portland Global Dividend Fund (to be renamed Portland 15 of 15 Alternative Fund)

11. The proposed Mergers were announced in:

(a) a press release dated February 10, 2020;

(b) a material change report dated February 10, 2020; and

(c) amendments dated February 10, 2020 to the prospectuses of each of the Funds, each of which has been filed on SEDAR.

12. 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.

13. The Manager expects to mail to securityholders the Circular (defined below) and fund facts documents of the Continuing Funds on or about February 28, 2020.

14. In determining the Funds the Manager would propose to securityholders to merge, including the Funds that would continue, the Manager considered the following:

(a) To the extent possible, attempt to merge Funds with similar investment styles and strategies;

(b) For Merger 2, Merger 3 and Merger 4, the Continuing Fund was chosen based on the size of the tax losses and the desire to preserve those tax losses for the benefit of securityholders;

(c) With respect to Merger 2, Merger 3 and Merger 4, the securityholders will benefit from the mutual fund trust status of the Continuing Fund; and

(d) The intention to simplify the product line-up and give securityholders the potential for lower operating costs and expenses.

15. The Manager is convening a special meeting of the securityholders of each Terminating Funds in order to seek the approval of the securityholders each of the Terminating Funds to complete its Mergers, as required by paragraph 5.1(1)(f) of NI 81-102. The meetings will be held on or about March 26, 2020.

16. The Manager has concluded that the Mergers are material changes to the Continuing Funds, and accordingly, it has also convened a meeting of securityholders of the Continuing Funds to approve the Mergers pursuant to paragraph 5.1(1)(g) of NI 81-102. The meetings will be held on or about March 26, 2020.

17. If all required approvals for the Mergers are obtained, it is intended that the Mergers will occur after the close of business on or about April 17, 2020 (the Effective Date). The Manager, therefore, anticipates that each securityholder of a Terminating Fund will become a securityholder 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.

18. The tax implications of the Mergers as well as the differences between the investment objectives and other features of the Terminating Funds and the Continuing Funds and the IRC’s recommendation of the Mergers are described in the information circular (the Circular), so that securityholders may make an informed decision before voting on whether to approve the Mergers. The Circular will also describe the various ways in which securityholders can obtain a copy of the simplified prospectus, annual information forms and fund facts for the Continuing Funds and their most recent interim and annual financial statements and management reports of fund performance.

19. Securityholders of each Terminating Fund will continue to have the right to redeem securities of the Terminating Fund at any time up to the close of business on the Effective Date. Following each Merger, all optional plans (including pre-authorized purchase programs, automatic withdrawal plans, systematic switch programs and automatic rebalancing services) which were established with respect to the Terminating Fund will be re-established in comparable plans with respect to its Continuing Fund, unless securityholders advise otherwise.

20. The costs of effecting the Mergers (consisting primarily of legal and regulatory fees, and proxy solicitation, printing and mailing costs) will be borne by the Manager.

21. No sales charges will be payable by securityholders of the Funds in connection with the Mergers.

22. Securities of the applicable Continuing Funds received by securityholders of the Terminating Funds as a result of the Mergers will have the same sales charge option and, for securities purchased under a deferred sales charge option or low sales charge option, the same remaining deferred sales charge schedule or low sales charge schedule, as their securities in the Terminating Funds.

23. The Manager has determined that it would not be appropriate to effect the Mergers as a “qualifying exchange” within the meaning of section 132.2 of the Income Tax Act or as a tax- deferred merger for the following reasons: (i) to the extent that securityholders in the Terminating Funds have an accrued capital loss on their securities, effecting the Merger on a taxable basis will afford them the opportunity to realize that loss and use it against current capital gains or even carry it forward or back as permitted under the Income Tax Act; (ii) effecting the Mergers on a taxable basis would preserve the net losses and loss carryforwards in the Continuing Funds; and (iii) neither Portland Advantage Fund, Portland Value Fund nor Portland 15 of 15 Fund is a “mutual fund trust” under the Income Tax Act, and accordingly it is not possible to effect Merger 2, Merger 3 and Merger 4 as a “qualifying transaction”.

24. Securities of the Continuing Funds are, and are expected to continue to be at all material times, “qualified investments” under the Income Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability plans and tax free savings accounts.

25. The investment portfolio and other assets of each Terminating Fund to be acquired by the applicable Continuing Fund in order to effect the Mergers are currently, or will be, acceptable, on or prior to the Effective Date, to the portfolio manager(s) of the applicable Continuing Fund and are, or will be, consistent with the investment objective of the applicable Continuing Fund.

Merger Steps

26. The steps to implement each Merger are as follows:

(i) Prior to the Merger, if required, the Terminating Fund will sell any securities in its portfolio that do not meet the investment objective and investment strategies of the Continuing Fund. As a result, the Terminating Fund may temporarily hold cash or money market instruments and may not be fully invested for a brief period of time prior to the Merger being effected.

(ii) 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.

(iii) Each of the Terminating Fund and the Continuing Fund may declare, pay and automatically reinvest a distribution to its securityholders of net realized capital gains and net income, if any to ensure it will not be subject to tax for its current taxation year.

(iv) The Terminating Fund will transfer substantially all of its assets to the Continuing Fund which will consist of cash and portfolio securities, less an amount required to satisfy the liabilities of the Terminating Fund. In return, the Continuing Fund will issue to the Terminating Fund units of the Continuing Trust Fund having an aggregate net asset value equal to the value of the assets transferred to the Continuing Fund.

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

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

(vii) The Terminating Fund will be wound-up as soon as practicable following its Merger.

(viii) The Continuing Fund’s name under Merger 2, Merger 3 and Merger 4 will be changed.

27. Although the procedures for implementing the Mergers may vary, the result of each Merger will be that investors in each Terminating Fund will cease to be securityholders of the Terminating Fund and will become securityholders of its Continuing Fund.

Benefits of the Mergers

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

(a) The Mergers have the potential to lower costs for securityholders as the operating costs of the Continuing Funds will be spread over a greater pool of assets after the Mergers, potentially resulting in a lower management expense ratio for the Continuing Funds than may occur otherwise;

(b) The Mergers will result in securityholders of the Terminating Funds holding a series of Units of the Continuing Funds that has lower management fees. The Continuing Fund for Merger 2, Merger 3 and Merger 4 will be subject to a performance fee;

(c) The Mergers will eliminate fund offerings, which is expected to result in a more simplified product line-up that is easier for investors to understand;

(d) The securityholders of the Terminating Funds and the Continuing Funds will not be responsible for the costs associated with the Mergers as such costs will be borne by the Manager; and

(e) In connection with Merger 2, Merger 3 and Merger 4, the Continuing Fund will retain approximately $27 million of existing tax losses. These losses may permit the Continuing Fund to receive a more favourable tax treatment in the hands of its securityholders.

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 Filer obtains the prior approval of the securityholders of the Terminating Funds and Continuing Funds at special meetings held for that purpose.

“Neeti Varma”

Neeti Varma Manager, Investment Funds and Structured Products Branch

Ontario Securities Commission

Application File # 2020/0074