Hedge fund investments survive section 94.1 challenge

Marianne Kennedy Beaulne - 

Although based in low-tax jurisdictions, Tax Court finds business reasons for investments overshadowed their tax benefits

Section 94.1 of the Income Tax Act (Canada) is an anti-avoidance rule aimed at attempts to divert investment income to an offshore entity in a low (or no) tax jurisdiction. In Gerbro Holdings Company v. The Queen [1] the Tax Court of Canada considered, for the first time, the application of this rule to investments in offshore hedge funds.[2]The Court concluded that the underlying assets of such funds may be “portfolio investments” for purposes of section 94.1, but the section did not apply in Gerbro because none of the main reasons for investing in the hedge funds was to defer or avoid Canadian taxes.

Continue Reading...

New TSX dividend reinvestment plan rules adopted

The Toronto Stock Exchange (TSX) has adopted amendments to the TSX Company Manual (the Manual) intended to provide a complete set of standards and practices (the DRIP Rules) for dividend reinvestment plans (DRIPs). The amendments follow the TSX’s publication for comment of the proposed DRIP Rules earlier this year and represent a departure from the current process whereby DRIPs that provide for the issuance of securities from treasury are treated as additional listings of securities under the Manual.  

Among other things, the DRIP Rules would require a DRIP and any amendments thereto, to be pre-cleared with the TSX at least 5 days before the effective date, unless the DRIP provides for the payment of dividends or distributions solely with securities purchased on the secondary market. The TSX will require that the price per listed security at which securities will be issued pursuant to the DRIP not be lower than the 5-day VWAP of the securities on the TSX, less a 5% discount. In addition, the DRIP must permit all security holders to participate in the DRIP, other than holders residing outside of Canada, and provisions must be made for fractional security interests. In order to list additional securities under an existing DRIP, listed issuers must file a DRIP additional listing application with the TSX.  

Continue Reading...

Rights offering amendments for TSXV issuers

Amendments to TSX Venture Exchange (TSXV) Policy 4.5 – Rights Offerings are now in effect reflecting guidance released by the TSXV earlier this year following the adoption by the Canadian Securities Administrators (the CSA) of amendments relating to rights offerings in Canada in December 2015. Notably, while CSA review and approval of a rights offering circular is no longer required under Canadian securities laws, the TSXV will still require the pre-clearance of the circular under its Policy 4.5. Rights offering documentation should be filed in draft form with the TSXV prior to finalization in order to provide sufficient time for the TSXV to review the pricing, mechanics and timing of the rights offering and maintain an orderly market for the trading of the listed securities and rights.

A number of other substantive amendments were made to Policy 4.5:

  • The minimum subscription price for securities acquired on the exercise of rights has been lowered to $0.01 from $0.05.
  • Deficiencies in rights offering documents must be resolved at least five trading days prior to the record date as opposed to seven.
  • Rights are no longer required to be listed on the TSXV, but may be at the option of the issuer; however rights must be transferable.
  • Shareholder approval of any new control person (20% holder) resulting from a stand-by commitment for a rights offering will not be required provided that the rights are listed on the TSXV and the subscription price for a right is at a significant discount to the market price.
  • Fractional rights may be issued; however the number of rights required to purchase a security must be a whole number.
Continue Reading...

T+2 settlement prompts proposed amendments to NI 24-101 and publication of consultation paper

The migration to a standard T+2 settlement cycle on September 5, 2017 is part of the impetus for amendments proposed by the Canadian Securities Administrators (CSA) to National Instrument 24-101 Institutional Trade Matching and Settlement (NI 24-101) and Companion Policy 24-101 Institutional Trade Matching and Settlement.  In addition to these proposed amendments, the CSA has published CSA Consultation Paper 24-402 Policy Considerations for Enhancing Settlement Discipline in a T+2 Settlement Cycle Environment(Consultation Paper 24-402).

While NI 24-101 does not mandate T+3 settlement and does not prevent T+2 settlement, the proposed amendments are intended to facilitate the move to a T+2 settlement cycle.  They are also intended to reform NI 24-101 to reflect developments that have occurred since it came into force in 2007 (such as the rise in ETF trading) and to revise the requirements applicable to matching service utility systems and business continuity planning.

Continue Reading...

Common Reporting Standard legislative proposals published in Canada

Roanne C. Bratz -

On July 29, 2016, the Department of Finance Canada released for public comment a package of draft legislative proposals and explanatory notes relating to a number of measures announced in the 2016 federal budget, which included, amongst other proposals, the introduction of a Common Reporting Standard penalty and relating consequential amendments to the Income Tax Act (the ITA).

Specifically, the proposed amendments will incorporate new section 281 into the ITA and will require that a “reportable person” must provide its taxpayer identification number, or “TIN” (the number used by the Minister of National Revenue to identify an individual or entity), to any person required to make an information return under the Common Reporting Standard (CRS) to be implemented in Canada as of July 1, 2017.  This section also empowers the Minister of National Revenue to assess a $500 penalty against any reportable person for each failure to provide its TIN upon request.

For CRS purposes, the term “reportable person” generally refers to a natural person or entity that is resident in a reportable jurisdiction (excluding Canada and the United States) under the tax laws of that jurisdiction, or an estate of an individual who was a resident of a reportable jurisdiction under the tax laws of that jurisdiction immediately before death, other than: (i) a corporation the stock of which is regularly traded on one or more established securities markets; (ii) any corporation that is a related entity of a corporation described in clause (i); (iii) a governmental entity; (iv) an international organization; (v) a central bank; or (vi) a financial institution.  See definitional subsection ITA 270 (1).

Online business models and findings from compliance reviews are the focus of OSC annual registrant report

Viviana Beltrametti Walker  & Junaid K. Subhan

An update on registration initiatives, including the registration of online business models, and current trends in deficiencies and acceptable practices of market participants are the focus of OSC annual summary report.

Trends in registration, including online business models, and common deficiencies identified in compliance reviews are the focus of the Ontario Securities Commission’s (OSC) Annual Summary Report for Dealers, Advisers and Investment Fund Managers.  The following summary highlights key points in the report. We recommend that market participants review in detail the portions of the report that may be applicable to their businesses.

Continue Reading...

To pay or not to pay: whistleblower programs launch in Ontario and Quebec

Julien Robitaille-Rodriguez and Laura Levine -

Whistleblower programs aimed at encouraging individuals to report securities related misconduct that occurs in Ontario and Quebec have been launched by the Ontario Securities Commission (the OSC) and the Autorité des marchés financiers (AMF) on July 14, 2016 and June 20, 2016, respectively. While the underlying policy rationale of each of the OSC whistleblower program (the OSC Program) and the AMF whistleblower program (the AMF Program) is substantially similar, under the OSC Program whistleblowers who meet certain criteria will be eligible to receive a monetary award for their information whereas the AMF Program will not offer financial awards at all. Both programs provide anti-reprisal and confidentiality protections to whistleblowers. The OSC Program is accompanied by recently adopted amendments to the Securities Act (Ontario) (the OSA) which provide anti-retaliation protections for individuals reporting misconduct. 

Continue Reading...

New exempt market disclosure obligations - impact on investment funds

Anne Ramsay and Laura Levine -

The new harmonized Form 45-106F1 Report of Exempt Distribution (the New Report) that came into effect on June 30, 2016 imposes new disclosure obligations, including specific requirements applicable only to investment funds. As previously discussed, on April 7, 2016, the Canadian Securities Administrators (the CSA) announced amendments to National Instrument 45-106 Prospectus Exemptions (NI 45-106) which introduce the New Report. As was the case for the prior form of report, the New Report applies to all types of public and private issuers in all Canadian jurisdictions and, as a new requirement, is to be filed electronically.

New disclosure requirements

Investment funds covered by the reporting obligation include both public and private non-redeemable funds and mutual funds, including non-Canadian funds that distribute securities to Canadian investors. Some of the enhanced disclosure requirements for investment funds in the New Report include:

Continue Reading...

Custody requirements and EMD permitted activities targeted in proposed amendments to NI 31-103

The Canadian Securities Administrators (CSA) have proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) in respect of custody arrangements for certain registered firms and permitted activities of exempt market dealers relating to prospectus-qualified securities.  The proposed amendments also incorporate relief previously granted in respect of the CRM2 requirements and effect minor housekeeping changes to NI 31-103.

The proposed amendments will require that registered firms ensure that a “Canadian custodian” or a “foreign custodian” holds securities and cash of a client or an investment fund in certain circumstances.  The terms “Canadian custodian” and “foreign custodian” would be newly defined in NI 31-103.  Self-custody and the use of a custodian that is not functionally independent of a registered firm would be prohibited under the proposed amendments, subject to certain exceptions.  The proposed amendments also contemplate certain disclosure requirements with respect to where and how client assets are held and accessed.  Registered firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) would be exempted from these particular elements of the proposed amendments so long as they comply with the corresponding IIROC and MFDA rules, as applicable.

Continue Reading...

NI 33-109 and Commodity Futures Act registration forms proposed to be amended

The Canadian Securities Administrators (CSA) have proposed amendments to certain forms under National Instrument 33-109 Registration Information.  Consequently, the Ontario Securities Commission (OSC) has proposed corresponding amendments to the equivalent forms under OSC Rule 33-506 (Commodity Futures Act) Registration Information Requirements.

Proposed amendments were published to Forms 33-109F4 Registration of Individuals and Review of Permitted Individuals and 33-506F4 Registration of Individuals and Review of Permitted Individuals; Forms 33-109F6 Firm Registration and 33-506F6 Firm Registration;and Forms 33-109F7 Reinstatement of Registered Individuals and Permitted Individuals and 33-506F7 Reinstatement of Registered Individuals and Permitted Individuals

Continue Reading...

Looking back and moving forward: CSA announces past achievement highlights and future business plan

Laura Levine -

The Canadian Securities Administrators (the CSA) recently published the highlights of their achievements over the past three years (the Highlights), as well as their business plan for 2016 to 2019 (the Business Plan). Looking forward, the CSA’s priorities are:

  1. The protection of investors from unfair, improper and fraudulent practices
  2. The ongoing efficient functioning of capital markets
  3. The reduction of risks to market integrity and to investor confidence in the markets
  4. The enhancement of information technology 
Continue Reading...

OSC releases 2016-2017 Statement of Priorities

The Ontario Securities Commission (OSC) has provided stakeholders with a glimpse into the OSC’s goals for the coming year as published in its Statement of Priorities on June 9, 2016. The Statement of Priorities follows the draft Statement of Priorities published on March 10, 2016. 

The Statement of Priorities enumerates five overarching regulatory goals for 2016-2017:

  • Deliver strong investor protection
  • Deliver responsive regulation
  • Deliver effective compliance, supervision and enforcement
  • Promote financial stability through effective oversight
  • Be an innovative, accountable and efficient organization
Continue Reading...

Insider trading restrictions now extended to "recommending" in Ontario

 The new offence of “recommending” has been added to the Securities Act (Ontario) (the OSA). Effective July 1, 2016, the OSA includes a prohibition on recommending or encouraging the purchase or sale of securities of an issuer where the person or company making the recommendation is in a “special relationship” with the issuer and has knowledge of a material fact or material change with respect to such issuer that has not been generally disclosed. As previously discussed, this amendment broadens the insider trading provisions of the OSA and is in line with the securities legislation in most other Canadian jurisdictions.

The new provision was adopted as part of the Ontario Budget Measures Bill 173, which received royal assent on April 19, 2016. The section implementing the recommending prohibition was proclaimed into force effective July 1, 2016.

Foreign issuers now exempt from certain new post-trade reporting disclosure obligations

Ralph Hipsher and Laura Levine

Responding to concerns raised by non-Canadian international market participants, the Canadian Securities Administrators (the CSA) have granted relief for certain foreign issuers from the requirement to report whether a purchaser under an exempt distribution in Canada is a “registrant” and/or an “insider” of the issuer (the Foreign Issuer Relief) in Schedule 1 to the new Form 45-106F1 – Report of Exempt Distribution (the New Form) that came into effect June 30, 2016.

As previously discussed, the New Form requires issuers and underwriters, as applicable, to complete a confidential schedule disclosing, among other things, whether or not each purchaser in Canada is a “registrant” and/or an “insider” of the issuer. Since publication of the New Report, non-Canadian international market participants have expressed concerns about the compliance challenges associated with determining such information within the meaning of the terms as defined in Canadian securities laws, given the different standards and meanings applied to such terms in other foreign jurisdictions and in light of the New Form’s certification requirements. 

Continue Reading...

CSA consult on regulatory best interest standard and targeted reforms to the client-registrant relationship

Alix d’Anglejan-Chatillon, Nicholas Badeen and Junaid Subhan -

The Canadian Securities Administrators (CSA) have published for comment a much-anticipated consultation on the client-registrant relationship and the appropriateness of introducing a regulatory best interest standard.  CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (CSA Consultation Paper 33-404) describes proposed targeted amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (31-103) and its Companion Policy.  In addition, CSA Consultation Paper 33-404 describes a framework for a regulatory best interest standard on which all CSA jurisdictions, except British Columbia, are consulting.  Comments on CSA Consultation Paper 33-404 will be accepted until August 26, 2016.

Proposed Targeted Reforms

The proposed targeted reforms to 31-103 are comprehensive and range from enhanced conflict of interest disclosure and know your client and know your product requirements to increased proficiency requirements.  The Companion Policy to 31-103 would also be amended to include detailed guidance relating to these requirements. In the CSA’s view, the proposed targeted reforms are merely explicit statements of existing registrant obligations that are necessary to meet the CSA’s current expectations for regulatory compliance in the following areas:

Continue Reading...