CANADA Law and Practice Contributed by: Darin Renton, Jill Winton, Amy Chao and Irena Ninkovic, Stikeman Elliott LLP
feeder or access funds that invest in underlying non- resident funds. Feeder and access funds are usually offered by way of private placement to accredited investors and/or permitted clients. Canadian resident funds with direct portfolios may be public or private, but publicly offered investment funds are subject to significant regulation, including substantive investment restrictions. See 2.2 Regulatory Regime for Funds for further detail. Alternative funds may be redeemable on demand at net asset value (a mutual fund), non-redeemable (a non-redeemable investment fund) or closed-ended. Canadian securities laws distinguish between funds that are “investment funds” and those that are not investment funds. Mutual funds and non-redeemable investment funds are regulated as “investment funds”. According to CSA guidance, investment funds are expected to be diversified, passive investors and are distinguished from non-investment funds that may carry on active business or invest to exercise control over, or be involved in the management of, an investee issuer or hold securities representing more than 10% of an investee issuer’s securities. Examples of non- investment funds include: • private equity and venture capital funds; • direct lending and factoring funds; • real estate funds; • funds investing in commodities, litigation and film finance; and • mortgage investment entities. Fund Structures The choice of structure for an alternative fund is gen - erally determined based on the investment strategy of the fund, its target investor base and tax considera - tions. The most typical fund structures in Canada are limited partnerships and trusts. To facilitate broad distribution in Canada, trusts are often structured to meet the conditions necessary to qualify as a “mutual fund trust” for Canadian income tax purposes. Securities of mutual fund trusts are qualified investments for registered plans such as registered retirement savings plans, tax-free savings
accounts, and other similar plans where many Cana - dians hold their retirement savings. This represents a large pool of potential investors. In contrast, limited partnership units or interests are generally not qualified investments for registered plans, unless listed on a designated stock exchange. Limited partnerships are generally used for non- investment funds that offer their securities mainly to large institutional investors such as pension plans, endowments and financial institutions, as well as fam - ily offices and high net worth individuals. Canadian trusts and limited partnerships are estab - lished or formed under provincial or territorial laws. A Canadian trust requires a Canadian resident trustee. Registered fund managers are generally permitted to act as a trustee of the funds they manage; otherwise, a licensed trust company or individual trustees may act. While Canadian limited partnerships often have a Canadian-resident general partner, this is not required under limited partnership or tax law. The flexibility to have non-resident management makes Canadian lim - ited partnerships attractive vehicles for non-resident managers. 2.2 Regulatory Regime for Funds In Canada, most aspects of securities regulation are under the jurisdiction of Canada’s ten provinces and three territories (Jurisdictions). While each Jurisdiction has its own securities laws, the rules with respect to investment fund regulation, the distribution of securi - ties and the registration of market participants have been largely harmonised under their umbrella organi - sation, the CSA. Private fund regulation includes: • National Instrument 31-103 Registration Require - ments, Exemptions and Ongoing Registrant Obli - gations (NI 31-103); • National Instrument 45-106 Prospectus Exemp - tions (NI 45-106); • Multilateral Instrument 32-102 Registration Exemp - tions for Non-Resident Investment Fund Managers (MI 32-102); and • National Instrument 81-106 Investment Fund Con - tinuous Disclosure, as well as local securities laws.
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