CANADA Law and Practice Contributed by: Darin Renton, Jill Winton, Amy Chao and Irena Ninkovic, Stikeman Elliott LLP
The best interest standard applies also to unregistered foreign-based sub-advisers to Canadian registered advisers under NI 31-103 and NI 93-101. 3.4 Tax Regime for Managers Fees paid to a Canadian-resident fund manager will generally be treated as ordinary income to the man - ager for Canadian tax purposes, and will be subject to income tax on that basis. Such fees are also generally subject to sales tax in Canada. If the fund is a partnership and the manager or gen - eral partner is to receive a carried interest, the car - ried interest will often be structured as a partnership distribution paid to an affiliate of the manager or gen - eral partner (referred to as a “special limited partner”) instead of a fee, and this carried interest should not be subject to sales tax in Canada; see 3.6 Taxation of Carried Interest . 3.5 Rules Concerning Permanent Establishments The Income Tax Act (Canada) contains a safe-harbour rule that generally protects a non-resident of Canada (including a non-resident partner of an alternative fund that is structured as a partnership) from being subject to income tax in Canada solely because it (or the partnership of which it is a member) receives cer - tain services from a Canadian-resident fund manager, provided certain conditions are met. The services to which such safe-harbour rule applies include invest - ment management and advice with respect to many types of investments and investment administration services. 3.6 Taxation of Carried Interest The tax treatment of a carried interest depends on whether it is received by the manager as: • a fee, which would be treated as ordinary income for Canadian tax purposes and would generally be subject to sales tax in Canada; or • a partnership distribution, where the fund is a part - nership. Where the alternative fund is a partnership, carried interests are generally paid to a “special limited part - ner” (which is usually an affiliate of the manager/gen -
eral partner) as a distribution from the partnership. In such cases, the carried interest should not be subject to sales tax in Canada, and for income tax purposes, the carried interest will be taxable to the special lim - ited partner as an allocation of income or capital gains from the partnership as provided for in the partnership agreement. Please see 4.8 Tax Regime for Investors regarding the tax treatment of partnership distribu - tions and allocations of income from a partnership. 3.7 Outsourcing of Investment Functions/ Business Operations Managers of alternative funds are permitted to out - source their functions or business operations to other service providers. Outsourced functions, such as fund administration, are generally unregulated. However, fund managers retain full legal liability and account - ability to the regulator for any and all functions, and are subject to oversight requirements. In addition, investment funds are subject to specific custody rules prescribed under NI 31-103 and NI 81-102; see 2.9 Rules Concerning Service Providers . For private funds, the engagement of service provid - ers is subject to market practice and usually disclosed in the fund’s offering document. Managers of public funds have an obligation to disclose the engagement of any providers of outsourced services in the fund’s prospectus. Non-resident PMs can provide investment advice and manage portfolios of Canadian resident alterna - tive funds under the IAE or the sub-adviser exemp - tion provided under NI 31-103; similar international exemptions are available under NI 93-101 and Ontario commodity futures legislation. See 3.3 Regulatory Regime for Managers . 3.8 Local Substance Requirements Registered IFMs are subject to minimum capi - tal requirements in NI 31-101 of CAD100,000. The excess working capital of a registered IFM, calculat - ed in accordance with Form 31-103F1 Calculation of Excess Working Capital, may not be less than zero for two consecutive days. The minimum capital require - ments do not apply to foreign IFMs that rely on the IFME.
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