CANADA Law and Practice Contributed by: Darin Renton, Jill Winton, Amy Chao and Irena Ninkovic, Stikeman Elliott LLP
registration and derivatives conduct requirements; see 4.1 Types of Investors in Alternative Funds for details on these types of exemptions. 4.6 Private Placements Marketing and advertising of alternative funds is gen - erally permitted in the context of a private placement by registered or exempt IFMs, portfolio managers or dealers; see 4.4 Rules Concerning Marketing of Alternative Funds . Reverse solicitation is generally not recognised in Canada, but the concept of reverse solicitation is recognised in the context of IFM registration under MI 32-102, applicable in the Exemption Jurisdictions. It is not an express exemption or safe harbour from the dealer registration requirement. IFMs are generally presumed to be in the business of trading in securi - ties, so trades in response to reverse solicitations are not excluded from the business trigger analysis for dealer registration; see also 3.3 Regulatory Regime for Managers . 4.7 Compensation and Placement Agents Alternative funds commonly use placement agents and wholesalers for private placements of their secu - rities. As noted in 3.3 Regulatory Requirements for Managers and 4.4 Rules Concerning Marketing of Alternative Funds , fundraising intermediaries must be registered as dealers, unless an exemption is avail - able. 4.8 Tax Regime for Investors Income of an alternative fund organised as a trust that is paid to investors that are resident in Canada will generally be taxable to the investors. In making distributions, a trust is generally able to designate its capital gains, taxable dividends and foreign source income to its investors, such that distributions of such amounts will essentially retain their character in the hands of the investors and will generally provide inves - tors with more favourable tax treatment. For example, for investors resident in Canada, capital gains are gen - erally taxed at one-half the rate of ordinary income. Non-residents of Canada will generally be subject to Canadian withholding tax on distributions of income from a trust, except that capital gains distributed by the trust are subject to certain special rules and may
not be subject to withholding tax, depending on the circumstances. The income or loss (including capital gains and losses) of an alternative fund organised as a partnership is generally allocated to investors in accordance with the terms of the applicable partnership agreement and will generally retain its character when allocated to the partners. Partners that are resident in Canada will be subject to income tax on the income that is allocated to them, regardless of whether they have actually received a distribution from the partnership. Partners are not generally subject to tax on distribu - tions they receive from a partnership. Partnerships are generally not required to withhold tax on distributions paid to non-residents of Canada, but amounts received by the partnership from Canadian payors can be subject to Canadian withholding tax to the extent the partnership has any partners that are not resident in Canada. Where a partnership has both resident and non-resident partners, it may be subject to a blended rate of withholding tax. The rules regarding the taxation of investors in funds that are trusts and partnerships generally apply equal - ly to all types of Canadian resident investors; however, corporations and individuals are subject to different income tax rates, and pension funds are generally tax-exempt. 4.9 Double Tax Treaties Partnerships are generally fiscally transparent for Canadian income tax purposes and are “looked through” for purposes of determining eligibility for benefits under a double tax treaty. For example, if a Canadian-resident corporation pays a dividend to a partnership with a non-resident member, the corpora - tion may generally apply a reduced rate of Canadian withholding tax to the dividend if the non-resident member of the partnership is otherwise entitled to the benefits under an applicable income tax treaty. Trusts can generally qualify for benefits under double tax treaties in their own right, assuming they meet the conditions for treaty eligibility set out in the relevant tax treaty.
70 CHAMBERS.COM
Powered by FlippingBook