Alternative Funds 2024 Comparisons

Canada has one of the safest and strongest financial systems in the world and it is a robust and growing market for alternative funds. The market is divided into domestic funds and non-resident funds being sold directly or indirectly to Canadian investors.

The domestic industry comprises offering memorandum hedge funds and prospectus qualified alternative mutual funds and ETFs (or liquid alts). The domestic market has grown significantly since 2019 when the Canadian Securities Administrators introduced alternative mutual fund amendments that made liquid alts accessible to the retail market. In Q3 of 2023, Scotiabank estimated the market to have grown to CAD26.4 billion across 182 alternative mutual funds and 169 alternative ETFs.

The international market comprises private placements of securities of non-resident investment entities into Canada and the formation of Canadian domiciled feeder and access funds providing investment exposure to underlying offshore funds. The offering of non-resident fund securities and strategies in Canada is facilitated by robust international exemptions from Canadian registration requirements covering dealing, advising, investment fund management, commodity futures and derivatives conduct rules. These international exemptions make it very efficient for non-resident funds and managers to deal and advise in respect of foreign securities with Canadian investors that qualify as “permitted clients”. Permitted clients include pension plans, financial institutions, investment funds, managed accounts and ultra-high net worth entities (CAD25 million) and individuals (CAD5 million).

While there are no pending regulatory developments applicable to alternative funds, the growth and development of the industry, including crypto-asset and ESG funds, are being closely monitored by the Investment Funds and Structured Products Branch of the Ontario Securities Commission (OSC), which is Canada’s largest securities regulator. OSC staff also collected information on funds and their managers by way of the 2024 Investment Fund Survey and the 2024 Risk Assessment Questionnaire, which were used to gather information about the business operations, practices and procedures of firms registered with the OSC.

Types of Alternative Funds

In Canada, alternative funds are commonly formed either as standalone funds with direct portfolios or as feeder funds or access funds that invest in underlying non-resident funds.

Feeder funds and access funds are usually offered by way of private placement to accredited investors and/or permitted clients. Domestic funds with direct portfolios may be public or private, but publicly offered investment funds are subject to substantive investment restrictions and regulation.

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” with different requirements.

According to CSA guidance, investment funds are expected to be diversified, passive investors and may be distinguished from non-investment funds that may carry on active business or 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, commodities, life settlements (insurance policies), litigation and film finance, and mortgage investment entities.

Fund Structures

The choice of structure for an alternative fund is generally determined based on the investment strategy of the fund, its target investor base and tax considerations. 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 “mutual fund trusts” for Canadian income tax purposes, the securities of which are qualified investments for registered plans such as registered retirement savings plans, tax-free savings accounts, first home savings accounts and other similar plans where many Canadians hold their retirement savings.

In contrast, limited partnership units or interests are not eligible investments for registered plans. 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 family offices and high net worth individuals.

Trusts and limited partnerships are established or formed under local 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 are required. 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 limited partnerships attractive vehicles for non-resident managers.

In Canada, most aspects of securities regulation are in 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 securities and the registration of market participants have been largely harmonised under their umbrella organisation, the CSA, in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), National Instrument 45-106 Prospectus Exemptions (NI 45-106) and Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Manager (MI 32-102), as well as local securities laws. National instruments (NIs) are securities rules that have been adopted by the securities regulators in all Jurisdictions, and apply nationally.

Alternative funds that are offered via offering memorandum in the exempt market are generally not subject to authorisation or regulation by any regulatory body. However, issuers that distribute securities in the exempt market may become “market participants” under applicable securities law. Market participants are subject to record-keeping requirements and compliance reviews of their books, records and documents by securities regulators. Managers of private funds that are not investment funds are not subject to registration; see 3.3 Regulatory Regime for Managers.

In Canada, the sale of securities to the public is subject to the prospectus requirement. As such, either a prospectus must be filed with the securities regulators, or the alternative fund can rely on an exemption from such requirement in order to distribute securities. A prospectus cannot be provided to investors before it receives clearance (receipt) from the securities regulators. The OSC Service Commitment statement published in 2024 provides for a 40 business-day timeline for the issuance of a receipt for the final prospectus after all materials are received in the final form.

The “accredited investor” exemption under NI 45-106 is the most common prospectus exemption relied on to distribute securities of both domestic and non-resident alternative funds. Registered dealers, including exempt market dealers, can distribute securities of non-resident alternative funds to accredited investors and other exempt buyers through private placements. Foreign dealers may distribute such securities to permitted clients under the “international dealer exemption” (IDE), subject to conditions under NI 31-103.

Alternative funds that distribute securities by way of prospectus become reporting issuers (public funds) subject to National Instrument 81-102 Investment Funds (NI 81-102).

Public funds are subject to fundamental investment restrictions and operating requirements, as well as enhanced and continuous disclosure requirements. Certain restrictions and requirements contained in securities legislation, including NI 81-102, are designed in part to ensure that the investments of the fund are diversified and relatively liquid, including investment restrictions relating to investments for control, investments in real property and loan syndications and investments in other investment funds (fund-on-fund structures), as well as illiquid securities and the use of leverage and derivatives, short selling and securities lending.

Other laws applicable to alternative funds in Canada include tax laws that apply at both the federal and provincial levels, trust law, limited partnership law, anti-money laundering and terrorist financing laws, anti-spam legislation, data privacy laws and, in the Province of Quebec, French language usage laws.

An offering memorandum (OM) delivered to prospective investors in certain Jurisdictions is required to include prescribed disclosure relating to certain conflicts of interest and disclosure relating to purchaser statutory rights of action for damages or rescission where the OM contains a misrepresentation. Alternative funds that distribute securities to permitted clients may be exempted from these disclosure requirements, provided that certain conditions are met.

There is no regulatory review or approval process for marketing and offering documents of alternative funds offered by way of a private placement. Certain Jurisdictions, such as Ontario, require a copy of the OM (and any amended OM) to be delivered to or filed with the securities regulators within ten days of the distribution made under the OM.

Alternative funds must report securities distributed to accredited investors by way of a private placement by completing and filing a report of exempt distribution on Form 45-106F1 with the applicable securities regulator online through SEDAR+, together with the applicable filing fee. Such reports are generally due within ten days of a sale of securities in Canada, but investment funds relying on certain prospectus exemptions have the option of filing Form 45-106F1 on an annual basis, within 30 days of the end of the calendar year.

The report of exempt distribution contains information on the fund, compensation paid to a dealer, and details of the Canadian investors and the size of their investment. Neither the OM (in most cases) nor investor-level information provided to the securities regulator under Form 45-106 is publicly available. Freedom of information legislation may require the securities regulator to make this information available if requested, although securities regulators have indicated that they would oppose any such freedom of information requests for investor information contained in a Form 45-106F1.

An alternative fund that is a trust resident in Canada is subject to income tax in Canada on its net income. However, in computing net income, the trust is entitled to deduct distributions it pays to holders, so a trust will generally pay distributions to the extent necessary to avoid being subject to income tax (unless the trust has had losses it can use to otherwise offset its income).

Alternative funds that are structured as partnerships are generally not subject to Canadian income tax. Instead, income of the partnership is allocated to holders and taxed at the holder level.

In certain cases, publicly traded partnerships and trusts may be taxed as corporations in Canada; in such cases, holders will generally be taxed on income from the trust or partnership (as applicable) as if they received a dividend from a Canadian corporation.       

Alternative funds are permitted to originate loans. Most lending is unregulated, apart from federal criminal interest rate regulations. Mortgage lending and administration, residential, commercial and farmland are subject to provincial licensing. Similarly, there are extensive special rules with respect to consumer credits, which differ by Jurisdiction.

Canada is one of the jurisdictions at the forefront of fund investments in non-traditional assets, in particular digital assets and cannabis and cannabis-related investments. Private funds, as well as public funds under certain conditions, can invest in these types of assets. Some crypto-assets and crypto-asset-based contracts are considered securities for the purposes of Canadian securities laws, and there are special rules around custody for crypto-assets that generally follow the rules for custodians of public investment funds prescribed in NI 81-102.

There are no special rules with respect to litigation funding, but some regulated sectors in Canada have sector-specific regulation, including with respect to investments in these sectors, such as financial institutions, telecommunication, broadcasting and transportation, among others. The sector-specific restrictions apply generally and are not specific to alternative funds.

Alternative funds often use subsidiaries to hold specific assets, like real property, to ring-fence liabilities or to avoid carrying on active business. For example, funds formed as mutual fund trusts are not permitted to actively participate in the business and management of their investments. Mutual fund trusts that invest to provide exposure to active business, such as direct lending or real estate development, typically invest via a subsidiary formed as a limited partnership that is fiscally transparent and can conduct active business.

Subsidiaries can also be used to facilitate the financing of specific assets or pools of assets by separate lenders or a syndicate of lenders.

Master-feeder structures also use subsidiaries for private placements of securities of non-resident investment entities into Canada, whereby Canadian domiciled feeder and access funds are formed to provide investment exposure to underlying offshore funds.

Generally, there is no requirement for alternative funds to have a Canadian investment manager or general partner, nor to have a physical presence in Canada.

Domestic investment funds are required to have a registered investment fund manager (IFM) in their Jurisdiction of formation. Investment funds formed elsewhere will trigger the IFM registration requirement in each of Ontario, Quebec and Newfoundland and Labrador (referred to as Exemption Jurisdictions) if they distribute securities in those Jurisdictions. As a result, non-resident IFMs must either obtain IFM registration or file to rely on the registration exemption (the non-resident investment fund manager exemption or the IFME).

The IFME is available where securities of an investment fund are distributed only to permitted clients in the Exemption Jurisdiction the following conditions are met, among others:

• the IFM does not have its head office or its principal place of business in Canada;
• the IFM is incorporated, formed or created under the laws of a foreign jurisdiction; and
• none of the investment funds managed by the IFM is a reporting issuer in any Jurisdiction.

See 3.3 Regulatory Regime for Managers for further detail.

Certain Jurisdictions have laws requiring entities (including general partners and IFMs) that carry on or are deemed to carry on business in such Jurisdiction to register extra-provincially. Alternative funds structured as limited partnerships may need to register extra-provincially to maintain limited liability status for the limited partners, and generally require a local registered address and the appointment of an agent for service of process in the Jurisdiction of registration.

Subject to certain exceptions, portfolio assets of Canadian public funds must be held by a Canadian custodian.

There are no specific rules for private alternative funds and their managers with respect to the appointment of non-resident administrators, custodians, directors and other service providers that do not require registration under Canadian securities laws. Private placement agents distributing alternative funds’ securities in Canada must be registered or rely on an exemption from registration in the relevant Jurisdiction; see 2.2 Regulatory Regime for Funds and 4.5 Compensation and Placement Agents.

IFMs that hold or have access to the cash or securities of a fund must also, subject to certain exceptions, appoint a Canadian custodian.

There are currently no anticipated changes to the regulation of alternative funds.

Domestic alternative funds established in Canada are typically established by Canadian promoters. Non-resident funds distributed in Canada or in which feeder funds and access funds invest are predominantly established by US promoters.

Alternative fund managers are typically structured as corporations, including unlimited liability companies (ULCs) in the Jurisdictions, but they may also be structured as general partnerships and limited partnerships.

Individual personnel compensation or equity incentive arrangements are generally not determinative for the type of structure used, but affiliated entities may be formed for the purpose of receiving performance allocation or carried interest for tax reasons. These entities may also be formed as corporations, ULCs or partnerships, depending on the particular circumstances and the applicable tax rules.

NI 31-103 regulates dealer, adviser and IFM registration requirements, exemptions from these requirements, and registrants’ activities. The requirement to register is generally triggered in each Canadian Jurisdiction where a person or company is:

• in the business of trading or advising;
• holding themselves out as being in the business of trading or advising; or
• acting as an IFM.

The regulatory regime applicable to alternative fund managers in Canada varies depending on the type of fund (investment fund or non-investment fund) and the residency of the fund and/or the manager (domestic or non-resident).

Managers that manage or advise non-investment funds do not have to be registered in Canada, regardless of their residency. Managers that manage or advise investment funds that carry on business in Canada must be registered as an IFM and a portfolio manager (PM) under the securities laws of the relevant Jurisdiction.

Non-resident IFMs that distribute securities of an investment fund to investors resident in the Exemption Jurisdictions are required to register as an IFM, unless an exemption from such registration is available. None of the other Jurisdictions (Policy Jurisdictions) requires a non-resident IFM to register on the basis of merely having resident investors or soliciting investors in such Jurisdictions. In the Policy Jurisdictions, a non-resident IFM is required to register only if it directs or manages the business, operations or affairs of an investment fund in that Jurisdiction.

In the Exemption Jurisdictions, MI 32-102 provides an exemption from the IFM registration requirement for non-resident IFMs of one or more investment funds if all the securities of the investment funds distributed in the Exemption Jurisdictions are to permitted clients only. The following conditions must also be satisfied in order for non-resident IFMs to rely on the IFME:

• the IFM does not have its head office or principal place of business in Canada;
• the IFM is incorporated, formed or created under the laws of a foreign jurisdiction;
• none of the investment funds managed by the IFM is a reporting issuer in any Jurisdiction;
• the IFM submits a Form 32-102F1 Submission to Jurisdiction and Appointment of Agent for Service for International Investment Fund Manager; and
• the IFM has provided a prescribed written notice to each permitted client.

An adviser managing the portfolio of an alternative fund that is an investment fund must register as a PM. A non-resident investment adviser can act as a PM for a Canadian investment fund by acting as a sub-adviser to a Canadian registered adviser or by relying on the international adviser exemption (IAE) to advise permitted clients (other than registered dealers or advisers), provided that advising on securities of Canadian issuers is incidental to its advice on foreign securities, and subject to satisfying all the conditions.

Portfolio managers that advise alternative funds investing in commodity futures contracts or options and dealers engaged in trading on commodity futures contracts or options on behalf of alternative funds may need to register as advisers or dealers, as applicable, under applicable commodity futures legislation in certain Jurisdictions, unless their activity can be characterised as incidental. Exemptions similar to the IAE and IDE are available under commodity futures legislation in Ontario for PMs advising on and dealers trading in commodity futures contracts or options. In Quebec, a dealer engaged in trading in derivatives is required to be registered under the Derivatives Act (Quebec). A foreign derivatives dealer or adviser will be subject to the requirements of National Instrument 93-101 Derivatives: Business Conduct if it is “in the business” of trading or advising in OTC derivatives in one or more Jurisdictions, unless an exemption is available. These exemptions include “foreign derivatives dealer” and “foreign derivatives adviser” exemptions that are broadly similar to IDE and IAE under NI 31-103.

Fiduciary Duty

Under Canadian securities laws, all fund managers have a duty to act honestly and in good faith, regardless of their registration status and residence. Registered IFMs have a prescribed duty to act in the best interest of their clients (funds) and to put the clients’ interest first at all times.

Fees paid to a Canadian-resident fund manager will generally be treated as ordinary income to the manager 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 general partner is to receive a carried interest, the carried interest will often be structured as a partnership distribution paid to an affiliate of the manager or general partner (referred to as a “special limited partner”) instead of a fee, so that the carried interest does not attract sales tax; see 3.6Taxation of Carried Interest.

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 certain services from a Canadian-resident fund manager, provided certain conditions are met. The services to which such safe-harbour rule applies include investment management and advice with respect to many types of investments and investment administration services.

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 partnership.

Where the alternative fund is a partnership, carried interests are generally paid to a “special limited partner” (which is usually an affiliate of the manager/general 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 limited partner as an allocation of income or capital gains from the partnership as provided for in the partnership agreement. Please see 4.6 Tax Regime for Investors regarding the tax treatment of partnership distributions and allocations of income from a partnership.

Managers of alternative funds are permitted to outsource their functions or business operations to other service providers. The same regulatory requirements applicable to managers with respect to their activities would apply to any service provider of outsourced services. In addition, custodians of 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 providers 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 alternative funds under the IAE or the sub-adviser exemption provided under NI 31-103; see 3.3 Regulatory Regime for Managers.

Registered IFMs are subject to minimum capital requirements in NI 31-101 of CAD100,000 and CAD25,000, respectively. The excess working capital of a registered IFM, calculated in accordance with Form 31-103F1 Calculation of Excess Working Capital, may not be less than zero for two consecutive days. The minimum capital requirements do not apply to foreign IFMs that rely on the IFME.

There are no residency requirements for employees of registered IFMs, but there are proficiency and registration requirements for the chief compliance officer and individuals performing registrable activities under the IFM’s registration.

A registered IFM is required to give the securities regulators written notice at least 30 days in advance where it proposes to acquire:

• for the first time, direct or indirect ownership, beneficial or otherwise, of 10% or more of the voting securities or other securities convertible into voting securities of a firm registered in Canada or any foreign jurisdiction, or its parent company; or
• all or a substantial part of the assets of a firm registered in Canada or any foreign jurisdiction.

A registered IFM must also give written notice to the regulators as soon as it knows or has reason to believe that another person or company – alone or in combination with any other person or company – is about to acquire or has acquired for the first time direct or indirect ownership, beneficial or otherwise, of 10% or more of the voting securities or other securities convertible into voting securities of the IFM or a person or company of which it is a subsidiary. This notice must be delivered to the IFM’s principal regulator as soon as possible.

In both cases described above, the securities regulators may object to the acquisition of securities or assets of or by a registered firm if they determine that the acquisition is:

• likely to give rise to a conflict of interest;
• likely to hinder the registered firm in complying with securities legislation;
• inconsistent with an adequate level of investor protection; or
• otherwise prejudicial to the public interest.

Registered IFMs of a public investment fund are also required to notify investors in the fund and securities regulators of any direct or indirect change of control or termination.

For registered IFMs that are also registered as investment dealers with the Canadian Investment Regulatory Organization (CIRO), there are also notification and/or approval requirements under CIRO Rules.

There are currently no regulatory requirements or limitations in connection with the use of artificial intelligence, predictive data or big data, either for investment purposes or for operational/compliance purposes.

There are currently no forthcoming changes that may impact any of the information given in this section.

Alternative funds are typically distributed on a private placement basis to two categories of investors:

• “accredited investors”, as such term is defined in NI 45-106; and
• “permitted clients”, as such term is defined in NI 31-103.

The “accredited investor” category includes institutional investors such as banks, trust companies, pension funds, municipalities, certain investment funds, entities (other than investment funds) that have net assets of at least CAD5 million (as shown on their most recent financial statements) and individuals who have:

• net income before taxes of more than CAD200,000 in each of the two most recent calendar years and whose net income is expected to be more than CAD200,000 in the current calendar year;
• net income before taxes combined with a spouse of more than CAD300,000 in each of the two most recent calendar years and whose combined net income is expected to be more than CAD300,000 in the current calendar year;

• financial assets, alone or with a spouse, of more than CAD1 million before taxes but net of related liabilities; or
• net assets, alone or with a spouse, worth more than CAD5 million.

The “permitted client” category is a subset of the “accredited investor” category that includes a similar list of institutional investors, but the financial tests for individuals and entities are much higher. Permitted clients include individuals who beneficially own net financial assets in excess of CAD5 million and entities (other than investment funds) that have net assets of at least CAD25 million (as shown on their most recently prepared financial statements).

Except under certain limited circumstances, retail investors cannot invest in alternative funds unless the distribution is qualified by a prospectus (public funds). The “offering memorandum exemption” permits an alternative private fund to solicit investments from a wider range of investors than under other prospectus exemptions, but the fund must prepare a prescribed form of OM (including audited financial statements) and there are limits that apply on how much individuals can invest. In some Jurisdictions (eg, Ontario), this exemption is not available to private investment funds.

Alternative private funds are permitted to enter into side letters with investors with respect to any aspect of the investment or contractual relationship between the fund and investor. There is no requirement to disclose the existence or contents of a side letter to other investors in the fund. There is also no requirement to offer side letters to investors, but certain types of investors usually request them, such as large pension plans and institutional investors.

Public funds do not enter into side letters but can deal with special investment conditions through separate classes of securities, mostly with respect to management fees.

Securities of domestic and non-resident alternative funds are generally marketed and sold on a private placement basis to accredited investors and permitted clients; see 4.1 Types of Investors in Alternative Funds.

Certain public funds, designated as “alternative mutual funds”, are marketed to retail investors as liquid AIFs or “liquids alts”. Prospectus offerings can be marketed and distributed only by investment dealers or mutual fund dealers registered in Canada.

Registration Requirements

In Canada, “trading” in securities is broadly defined to include not only the sale or disposition of a security for valuable consideration, but also any act, solicitation or conduct that is directly or indirectly in furtherance of the sale or disposition of a security. The marketing of the securities of alternative funds is considered an act in furtherance of a trade and, as such, is subject to the prospectus and dealer registration requirements. Please refer to 2.2 Regulatory Regime for Funds and 3.3 Regulatory Regime for Managers with respect to potential filing obligations.

As a general rule, alternative funds that do not prepare and file a prospectus cannot market to retail investors. Prospectus qualified distributions of securities can only be marketed by investment dealers or mutual fund dealers registered in Canada with CIRO. Firms registered as “exempt market dealers” under NI 31-103 can market alternative funds to accredited investors in reliance on the accredited investor exemption or another prospectus exemption available under NI 45-106. Foreign dealers can market securities of non-resident alternative funds to permitted clients under the IDE.

Managers and sponsors of alternative private funds may also engage a registered dealer in Canada and rely on an exemption from the dealer registration requirement for trades to or through a registered dealer. The exemption is not available if a manager or sponsor solicits or contacts directly any purchaser or prospective purchaser in connection with the offering of the fund’s securities.

Some non-resident alternative funds opt to distribute their securities directly to investors who qualify as accredited investors, without engaging a registered dealer, on the basis that the fund’s business is non-securities-related and its capital-raising activities are occasional and uncompensated, such that the business trigger for dealer registration is not met; please refer to 4.1 Types of Investors in Alternative Funds.

Disclosure and Filing Requirements

Canadian securities laws do not require a specific disclosure document or prescribed content for marketing materials used in private placements. Best practices for marketing are set out in regulatory notices of the CSA and the OSC, including CSA Staff Notice: 31-325 Marketing Practices of Portfolio Managers and OSC Staff Notice: 33-729 Marketing Practices of Investment Counsel/Portfolio Managers Prospectus. Public funds are subject to National Instrument 81-105 Mutual Fund Sales Practices.

There is no obligation for marketing documents of alternative funds offered by way of a private placement to be registered with or approved by Canadian securities regulators. Certain Jurisdictions require a copy of the OM to be delivered to, or filed with, the applicable securities regulator within ten days of the distribution. See 2.3 Disclosure/Reporting Requirements for certain prescribed disclosure and statutory rights of action applicable to an OM provided to a Canadian investor in certain Jurisdictions.

Canada’s Anti-Spam Rules

In addition to the requirements described above, Canada’s Anti-Spam Law (CASL) imposes significant limitations on marketing activities that involve sending commercial electronic messages (CEMs) to recipients in Canada. Under CASL, a CEM is defined as an electronic message intended to encourage participation in a commercial activity, based on its content, hyperlinks to websites or databases, or the contact information it contains. An electronic message encompasses, but is not limited to, email and other forms of electronic messaging and social media communication, including text, audio, voice or image messages. Consequently, the law regulates not only direct solicitations but also a wide array of advertising, marketing and general promotional activities. Subject to certain exemptions, the primary impact of CASL is to require consent from the recipient of a CEM prior to sending a CEM to a recipient located in Canada.

Alternative funds commonly use placement agents for private placements of their securities. 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 available.

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 investors with more favourable tax treatment. 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 the partners have actually received a distribution from the partnership. Partners are not generally subject to tax on distributions 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 equally 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.

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 corporation 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.

Distributions from a Canadian-resident trust to a non-resident of Canada may be entitled to a reduced rate of withholding under an applicable tax treaty, assuming the non-resident recipient qualifies for benefits under such treaty.

Canada has implemented the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (known as the “MLI”), which, where applicable, is designed to counter abuses of tax treaties.

Canada complies with the FATCA and CRS regime, and follows the international self-certification standards. The Income Tax Act (Canada) incorporates the due diligence and reporting requirements under FATCA and the CRS.

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is the primary anti-money laundering and anti-terrorist financing legislation in Canada. It applies to a prescribed set of persons and entities, including “persons and entities authorised under provincial legislation to engage in the business of dealing in securities or any other financial instruments, or to provide portfolio management or investment advising services”. The use of the term “authorised”, rather than registered or regulated, mean that entities operating in Canada under an exemption such as the IAE or IDE are also subject to compliance with Canadian AML rules.

The AML compliance obligations include requirements relating to reporting, filing, record-keeping, client identification, the establishment and maintenance of a compliance regime, including an assessment and documentation of related risks to the business, compliance training, and certain other monitoring requirements and restrictions on dealing with designated individuals and groups, which in the case of non-resident dealers may differ from the requirements of their home jurisdiction.

However, a fund manager that is registered as an IFM or relying on the IFME exclusively to engage in the development, marketing, organisation, management and/or administration of investment products is not considered to be authorised under provincial legislation to engage in the business of:

• dealing in securities or any other financial instruments; or
• providing portfolio management or investment advising services.

Therefore, such fund manager is not subject to the PCMLTFA, regardless of its residency or registration status. It is common, though, for both foreign and local fund managers to screen their clients against Canadian sanctions lists.

Local registered dealers and advisers and non-resident dealers and advisers relying on the IDE or IAE must also comply with the monthly reporting requirements under federal anti-terrorist financing and UN sanctions regulations.

Registered dealers, PMs and IFMs are also subject to KYC, KYP and suitability requirements under NI 31-103, requiring them to determine the level of risk that an investor may be able to take and the suitability of a particular investment for an investor, taking the investor's portfolio and investment goals into consideration.

The collection, use and disclosure of personal information in the private sector is governed by federal, provincial and sector-specific legislation. Various legislation may apply to an organisation depending on multiple factors, such as the location of the organisation, the location of third-party service providers and/or recipients, the sector in which an organisation operates, and whether or not such organisation transfers personal information across borders.

In general, personal information, as it is defined in relevant legislation, may not be collected, used and/or disclosed without the individual's consent, and may only be collected, used and/or disclosed for specific purposes that have been brought to the individual's attention, the whole subject to certain exceptions.

At the federal level (for organisations that have federal undertakings), the collection, use and disclosure of personal information in the course of commercial activities is governed by the Personal Information Protection and Electronic Documents Act (PIPEDA).

At the provincial level, PIPEDA applies where a province has not enacted legislation that has been deemed substantially similar to PIPEDA. At the time of writing, the provinces of Quebec, Alberta and British Columbia have enacted legislation that has been deemed substantially similar to PIPEDA with regards to all privacy obligations. The provinces of Ontario, New Brunswick and Newfoundland and Labrador have enacted legislation that has been deemed substantially similar to PIPEDA with regards to health information custodians only. In such provinces, PIPEDA applies with respect to the remaining privacy obligation.

There are no forthcoming changes that may impact any of the information given in this section.