The choice of legal structure for alternative investment funds in Canada, as in many jurisdictions, is primarily influenced by two key factors: tax implications and the degree of liability protection offered to investors. Among the options available, the limited partnership stands out as the most frequently utilised legal vehicle for alternative investment funds in Canada. This preference stems from the limited partnership’s ability to offer both tax transparency and limited liability protection to its investors, making it an attractive choice for fund managers and investors alike.

Alternative funds — including private equity, venture capital, private credit, real estate, and infrastructure funds — are typically structured as limited partnerships formed under provincial partnership legislation, with a corporate general partner and a separate management or advisory entity.

Private alternative funds themselves are not subject to direct registration or approval by Canadian securities regulators, provided that all securities are offered in reliance on exemptions under NI 45-106.

The following are the core documents typically prepared in connection with an alternative fund launch:

• limited partnership agreement;
• subscription agreement;
• management agreement; and
• side letter (for some limited partners). 

Some fund sponsors use a marketing deck or a private placement memorandum to offer the fund.

The formation process for alternative funds is relatively efficient but varies from case to case. From mandate to first close, the timeline typically ranges from ten to 16 weeks, depending on complexity and investor negotiations. Both internal factors specific to the fund sponsor, such as its track record, investment thesis, and size and external factors such as macroeconomic and geopolitical considerations, interest rates and the risk aversion of investors in times of uncertainty, may result in the fundraising process being the most lengthy part of launching an alternative fund.

Relative to international fund formation hubs, establishing an alternative fund in Canada is reasonably priced. Legals fees vary depending on many factors including the complexity of the structure, number and sophistication of limited partners and extent of customisation.

In Canada, limited partnerships can be formed under the laws of any province or territory. The legal framework governing limited partnerships is largely consistent across Canadian jurisdictions, offering liability protection to investors who do not play an active part in the partnership’s business.

If a private placement memorandum (PPM) is used, the applicable laws in certain Canadian jurisdictions grant investors statutory rights to rescission or damages if the PPM contains misrepresentations.

The investor appetite for alternative funds in Canada remains good for all alternative asset classes and with respect to all types of investors (institutional investors, accredited investors and HNW clients, family offices, government investors and increasingly, for retail investors).

See 2.1.1 Fund Structures.

Most alternative investment funds in Canada are distributed under exemptions from prospectus requirements under NI 45-106.

The most commonly used exemptions for such distributions are the private issuer exemption and the accredited investor exemption which require the fund sponsor to ensure that all investors are “accredited investors” at the time of their investment.

Beyond these prospectus exemptions, there are no additional restrictions on the types of investors that can invest in alternative investment funds in Canada.

As previously described, alternative funds themselves are not subject to direct registration or approval by Canadian securities regulators, provided that all securities are offered in reliance on exemptions under NI 45-106.

In most cases, fund managers/sponsors also do not require any registrations under securities laws to distribute or manage alternative funds. However, while rare, the management of certain more passive strategies or the more widespread or frequent distribution of alternative funds may trigger registration requirements for the manager.

There are no specific regulatory limitations on the investment activities of alternative investment funds in Canada, allowing for flexibility in investment strategies and asset allocation.

Non-local service providers – including administrators, custodians and director services providers – are not subject to regulation/registration requirements.

The registration requirements outlined in 2.3.1 Regulatory Regime also apply to non-local managers of alternative funds in Canada. Even if the registration requirements are triggered, exemptions are available to non-Canadian managers who are already registered in their home jurisdiction.

This is not applicable in Canada.

Other than complying with the prospectus exemption (described in 2.2.3 Restrictions on Investors), there are generally no specific regulations addressing pre-marketing activities for alternative funds.

See 2.3.5 Rules Concerning Pre-Marketing of Alternative Funds.

If using the private issuer or accredited investor exemption, alternative funds should only be marketed to “accredited investors”.  See 2.2.3 Restrictions on Investors.

Authorisation or notification is not required by the national regulator prior to the marketing of alternative funds.

Some prospectus exemptions (eg, the accredited investor exemption) require alternative funds to make certain filings when distributing to their Canadian investors. 

There are no additional investor protection provisions or regulatory reporting requirements.

The regulatory authorities in Canada are generally approachable and willing to engage in constructive dialogue with industry participants. Face-to-face meetings with regulatory officials are possible when circumstances warrant such direct interaction.

Canada’s retail investment fund market is well developed and tightly regulated. The principal types of retail funds include mutual funds and ETFs, both of which are typically structured as open-end trusts, although corporations are also occasionally used.

Mutual fund trusts are the most familiar and widely accepted structure. They offer flow-through tax treatment and flexibility for launching multiple series or classes of units with different fee structures, and they are operationally efficient for daily pricing and subscriptions/redemptions. Investors investing in trusts subscribe for units.

Mutual fund corporations historically offered tax deferral benefits by allowing the offsetting of capital gains and losses across different classes but have lost some of that flexibility due to tax law changes in 2016 limiting the switching of assets between classes on a tax-deferred basis. Mutual fund corporations, despite the elimination of the tax-free switch mechanism, remain relevant in Canada for several reasons – see 3.6 Tax Regime. Investors investing in mutual fund corporations subscribe for shares.

To offer a retail fund to the public, the fund must file and obtain a receipt for a prospectus with the relevant securities regulators through the Canadian Securities Administrators (CSA) passport system. Key requirements include:

• filing of a preliminary and final simplified prospectus and Fund Facts (for mutual funds) or ETF Facts (for ETFs); and
• approval from the principal regulator, which then grants a passport receipt applicable across most provinces and territories (with a separate filing typically required in Quebec).

The fund manager must be registered as an investment fund manager. The investment adviser must be registered as a portfolio manager. The entity distributing the fund must generally be registered as dealer.

The key documents involved in the formation and launch of a retail fund include (but are not limited to):

• a declaration of trust (for mutual fund trusts) or articles and by-laws (for mutual fund corporations);
• a simplified prospectus, and Fund Facts;
• a management agreement;
• sub-advisory or portfolio management agreements (if applicable); and
• a custody agreement.

The set-up and approval process for a retail fund is relatively lengthy compared to private funds. From initial structuring to final regulatory approval and launch, the process typically takes at least three to six months.

Launching a retail fund in Canada is relatively expensive, due to regulatory, legal and operational requirements, and the need to translate it into French (if offered in Quebec). Fees associated with launching a retail fund in Canada must be paid by the fund sponsor.

For mutual fund trusts, investors hold units of the trust and are considered beneficiaries under provincial trust law. Their liability is generally limited to the amount of their investment. The declaration of trust typically includes an express limitation of liability clause stating that unitholders are not personally liable for the obligations of the fund or the trustee.

For mutual fund corporations, investors hold shares of the corporation and benefit from the limited liability protections afforded under Canadian corporate law. Shareholders are generally not responsible for the debts or liabilities of the fund beyond the value of their investment. Their liability is limited to the capital invested in their shares.

Canadian retail funds are subject to extensive disclosure and reporting obligations under securities regulations, primarily National Instrument 81-101 – Mutual Fund Prospectus Disclosure (NI 81-101), NI 81-102, and National Instrument 81-106 – Investment Fund Continuous Disclosure (NI 81-106).

Key requirements include:

• Prospectus disclosure – funds must file a simplified prospectus and deliver a Fund Facts (or ETF Facts) document to investors at or before the point of sale.
• Financial reporting – funds must prepare and file annual audited and interim unaudited financial statements, along with Management Reports of Fund Performance (MRFPs).
• Material change reporting – a fund must issue a press release and file a report if a material change occurs (eg, a strategy shift, change in managers or a fund merger).
• Governance disclosure – funds must disclose proxy voting records and provide annual reports from the Independent Review Committee (IRC), which oversees conflicts of interest.

All disclosure documents must be filed on SEDAR+ (Canada’s official platform for filing and accessing regulatory documents) and made available to investors. These requirements ensure transparency and investor protection in the retail market.

Investor appetite for retail funds in Canada remains strong and diversified, reflecting a mature and stable market. As of 2024, total assets under management in Canadian mutual funds and ETFs exceeded CAD2 trillion, with retail funds serving as a core investment vehicle for Canadian households.

In Canada, retail fund managers are typically structured as corporations, most often federally or provincially incorporated companies.

Most retail investment funds in Canada are designed to be widely accessible, with relatively low minimum investment requirements and simplified investment processes. This accessibility is intended to encourage broad participation from various types of investors (ie, individual investors who can invest through various accounts including registered accounts; institutional investors such as pension funds, endowments and foundations; and accredited investors including HNW individuals and entities with significant assets), promoting diversification and the pooling of capital for investment purposes.

Certain sector-focused retail investment funds may have additional suitability requirements or restrictions to ensure that investors understand the risks involved and that the fund is appropriate for their investment objectives and risk profile.

Retail investment funds in Canada are governed by a comprehensive regulatory framework designed to ensure investor protection, product transparency, and liquidity.

Retail funds must be qualified by a prospectus, subject to regulatory review and continuous disclosure requirements. Retail funds must appoint a registered investment fund manager, a qualified portfolio manager, and a qualified custodian (see below). An Independent Review Committee (IRC) must oversee conflicts of interest as provided under National Instrument 81-107 – Independent Review Committee for Investment Funds (NI 81-107).

Retail funds are subject to detailed rules on valuation, liquidity, leverage, borrowing, derivatives use, and securities lending. They are subject to a range of investment restrictions and limitations, including the following.

Key Rules Applicable to Retail Funds

Concentration limits

A mutual fund cannot invest more than 10% of its net asset value (NAV) in the securities of any single issuer. This limit helps ensure diversification and reduce the risk associated with a concentrated investment in any one issuer.

Control restrictions

A mutual fund cannot hold more than 10% of the outstanding voting securities of any issuer. This rule prevents funds from exerting undue influence or control over the companies in which they invest.

Prohibited investments

Mutual funds are generally prohibited from investing in certain types of securities, including physical commodities, mortgages (other than guaranteed mortgages), real estate (other than listed real estate investment trusts – REITs), and loans.

Illiquid assets

A mutual fund cannot invest more than 10% of its NAV in illiquid assets. Illiquid assets are those that cannot be readily sold or disposed of in the ordinary course of business within seven days at their fair value.

Borrowing and leverage

Traditional mutual funds are generally not allowed to borrow money or use leverage, except for temporary borrowing to meet redemption requests or to settle portfolio transactions (up to 5% of the fund’s NAV). Alternative mutual funds, however, are permitted to use leverage, with a total leverage exposure limit of 300% of the fund’s NAV.

Short selling

Traditional mutual funds are not permitted to engage in short selling. Alternative mutual funds are allowed to short-sell securities, with the maximum aggregate market value of securities sold short not exceeding 50% of the fund’s NAV. Additionally, the fund must hold cash cover equal to at least 150% of the market value of the securities sold short.

Derivatives

Mutual funds can use derivatives for hedging purposes and non-hedging purposes, subject to certain conditions.

Related party transactions and conflicts of interests

Mutual funds are subject to restrictions on transactions with related parties, including the fund manager, portfolio adviser, and their affiliates.

Qualified custodian

The assets of a mutual fund must be held by a qualified custodian. Qualified custodians typically include banks, trust companies and other financial institutions that meet specific regulatory requirements. The custodian must generally be a Canadian entity or have a Canadian affiliate that is a qualified custodian. In certain limited circumstances, assets of Canadian retail investment funds may be held outside Canada by a qualified foreign custodian or sub-custodian, if appropriate to facilitate portfolio transactions of the investment fund outside Canada.

See 3.3.1 Regulatory Regime.

Non-Canadian managers that seek to offer retail investment funds to retail clients in Canada are generally subject to Canadian securities laws and must comply with the same regulatory framework applicable to domestic fund sponsors.

Exemptions may be available to non-Canadian managers looking to distribute a non-Canadian retail fund to non-retail investors (permitted clients).

For retail investment funds in Canada, regulatory approval is required through the prospectus review process, administered by the CSA under the passport system.

The typical timelines vary between eight to 12 weeks from the filing of the preliminary prospectus to receipt of the final prospectus, assuming there are no major issues or deficiencies, and four to six weeks to add a new fund to an existing shelf, as the issuer benefits from an established filing history and streamlined review.

Where the fund will be listed on an exchange (eg, the TSX or NEO), the exchange listing process runs in parallel and usually does not significantly extend the timeline if co-ordinated properly.

These timelines may vary depending on the completeness of the submission, the complexity of the strategy, and whether the issuer is seeking exemptive relief (eg, for novel fund features).

Canadian securities laws prohibit the sale of mutual fund units or shares before the fund’s prospectus has been receipted by the relevant securities regulatory authority. This means that no sales can be made, and no binding commitments can be accepted from investors during the pre-marketing phase. The distribution or publication of advertisements, sales literature, or other promotional materials that solicit or recommend the purchase of mutual fund securities is generally prohibited before the prospectus has been receipted.

Investment fund managers may communicate with potential investors and financial advisers to provide general information about the fund and its investment objectives, strategies and features. However, these communications must not be promotional in nature and must clearly indicate that the fund has not yet been receipted and that no sales can be made until the receipt is issued.

Nevertheless, prior to launching any pre-marketing activities, it is recommended that investment fund managers engage legal and compliance professionals to review pre-marketing activities and materials, to ensure compliance with applicable securities laws and regulatory requirements.

Firms marketing retail funds must generally be registered as mutual fund dealers or investment dealers. A Fund Facts (or ETF Facts) document must be delivered to investors at or before the point of sale, in accordance with NI 81-101 and National Instrument 41-101 – General Prospectus Requirements (NI 41-101).

Sales communications must present performance data using standardised periods (eg, one, three, five and ten years) and prescribed calculation methods, to ensure consistency and comparability. Appropriate disclaimers and explanations are required to help investors interpret performance figures. Marketing materials must refer investors to the fund’s prospectus and Fund Facts, which provide a concise summary of investment objectives, performance, risks and fees.

National Instrument 81-105 – Mutual Fund Sales Practices (NI 81-105) also regulates sales practices and prohibits compensation arrangements that could create conflicts of interest. For example, fund managers may not provide incentives to dealers or representatives that could unduly influence investment recommendations. All compensation and sales incentives must be fully disclosed in the fund’s offering documents.

In Canada, retail investment funds can be marketed to all members of the public, including individual retail investors, institutional investors, advised clients and self-directed investors. There are no eligibility or accreditation requirements for investors purchasing prospectus-qualified retail funds.

See 3.3.4 Regulatory Approval Process.

For firms that have marketed a retail fund in Canada, there are several ongoing regulatory requirements that must be adhered to in order to ensure continued compliance with Canadian securities laws. These requirements are designed to maintain transparency, protect investors, and uphold the integrity of the financial markets. The specific requirements can vary by province or territory, but generally include the following.

Regulatory Requirements for Marketing a Retail Fund

Continuous disclosure obligations

Funds must file and deliver to investors annual and interim financial statements; MRFPs; updated Fund Facts or ETF Facts documents; material change reports, if applicable.

Prospectus renewals

The prospectus for a retail fund must be renewed every two years. This involves updating the prospectus to reflect any changes in the fund’s operations, investment strategies, risks, fees and other relevant information.

Fund facts renewal

The Fund Facts document for each class or series of securities of the investment fund must be updated no sooner than 13 months and no later than 11 months before the lapse date of the previous prospectus.

Compliance with ongoing regulatory obligations for registered firms

Registered firms (the investment fund manager, the portfolio manager and dealer) must comply with capital, insurance, reporting and conduct obligations under National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and are subject to periodic reviews from the securities commissions or the Canadian Investment Regulatory Organization (CIRO).

Conflict of interest matters/NI 81-107

Managers of retail investment funds must refer conflict-of-interest matters to the IRC for review, recommendation or approval. The manager must comply with the IRC’s recommendations and ensure that the investment fund operates in accordance with the approved policies and procedure.

In addition to the general framework provided by NI 81-107 governing conflict-of-interest matters, Canadian securities regulations include several investor protection provisions and regulatory reporting requirements for retail investment funds.

Suitability Requirements

Know Your Client (KYC): Investment fund managers and dealers must collect detailed information about their clients’ financial situation, investment knowledge, risk tolerance and investment objectives to ensure that any recommendations or transactions are suitable for the client.

Know Your Product (KYP): Representatives of mutual fund dealers and investment dealers must thoroughly understand the products they offer to ensure they are appropriate for their clients.

The Canadian Investor Protection Fund (CIPF)

The Canadian Investor Protection Fund (CIPF) is a non-profit compensation fund that provides limited protection to clients of insolvent investment dealers that are members of CIRO.

Statutory Right of Action

Applicable laws in certain Canadian jurisdictions grant investors statutory rights to rescission or damages if the prospectus, Fund Facts or financial statements of a retail fund contain a misrepresentation.

See 3.3.4 Regulatory Approval Process.

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