CONTENTS

• Proposed General Anti-treaty Shopping Rule : Private Investment Funds Will Need to Play it Safe
• Registration Requirements of Venture Capital and Private Equity Fund Managers in Canada : A Favourable Regulatory Framework
• Bill 1 : New Requiremetns for Public Calls for Tenders

PROPOSED GENERAL ANTI-TREATY SHOPPING RULE : PRIVATE INVESTMENT FUNDS WILL NEED TO PLAY IT SAFE
Martin Bédard

Following the recent public consultations held by the federal government on the issue of treaty shopping, the 2014 Budget proposes to implement in the Canadian domestic law a general anti-treaty shopping rule (“GATSR”) which private investment funds investing in Canada (“Funds”) may have to deal with.

Treaty shopping refers to a situation where, for example, a non-resident person who is not entitled to benefits under a Canadian tax treaty uses an entity in a country with which Canada has concluded a tax treaty and, to obtain Canadian tax benefits, earns or realizes income sourced in Canada indirectly through that entity.

The GATSR would probably be integrated into the Income Tax Conventions Interpretation Act. Its application would result in denying in whole or in part the benefits claimed pursuant to a tax treaty.

The GATSR provisions would provide for the following items:

• Main purpose provision: Subject to the relieving provision, the purpose of the GATSR would be to deny the benefit of a tax treaty to a person where it is reasonable to conclude that one of the main purposes of the transaction or series of transactions is to allow that person to obtain the benefit.
• Conduit entity’s rebuttable presumption: It would be presumed that one of the main purposes of the transaction or series of transactions is to obtain a benefit pursuant to such a treaty if the income in question is primarily used to pay, directly or indirectly, an amount to another person (such as a limited partner of a Fund) who would not have been entitled to an equivalent or more favourable benefit had that person received directly the income in question.
• Safe harbour’s rebuttable presumption: Subject to the rebuttable presumption of use of a conduit entity, it would be presumed that none of the main purposes for undertaking a transaction was for someone to obtain a benefit under a tax treaty if, as the case may be:
  • the person carries on an active business, other than managing investments, in the foreign treaty country and, where the income in question is derived from a related person in Canada, the active business is substantial compared to the activity carried on in Canada by such related person;
  • the person is not controlled, de jure or de facto, by another person who would not have been entitled to the benefit had that person directly received the income in question;
  • the person is a corporation or trust listed on a recognized stock exchange.
• Relieving provision: The Minister of National Revenue (“Minister”) would, at his discretion, allow the grant of the benefit, in whole or in part, when circumstances reasonably justify it. Some examples of application of the GATSR suggest that a Fund may be targeted by the new rule. A fund which is set up as a limited partnership generally relies on a holding corporation which may be considered by the Minister as a conduit corporation pursuant to the GATSR. Funds should not assume that the legislator will provide relieving transitional rules for current structures, but rather consider right now the implementation of mechanisms to avoid or reduce the effects of the GATSR.

REGISTRATION REQUIREMENTS OF VENTURE CAPITAL AND PRIVATE EQUITY FUND MANAGERS IN CANADA : A FAVOURABLE REGULATORY FRAMEWORK
Guillaume Lavoie
André Vautour

The U.S. House of Representatives passed a bill in December 2013 that would exempt many private equity fund advisers in the United States from the provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that requires advisers with more than $150 million in assets under management to register with the U.S. Securities and Exchange Commission (the “SEC”). The bill’s passage into law remains, however, uncertain. As a result, most private equity fund advisers in the United States remain under the oversight of the SEC.

Canada, in contrast, remains one of the very few remaining jurisdictions where most private equity fund managers do not have to register with any securities regulator. When the Canadian Securities Administrators (the “CSA”) proposed the adoption of National Instrument 31-103 – Registration Requirements in 2007, many feared that this would change. A record number of comments made on the original draft in response to such changes led the regulators to clarify, in the final version of the policy adopted along with the new instrument, that the intention of the CSA was not to subject typical private equity funds to such requirements.

REGISTRATION AS A PORTFOLIO MANAGER
The CSA indicates that venture capital and private equity funds (and their general partners and managers) (collectively, the “VCs”) are not required to register as a portfolio manager if the advice provided to the fund (and indirectly to the GUILLAUME LAVOIE [email protected] ANDRÉ VAUTOUR [email protected] investors of the fund) in connection with the purchase and sale of securities is incidental to their active management of the fund’s investments (notably as a result of the VC having representatives sitting on the boards of directors of the portfolio companies in which they invest) and if the VCs do not solicit clients on the basis of their securities advice. It must be also clear that the expertise of the manager of the VC is sought in connection with the management of the portfolio companies and that its remuneration is connected to such management and not to any securities advice it might be considered to be giving to the fund and its investors.