The Department of Finance released additional rules with regard
to the character conversion measures that was proposed in the
federal budget of March 20, 2013 (« 2013 Budget
»). These rules seek to address discrepancies in the
original budget proposals. The following is a quick summary
of the highlights:
1. The rules only deal with the character conversion
measure, there is no attempt to address technical deficiencies in
other 2013 Budget proposals.
2. The rules provide grandfathering for derivative forward
agreements entered before March 21, 2013, the terms of which
provide for final settlement before 2015 where either;
a) the term of the derivative forward agreement is extended
to no later than the end of 2014; or
b) a derivative forward agreement is part of a series of
agreements that ends before 2015.
3. Derivative forward agreements entered before March 21,
2013 having a term ending after 2014 are grandfathered to the
earlier of the end of the term and March 21, 2018.
4. To benefit from grandfathering, growth limits (described
below) must be respected.
5. A merger of funds is permitted; however, the term of the
surviving derivative forward agreement cannot exceed the term of
either of the predecessor agreements.
6. Grandfathering is lost if the notional amount of the
derivative forward agreement (i.e. the value of the reference
interest at any time) exceeds the total of :
a) The notional amount of the derivative forward agreement
immediately before March 21, 2013;
b) The increase in value of the reference interest due to
an increase in the value of the underlying investments (and not due
to new investments) net of any decreases in such value;
c) The amount of any cash on hand immediately before March
21, 2013 that can reasonably be considered to have been committed
to the derivative forward agreement before March 21, 2013;
d) Amounts invested in the derivative forward
agreement using the proceeds from the exercise of an over-allotment
option after March 20, 2013 where the derivative forward agreement
was entered into and the over allotment option was granted before
March 21, 2013;
e) Increases occurring after March 20, 2013 and before July
11, 2013 up to a maximum amount of 5% of the derivative forward
7. Rebalancing of the derivative forward agreements are
permitted and are taken into account in calculating the growth
Fasken's Quick Comments
8. Although not clear in the document, we presume that if a
fund has already entered into a new 180 day derivative forward
agreement prior to July 11, 2013 to replace a derivative forward
agreement the term of which expired after March 21, 2013, the two
derivative forward agreements would be considered to be a series of
agreements eligible for grandfathering up to 2015 (subject to the
9. There does not appear to be any extension available
after the end of 2014 for derivative forward agreements having a
term that ends before 2015.
10. It appears that a fund could enter into one 180 day
derivative forward agreement without having to respect the growth
limits where the 180 day derivative forward agreement was entered
into after March 20, 2013 and before July 11, 2013. However,
grandfathering to the end of 2014 would not be available.
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