Tax Information
The Fund intends to qualify as a MIC throughout its current taxation year and for all of its future taxation years. A MIC is generally able to operate as a flow-through entity so that a shareholder of a MIC is put in a similar position from an income tax perspective as if the investments made by the MIC had been made directly by the shareholder.
The two-tiered taxation normally applicable to shareholders of a corporation in respect of dividends paid from that corporation’s profits is generally avoided with shareholdings in a MIC. The Tax Act imposes certain requirements in order for a corporation to qualify as a MIC in a taxation year. These requirements generally will be satisfied by the Fund if, throughout the taxation year: the Fund was a Canadian corporation for the purposes of the Tax Act; the Fund engaged in the business of investing its funds and did not manage or develop real property; none of the Fund’s property consisted of specified types of foreign property; the Fund had at all times at least 20 shareholders; no shareholder (together with Related Persons, see below) held directly or indirectly more than 25% of any class of the issued shares of the Fund; at least 50% of the cost amount to the Fund of its property consisted of certain residential mortgages, deposits and money; not more than 25% of the cost amount to the Fund of its property was attributable to real property or leasehold interests therein; and the Fund’s ratio of liabilities to the Fund’s cost amount of its property did not exceed certain limits, being 3:1 where the cost amount to the Fund of certain residential mortgages, deposits and money of the Fund was less than two-thirds of the cost amount to the Fund of all of its property, and 5:1 otherwise. With respect to the requirement noted above that no shareholder (together with Related Persons) may own more than 25% of the shares of any class of the Fund, for these purposes “Related Persons” include a corporation and the person or persons that control the corporation, a parent corporation and its subsidiary corporation(s) and corporations that are part of the same corporate group, and an individual and that individual’s spouse, common-law partner or child under 18 years of age. The rules in the Tax Act defining “related persons” are complex and holders should consult with their own tax advisors in this regard.
Taxation of the Fund
The Fund is a public corporation for tax purposes and as such is subject to tax at the full corporate rate on its taxable income. However, as long as the Fund is a MIC, generally the Fund is able to deduct in computing its income for a taxation year the amount of its income for that year that is distributed to its shareholders. The Fund is entitled to deduct in computing its income for a taxation year: (i) all taxable dividends, other than capital gains dividends, paid by the Fund to its shareholders during the year or within 90 days after the end of the year; and (ii) one-half of all capital gains dividends paid by the Fund to its shareholders during the period commencing 91 days after the commencement of the year and ending 90 days after the end of the year. The Fund must elect to have the full amount of a dividend qualify as a capital gains dividend. The payment of capital gains dividends will allow the Fund to flow capital gains it realizes through to its shareholders.
The Fund intends to pay dividends to the extent necessary to reduce its taxable income each year to nil so that it has no tax payable under Part I of the Tax Act and to elect to have dividends be capital gains dividends to the maximum extent allowable. Any dividends deemed to be paid by the Fund on the redemption of Class A Shares will be deductible and will qualify for treatment as capital gains dividends on the same basis as other dividends.
Taxation of Shareholders
Capital gains dividends on the Class A Shares will be treated as a capital gain of the shareholder from a disposition of capital property. Ordinary dividends (i.e., dividends other than capital gains dividends) paid by the Fund on the Class A Shares, whether received in cash or reinvested in additional shares, will be included in the shareholder’s income as bond interest. The reinvestment of a dividend in additional Class A Shares will have the same consequence for determining the adjusted cost base of a shareholder’s Class A Shares as any other purchase of Class A Shares. A sale or other disposition of Class A Shares by a shareholder who holds Class A Shares as capital property will give rise to a capital gain (or loss) to the extent that the proceeds of disposition of the Class A Shares exceed (or are exceeded by) the shareholder’s adjusted cost base of the Class A Shares disposed of and any reasonable disposition costs. One-half of capital gains (“taxable capital gains”) realized in the year by a shareholder on the disposition of Class A Shares generally will be included in the shareholder’s income for the year, and one-half of capital losses (“allowable capital losses”) realized in the year on the disposition of Class A Shares generally may be deducted from the shareholder’s taxable capital gains realized in such year. On a redemption or acquisition of Class A Shares by the Fund, the shareholder will be deemed to have received, and the Fund will be deemed to have paid, a dividend in an amount equal to the amount by which the redemption price exceeds the paid-up capital of the Class A Shares. This deemed dividend will be treated in the same manner as other dividends received by the shareholder from the Fund, and will depend on whether the Fund elects that the entire dividend be a capital gains dividend. The balance of the redemption price will constitute proceeds of disposition of the Class A Shares for purposes of the capital gains rules.