In discussing what are investment funds in Canada, a related area would be the applicable Canadian laws and regulations that governs such funds. While an investment fund lawyer is best consulted with for this matter, a general overview of what are investment funds in the context of Canada is discussed in this article.
What are investment funds?
An investment fund is pooled money, or a collective investment, which is made up of different investments from numerous investors. The money collected is then invested or is used to capitalize other businesses or entities according to its structure or agreement with the investors.
While different sourced money is pooled in an investment fund, an investor in that fund still retains ownership or control over their respective funds. This will depend on the contract, arrangement, or the nature of investment between the fund manager and the investor.
The overall risk of an investor’s fund is spread across the pooled fund. Although this will not eliminate any risk of loss, there’s a greater chance it will be minimized should any loss occur.
Examples of investment funds
While there are various types or examples of investment funds, there are three main types that investment funds may be structured in Canada, namely (1) trusts, (2) limited partnerships, and (3) corporations.
Each investment fund would structure itself according to its purpose. As a result, each structure would have varying legal liabilities and tax regulations that it would have to consider.
(1) Trusts
Also called unit trusts, an investment fund that is publicly offered are usually in the form of investment trusts. Here, units are issued to investors, who become unitholders of the fund. The funds are then invested in different assets or are traded to generate revenue.
Unitholders in an investment trust become beneficiaries of the trust, who are entitled to any benefit from this fund. As the investment trust gains steady revenues, these are then distributed periodically to the unitholders.
(2) Limited Partnerships
A limited partnership is where an investor – called the limited partner – invests money in an entity who manages the fund and the operations of the business – called the general partner. The general partner then decides where to invest such funds, whose income is distributed to the limited partners according to their partnership agreement.
One distinct factor of limited partnerships is that due to the nature of a limited partners’ “limited” liability, it cannot be involved in the management or the operations of the company. This is solely done by the general partner, who has “unlimited” liability regarding the fund and according to Canadian laws.
Limited partnerships are commonly used for hedge funds and investment funds that are not publicly offered.
(3) Corporations
Investment funds that are publicly offered may also be structured as a corporation or as shares in a corporation. Here, investors will be issued shares of the corporation, who are commonly called corporate or company shareholders.
As a shareholder, an investor is entitled not only to the benefits or interests of their invested fund, but also to the affairs of the corporation. This is due to the nature of a shareholder which is equated to ownership of the corporation. As an example, a shareholder may (or may not) have voting rights in any of the corporation’s decision-making processes.
Watch this video to know more about what are investment funds in the form of mutual funds:
Contact a lawyer to learn more about mutual funds in Canada and how are these regulated in the country. Ontarians may reach out to the best investment funds and asset management lawyers in Ontario as ranked by Lexpert.
Are investment funds regulated in Canada?
Canadian laws on securities, investments, and taxation governs any of the party’s liabilities in an investment business. This is also in relation to the regulations of the different regulatory bodies in Canada.
Securities law
One important area in discussing what are investment funds is the Canadian law on securities. In Canada, there is no single federal law or regulatory body governing securities. As such, securities regulation is governed by each province or territory, which has enacted laws and established their own securities regulatory body.
Some examples of these securities regulatory body are:
- Ontario: Ontario Securities Commission through the Securities Commission Act, 2021
- Québec: Autorité des marchés financiers established by the Act Respecting The Regulation Of The Financial Sector
- British Columbia: British Columbia Securities Commission through the Securities Act
Processes, policies, and forms for compliance under the securities regulators have been harmonized to prevent any inconsistency across the provinces and territories.
Registration
Generally, before an investment fund may publicly offer its securities, it must comply with the following requirements with their respective securities regulator:
- Filing of a prospectus
- Registration of the investment fund’s manager
- Registration of the investment fund’s portfolio
- Registration of dealers
These registrations or filings are governed by the following instruments:
- National Instrument 81-101
- Form 33-109 F6
- Form 33-109 F4
Conflict of interest
Under National Instrument 81-107, an Independent Review Committee must be established by every public investment fund. This Committee is tasked in reviewing matters or decisions made by the fund manager that may result (or have already resulted) in a conflict of interest.
Limitations to investment activities
As provided by National Instrument 81-102, certain investment activities are prohibited or are limited. This may include investments made to parties related to the fund manager or the portfolio advisers, among others.
Investment Canada Act
The Investment Canada Act will generally apply when foreign investments are involved.
When a direct investment from a non-Canadian company or entity is made to a new or existing Canadian corporation, a mandatory notification must be filed with the Director of Investments.
In addition, investments that reached the following thresholds may be subject to review either by the Minister of Innovation, Science, and Industry or by the Minister of Canadian Heritage:
- Financial Threshold
- Acquisition of Control Threshold
Taxation
Canada’s tax laws and regulations, as administered by the Canada Revenue Agency, will also govern investment funds. Some of these regulations include:
- taxation of income from mutual funds
- capital gains when units or shares are sold, redeemed, or cashed in
What is an investment fund lawyer?
Investment fund lawyers, also called investment management lawyers or asset management lawyers, can guide investors and fund managers alike.
At most, investment fund lawyers guide clients on the following concerns on investment funds in Canada:
- how to establish an investment fund in Canada and counsel managers on their fiduciary duty;
- how to comply with regulatory requirements from the applicable securities regulator;
- how to comply with regulations regarding mergers, acquisitions, or conversions;
- how to legally acquire foreign funds and investments;
- among others.
To learn more about what are investment funds in Canada and the regulations that govern it, consult with the Lexpert-Ranked best Canadian investment funds and asset management lawyers.