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;
    1. the term of the derivative forward agreement is extended to no later than the end of 2014; or
    2. 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.

Growth Limits

  1. 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 :
    1. The notional amount of the derivative forward agreement immediately before March 21, 2013;
    2. 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;
    3. 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;
    4. 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;
    5. Increases occurring after March 20, 2013 and before July 11, 2013 up to a maximum amount of 5% of the derivative forward agreement
  2. Rebalancing of the derivative forward agreements are permitted and are taken into account in calculating the growth limits.

Fasken's Quick Comments

  1. 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 growth limits).
  2. 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.
  3. 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.

A link to the Department of Finance  document is here:  Department of Finance Announces Proposed Technical Changes to the Transitional Rules for the Economic Action Plan 2013 Character Conversion Measure.