There are certain risks inherent in an investment in the Units and in the activities of the Trust, which investors should carefully consider before investing in the Units. The following is a summary only of the risk factors. Prospective investors should review the risks relating to an investment in the Units with their legal and financial advisors.
The Trust advises that prospective Subscribers should consult with their own independent professional legal, tax, investment and financial advisors before purchasing Units in order to determine the appropriateness of this investment in relation to their financial and investment objectives and in relation to the tax consequences of any such investment.
In addition to the factors set forth elsewhere in this Offering Memorandum, prospective Subscribers should consider the following risks before purchasing Units. Any or all of these risks, or other as yet unidentified risks, may have a material adverse effect on the Trust’s business, and/or the return to the Subscribers.
This is a Blind Pool Offering
This is a “blind pool” Offering. Although the Trust expects that the available net proceeds of the Offering will be applied to the purchase of interests in one or more Properties, the U.S. Manager has not identified any Properties for potential investment by the Holding LP. The Unitholders’ return on their investments in the Units will vary depending on the return on investment achieved on the Properties that may be acquired with the net proceeds of the Offering.
As this is a “blind pool” Offering, initially, not all of the net proceeds from the Offering will be deployed by the Trust to indirectly acquire interests in Properties. Accordingly, the net proceeds from the Offering are not expected to have an immediate impact on Distributable Cash Flow and, accordingly, until such funds are deployed by the Trust to indirectly acquire interests in Properties, the annualized pre-tax distribution yield per Unit can be expected to be less than the Trust’s targeted annual pre-tax distribution yield of 7% calculated based on the Investor’s per Unit acquisition price.
Investment Risk
While the Manager believes that the Trust’s Investment Strategy will be successful over the long-term, there can be no guarantee against losses resulting from an investment in Units of the Trust and there can be no assurance that the Trust’s investment approach will be successful or that its Investment Objective will be attained. All investments in securities and other financial instruments risk the loss of invested capital. The Trust may realize substantial losses, rather than gains, from some or all of the investments described herein. A subscription for Units should be considered only by persons financially able to maintain their investment and who can bear the risk of loss associated with an investment in the Trust.
Lack of Operating History
Although the persons involved in the management of the Trust and the service providers to the Trust, as the case may be, have had experience in their respective fields of specialization, the Trust is a newly organized investment trust with no previous operating history upon which prospective investors can evaluate the Trust’s performance.
No Market for Units
There is no market through which the Units may be sold and purchasers may not be able to resell securities purchased under this Offering Memorandum. This may affect the pricing of the Units in the secondary market, the transparency and availability of trading prices, the liquidity of the securities, and the extent of issuer regulation. As at the date of this Offering Memorandum, the Trust does not have any of its securities listed or quoted, has not applied to list or quote any of its securities, and does not intend to apply to list or quote any of its securities, on the Toronto Stock Exchange, Aequitas NEO Exchange Inc., any other Canadian marketplace, a U.S. marketplace, or a marketplace outside Canada and the U.S. Accordingly, an investment in Units is suitable solely for persons able to make and bear the economic risk of a long-term investment.
Reliance on the Manager
Prospective Purchasers assessing the risks and rewards of this investment should appreciate that they will, in large part, be relying on the good faith and expertise of the Manager and its senior executives, Rae Ostrander and Paul Ostrander. In particular, prospective Purchasers will have to rely on the discretion and ability of the Manager and their principals in determining the composition of the portfolio of Properties, and in negotiating the pricing and other terms of the agreements leading to the acquisition of interests in Properties. The ability of the Manager to successfully implement the Trust’s Investment Strategy will depend in large part on the continued employment of Rae Ostrander and Paul Ostrander. Neither the Trust nor Manager maintains key person life insurance for any of these named individuals. While, the Trust has qualified appointees who would step in to lead the search committee for an appropriate replacement manager and/or facilitate the liquidation of the Trust’s assets, if the Manager loses the services of one or both of these individuals, the business, financial condition and results of operations of the Trust may be materially adversely affected.
Distributions may be Reduced or Suspended
Although the Trust intends to distribute its available cash to Unitholders, such cash distributions may be reduced or suspended. The ability of the Trust to pay Unitholders a targeted annual pre-tax distribution yield of 7% calculated based on the Investor’s per Unit acquisition price across all Unit series and the actual amount distributed or paid to Unitholders will vary as between series of Units based on the proportionate entitlements of each series of Units and will depend on the ability of the Trust to fully deploy the net proceeds of the Offering and the Mortgage Loans to indirectly acquire interests in the Properties and the manage ongoing operations of the Properties. The return on an investment in the Units is not comparable to the return on an investment in a fixed income security. Cash distributions, including a return of a Unitholder’s original investment, are not guaranteed and their recovery by an investor is at risk and the anticipated return on investment is based upon many performance assumptions. It is important for Purchasers to consider the particular risk factors that may affect the real estate investment markets generally and therefore the availability and stability of the distributions to Unitholders.
Same Management Group for Various Rae Ostrander Group Entities
Due to the fact that the Rae Ostrander Group manages other investment portfolios and realty investment vehicles in similar asset classes, there is a risk that conflicts may arise regarding the allocation of tenants amongst the various Rae Ostrander Group managed entities.
Relationship between the Trust and various Rae Ostrander Group managed entities
There is a risk that conflicts may arise regarding the allocation of properties among the various Rae Ostrander Group managed entities. The following measures have been adopted in order to align the interests of the various Rae Ostrander Group and Unitholders: (i) all co-investments by the Trust in any Property in which a Rae Ostrander Group entity or any related party of the Trust has, or upon acquisition will have, any direct or indirect interest require the approval of the Canadian Manager; (ii) pursuant to the Trust Agreement, the Canadian Manager is required to act with a view to the best interests of the Trust and the Unitholders, and (iii) the Management Agreement requires that the Canadian Manager exercise its powers and discharge its duties diligently, honestly, in good faith and in the best interests of the Trust or the Investment LP, including exercising the standard of care, diligence and skill that a reasonably prudent person would exercise in similar circumstances.
Leverage by the Trust
The Trust may from time to time borrow under loans with Canadian and U.S. chartered banks and others. See “Item 4 – Capital Structure – Long-Term Debt”. The Trust intends to borrow to the extent that the Canadian Manager is satisfied that such borrowing and additional investments will increase the overall profitability of the Trust. The obligations under such loans may be secured, and while the addition of leverage has the potential to enhance returns, it also involves additional risks. For example, due to the varying loan maturities and constant fluctuations in interest rates, there is no assurance that the interest received by the Trust on its mortgage investments will always exceed the interest the Trust pays on loans that it may have previously taken out to finance mortgage investments. Therefore, there can be no assurance that the leveraging employed by the Trust will enhance returns, and to the extent that secured lenders realize on their respective collateral, they will have right to receive distributions in priority to the Unitholders in addition to the right to seize mortgage assets pursuant to security agreements with the Trust.
Reliance on third parties
In assessing the risk of an investment in the Trust, potential investors should be aware that they will be relying on the good faith, experience and judgment of certain staff of the Manager. Should these staff be unable or unwilling to continue their employment with the Manager, this could have an adverse effect on the Trust’s business, financial condition and results of its operations. The competition for such key qualified personnel is intense and there can be no assurance of success in attracting, retaining, or motivating such individuals. Failure in this regard would likely have a material adverse effect on the Trust’s business, financial condition and results of operations which in turn may adversely affect the Trust’s ability to perform its obligations and its ability to maintain distributions on the Units at a consistent and desirable level.
Lack of Separate Legal Counsel
Purchasers, as a group, have not been represented by separate counsel. Neither counsel for the Trust nor counsel for the Manager purports to have acted for the Investors or to have conducted any investigation or review on their behalf.
COVID-19 and other Events
Natural disasters, changes in climate, geo-political events, pandemics, and catastrophic events could materially adversely affect the Trust’s financial performance. On March 11, 2020, the World Health Organization recognized the outbreak of COVID-19 as a pandemic. The COVID-19 pandemic and the measure attempting to contain and mitigate the effects of the virus (including travel bans and restrictions, quarantines, social distancing, shutdowns, and restrictions on business venues) have caused heightened uncertainty in the global economy. Many of the other risks described in the “Risk Factors” section may also be heightened.
COVID-19, as well as any future pandemic outbreaks, could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of pandemic situations precludes any prediction as to the ultimate adverse impact of COVID-19 or any future pandemic outbreak. Nevertheless, COVID-19, and possible future pandemic diseases, present material uncertainty and risk with respect to economic and market conditions, corporate earnings or loan performance, and the ability of borrowers to service their debt, any of which could have an adverse impact on the performance and financial results of the Trust and the obligors of the Trust, and the value and the liquidity of the units of the Trust. Nevertheless, since the impact of COVID-19 is ongoing, the effect on the Trust may not be fully reflected in our results of operations until future periods.
Management has developed a business continuity plan and will continue to monitor and adjust its plan as the COVID-19 situation changes. Management has taken several proactive and precautionary measures to protect the health and safety of its operational staff, including the implementation of alternative working arrangements such as working-from-home as required.
Risks of Real Estate Investment and Ownership
An investment in Units is an investment in U.S. real estate through the Trust’s indirect interest in the Holding LP and the Properties, directly or indirectly, acquired by it. Investment in real estate is subject to numerous risks, including the factors listed below and other events and factors which are beyond the control of the Trust:
Acquisition Risk
The U.S. Manager intends to acquire interests in Properties selectively. The acquisition of interests in Properties entails risks that investments will fail to perform in accordance with expectations. In undertaking such acquisitions, the U.S. Manager will incur certain risks, including the expenditure of funds on, and the devotion of management’s time to, transactions that may not come to fruition. Additional risks inherent in acquisitions include risks that the Properties will not achieve anticipated occupancy levels and that estimates of the costs of improvements to bring an acquired Property up to standards established for the market position intended for that Property may prove inaccurate.
General Real Estate Ownership Risks
All real property investments are subject to a degree of risk and uncertainty. Property investments are affected by various factors including general economic conditions, local real estate markets, demand for leased premises, competition from other available premises and various other factors. The value of real property and any improvements thereto may also depend on the credit and financial stability of the tenants. Distributable Cash will be adversely affected if a significant number of tenants of the Properties were to become unable to meet their obligations under their leases or if a significant amount of available space in the Properties is not able to be leased on economically favourable lease terms. In the event of default by a tenant, delays or limitations in enforcing rights as lessor may be experienced and substantial costs in protecting the Holding LP’s investment may be incurred. The ability to rent unleased space in the Properties will be affected by many factors. Costs may be incurred in making improvements or repairs to Property required by a new tenant. A prolonged deterioration in economic conditions could increase and exacerbate the foregoing risks. The failure to rent unleased space on a timely basis or at all would likely have an adverse effect on the Trust’s financial condition.
Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges must be made throughout the period of ownership of real property regardless of whether a Property is producing any income. Real property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relationship with demand for and the perceived desirability of such investments. Such illiquidity will tend to limit the Trust’s ability to vary its portfolio promptly in response to changing economic or investment conditions. If for whatever reason, liquidation of assets is required, there is a risk that sale proceeds realized might be less than the current book value of the Trust’s investments or that market conditions would prevent prompt disposition of assets. The Trust may, in the future, be exposed to a general decline of demand by tenants for space in properties. As well, certain of the leases of the Properties held by the Trusts may have early termination provisions which, if exercised, would reduce the average lease term.
Financing Risks
There is no assurance that the U.S. Manager will be able to obtain sufficient Mortgage Loans to finance the acquisition of interests in Properties, or, if available, that the U.S. Manager will be able to obtain Mortgage Loans on commercially acceptable terms. Further, there is no assurance or guarantee that any Mortgage Loans, if obtained, will be renewed when they mature or, if renewed, renewed on the same terms and conditions (including the rate of interest). In the absence of mortgage financing, the number of Properties which the Holding LP is able to purchase will decrease unless further funding is successfully sought and the return from the ownership of Properties (and ultimately the return on an investment in Units) will be reduced. Even if the U.S. Manager is successful in obtaining adequate Mortgage Loans, the U.S. Manager may not be able to generate sufficient funds through the operation of the Properties to service the Mortgage Loans. If a default occurs under any of the Mortgage Loans, one or more of the Lenders could exercise its rights including, without limitation, foreclosure or sale of the Properties.
Interest Rate Fluctuations
The Mortgage Loans may include indebtedness with interest rates based on variable lending rates that will result in fluctuations in the Holding LP’s cost of borrowing.
Environmental Matters
Under various environmental and ecological laws, the Holding LP and/or its subsidiaries could become liable for the costs of removal or remediation of certain hazardous or toxic substances that may be released on or in one or more of the Properties or disposed of at other locations. The failure to deal effectively with such substances may adversely affect the U.S. Manager’s ability to sell such Property or to borrow using the Property as collateral, and could potentially also result in claims against the Holding LP by third parties.
Uninsured Losses
Holding GP will, under the terms of the Holding LP Agreement, arrange for comprehensive insurance, including fire, liability and extended coverage, of the type and in the amounts customarily obtained for properties similar to those to be owned by the Holding LP or its subsidiaries and will endeavour to obtain coverage where warranted against earthquakes and floods. However, in many cases certain types of losses (generally of a catastrophic nature) are either uninsurable or not economically insurable. Should such a disaster occur with respect to any of the Properties, the Trust could suffer a loss of capital invested and not realize any profits which might be anticipated from the disposition of such Properties.
Reliance on Property Management
Holding GP may rely upon independent management companies to perform property management functions in respect of each of the Properties. To the extent, Holding GP relies upon such management companies, the employees of such management companies will devote as much of their time to the management of the Properties as in their judgement is reasonably required and may have conflicts of interest in allocating management time, services and functions among the Properties and their other development, investment and/or management activities.
Competition for Real Property Investments
The U.S. Manager will compete for suitable real property investments with individuals, corporations, REITs and similar vehicles, and institutions (both Canadian and foreign) which are presently seeking or which may seek in the future real property investments similar to those sought by the U.S. Manager. An increased availability of investment funds allocated for investment in real estate would tend to increase competition for real property investments and increase purchase prices, reducing the yield on such investments.
Revenue Shortfalls
Revenues from the Properties may not increase sufficiently to meet increases in operating expenses or debt service payments under the Mortgage Loans or to fund changes in the variable rates of interest charged in respect of such loans.
Fluctuations in Capitalization Rates
As interest rates fluctuate in the lending market, generally so too do capitalization rates which affect the underlying value of real estate. As such, when interest rates rise, generally capitalization rates should be expected to rise. Over the period of investment, capital gains and losses at the time of disposition can occur due to the increase or decrease of these capitalization rates.
U.S. Market Factors
The Properties will be located in the U.S. Concern about the stability of the markets generally and the strength of the economy may lead lenders to reduce or cease to provide funding to businesses and consumers, and force financial institutions to continue to take the necessary steps to restructure their business and capital structures. Weak economic conditions in the U.S. and the uncertainty over the duration of these conditions could have a negative impact on the retail industry. Recent improvements in demand trends globally may not continue, and the Trust’s future financial results and growth could be harmed or constrained if the recovery stalls or conditions worsen
Reliance on Assumptions
The Trust’s investment objectives and the Canadian Manager’s strategy have been formulated based on the U.S. Manager’s analysis and expectations regarding recent economic developments in the U.S., the future of U.S. real estate markets generally, and the U.S. to Canadian dollar exchange rate. Such analysis may be incorrect and such expectations may not be realized, in which case, Unitholders can expect the annualized pre-tax distribution yield per Unit to be less than 7% calculated based on the Investor’s per Unit acquisition price.
Timing for Investment of Net Subscription Proceeds
Although the Canadian Manager is targeting deployment of the net proceeds of the Offering within three months following the Closing Date, the time period for the full investment of the net proceeds of the Offering in Properties is not certain and may exceed nine months. The timing of such investment will depend, among other things, upon the identification of Properties meeting the criteria for acquisition. There is a risk that the U.S. Manager may not invest all proceeds of the Offering in Properties in a timely manner and may not be able to generate sufficient funds to pay the targeted annual distributions of 7% calculated based on the Investor’s per Unit acquisition price.
Potential Conflicts of Interest
The Canadian Manager will, from time to time, deal with parties with whom the Trust may be dealing, or may be seeking investments similar to those desired by the Trust. The interests of these persons could conflict with those of the Trust. Pursuant to the Trust Agreement, all decisions to be made by the Canadian Manager which involve the Trust are required to be made in accordance with the Canadian Manager’s duties and obligations to act honestly and in good faith with a view to the best interests of the Trust and its Unitholders. There can be no assurance that the provisions of the Trust Agreement will adequately address potential conflicts of interest or that such actual or potential conflicts of interest will be resolved in favour of the Trust.
Risks Related to Redemptions
Use of Available Cash
The payment in cash by the Trust of the redemption price of Units will reduce the amount of cash available to the Trust for the payment of distributions to Unitholders, as the payment of the amount due in respect of redemptions will take priority over the payment of cash distributions.
Limitation on Payment of Redemption Price in Cash
The total cash amount available for the payment of the redemption price of Units by the Trust is limited to $100,000 USD in each calendar quarter and is also limited in any 12-month period to 1% of the aggregate Net Asset Value of the Trust at the start of such 12-month period.
Payment of Redemption Price in Kind
The redemption of Units may be paid and satisfied by way of an in specie distribution of property of the Trust, and/or unsecured subordinated notes of the Trust, as determined by the Canadian Manager in its discretion, to the redeeming Unitholder. Such property may not be liquid and generally will not be a qualified investment for Registered Plans and may be a prohibited investment for RRSPs, RRIFs, TFSAs, FHSAs, RESPs and RDSPs. In such circumstances, adverse tax consequences generally may apply to a Unitholder, or Registered Plan and/or its annuitant, holder, subscriber or beneficiary thereunder or thereof, as a result of the redemption of Units. Accordingly, investors that propose to invest in Units through Registered Plans should consult their own tax advisors before doing so to understand the potential tax consequences of exercising their redemption rights attached to such Units.
Restriction on Transfers
Units may not be transferred except in conformity with applicable securities laws relating to resale of securities and only if the prior written consent of the Canadian Manager has been obtained and the transfer is in accordance with the provisions of the Trust Agreement.
Limited Ability to Liquidate Investments
There is no formal market for Units and one is not expected to develop. This offering of Units is not qualified by way of prospectus, and consequently the resale of Units is subject to restrictions under applicable securities legislation. In addition, Units may not be assigned, encumbered, pledged, hypothecated or otherwise transferred except with the prior written consent of the Canadian Manager, which may be withheld in the Canadian Manager’s sole and absolute discretion. Accordingly, it is possible that Unitholders may not be able to resell their Units other than by way of redemption of their Units as of any Valuation Date which redemption will be subject to the limitations described under “Item 5 – Securities Offered – The Trust – Redemption”. There are circumstances where the Trust may suspend redemptions. Unitholders may not be able to liquidate their investments in a timely manner. As a result, an investment in the Units is suitable only for sophisticated investors who do not require liquidity for their investment and are able to bear the financial risk of the investment for an extended period of time.
Risk Factors Relating to Canadian Tax
Non-Resident Ownership
The Trust intends to comply with the requirements under the Tax Act at all relevant times such that it maintains its status as a “unit trust” and a “mutual fund trust” for purposes of the Tax Act. Under current law, a trust may lose its status under the Tax Act as a mutual fund trust if it can reasonably be considered that the trust was established or is maintained primarily for the benefit of Non-Residents. However, the restrictions on Non-Resident ownership will not apply where all or substantially all of the mutual fund trust’s property is not “taxable Canadian property”, as defined in the Tax Act. Even though the Trust will not own any taxable Canadian property, Non-Residents may not be the beneficial owners of more than 49% of the Units. The Canadian Manager will also have various powers that can be used for the purpose of monitoring and controlling the extent of Non-Resident ownership of the Units. See “Item 5 – Securities Offered – Terms of Securities – The Trust – Restrictions on Ownership and Transfer of Units – Limitations on Non-Resident Ownership”.
The restrictions on the issuance of Units by the Trust to Non-Residents may negatively affect the Trust’s ability to raise financing for future acquisitions or operations. In addition, the Non-Resident ownership restrictions could negatively impact the liquidity of the Units and the market price at which Units can be sold.
Taxation of Trusts and Partnerships
There can be no assurance that Canadian federal income tax laws and the administrative policies and assessing practices of the CRA respecting mutual fund trusts will not be changed in a manner that adversely affects Unitholders. In addition, the Tax Act requires the Trust to satisfy certain factual conditions in order for it to qualify as a mutual fund trust, including, among other things, that at least 150 beneficiaries of the Trust own not less than one block of units of any one class having an aggregate fair market value of not less than $500. Should the Trust fail or cease to qualify as a mutual fund trust under the Tax Act, the income tax considerations described under the heading “Item 8 – Income Tax Consequences and Registered Plan Eligibility” would be materially and adversely different in certain respects and the Units may cease to be qualified investments for Registered Plans.
The SIFT Rules apply to a trust that is a “SIFT trust” and a partnership that is a “SIFT partnership”, each as defined in the Tax Act. The SIFT Rules generally do not apply to trusts and partnerships, the interests in which are not listed or traded on a stock exchange or other public market. The Partnerships and the Trust intend to conduct their affairs in such a manner so as to ensure that the Trust is not a “SIFT trust” and neither Partnership is a “SIFT partnership”. However, there can be no assurance that the SIFT Rules or the administrative policies or assessing practices of the CRA will not be changed in a manner that adversely affects the Trust, the Partnerships and Unitholders.
Proposed Amendments with respect to “hybrid mismatch arrangements” and the “excessive interest and financing expenses limitation” regime could, depending on the circumstances, result in additional Canadian tax being payable by the Trust or increase the amount of taxable income allocated by the Trust to Unitholders.
Distribution of Additional Units
Interest on the Investment LP Notes accrues at the Trust level for Canadian federal income tax purposes, whether or not actually paid. The Trust Agreement provides that a sufficient amount of the Trust’s net income and net realized capital gains will be distributed each year to Unitholders in order to eliminate the Trust’s liability for tax under Part I of the Tax Act. Where such amount of net income (including interest on the Investment LP Notes) and net realized capital gains of the Trust in a taxation year exceeds the cash available for distribution in the year, such excess net income and net realized capital gains will be distributed to Unitholders in the form of additional Units. Unitholders generally will be required to include such distributions in the form of Units in their taxable income, even in circumstances where they do not receive a cash distribution.
Foreign Taxes
Foreign taxes paid by the Investment LP will be allocated pursuant to its limited partnership agreement. Each partner’s share of the “business-income tax” and “non-business-income tax” paid in a foreign country for a year will be creditable against its Canadian federal income tax liability to the extent permitted by the detailed rules contained in the Tax Act.
Although the foreign tax credit provisions are designed to avoid double taxation, the maximum credit is limited. Because of this, and because of timing differences in recognition of expenses and income and other factors, double taxation may arise.
Under the Foreign Tax Credit Generator Rules, the foreign “business income tax” or “non-business-income tax”, each as defined in the Tax Act, for any taxation year may be limited in certain circumstances, including where a partner’s share of the partnership’s income under the income tax laws of any country (other than Canada) under whose laws the income of the partnership is subject to income taxation, is less than the partner’s share of such income for purposes of the Tax Act. No assurances can be given that the Foreign Tax Credit Generator Rules will not apply to any Unitholder. If the Foreign Tax Credit Generator Rules apply, a Unitholder’s foreign tax credits will be limited.
Differences in Canadian and U.S. Tax Laws
The Trust is required to compute its income as though it were an individual resident in Canada. The Trust is, therefore, subject to the provisions of the Tax Act which may differ materially from the applicable provisions of the Code. In addition, the effective tax rate under the Tax Act and the Code may differ, in which case Unitholders generally will be subject to the higher effective tax rate.
Dispositions of Real Property
In the ordinary course and/or in connection with the termination of the Trust, the Trust may effect a sale of U.S. real property by disposing of securities of an underlying entity (such as the Holding LP or any of its subsidiary partnerships) or by disposing of the property directly. In these circumstances, the Investment LP’s effective tax rate under the Code on such dispositions will be greater than the effective tax rate on capital gains under the Tax Act. In the event that a sale of real property is structured in this manner, the net cash available for distribution to Unitholders will be reduced.
Change of Law
There can be no assurance that Canadian federal income tax laws, the judicial interpretation thereof, the terms of the U.S. – Canada Tax Treaty, or the administrative and assessing practices and policies of the CRA will not be changed in a manner that adversely affects Unitholders. Any such change could result in tax being payable by the Trust or its affiliates or could otherwise adversely affect Unitholders by reducing the amount available to pay distributions or changing the tax treatment applicable to Unitholders in respect of such distributions.
Non-Residents of Canada
The Tax Act may impose additional withholding or other taxes on distributions made by the Trust to Unitholders who are Non-Residents. These taxes and any reduction thereof under a tax treaty between Canada and another country may change from time to time. In addition, this Offering Memorandum does not describe the tax consequences under the Tax Act to Non-Residents, which may be more adverse than the consequences to other Unitholders. Prospective Purchasers who are Non-Residents should consult their own tax advisors.
Foreign Currency
For purposes of the Tax Act, the Trust generally is required to compute its Canadian tax results using Canadian currency. Where an amount that is relevant in computing a taxpayer’s Canadian tax results is expressed in a currency other than Canadian currency, such amount must be converted to Canadian currency using the rate of exchange quoted by the Bank of Canada for the day on which such amount arose, or using such other rate of exchange as is acceptable to the Minister of National Revenue (Canada). As a result, the Trust may realize gains and losses for tax purposes by virtue of the fluctuation of the value of foreign currencies relative to Canadian dollars.
Loss Restriction Event
Pursuant to rules in the Tax Act, if the Trust experiences a “loss restriction event” (“LRE”) (i) it will be deemed to have a year-end for tax purposes (which would result in an unscheduled distribution of the Trust’s net income and net realized capital gains, if any, at such time to Unitholders so that the Trust is not liable for income tax on such amounts under Part I of the Tax Act), and (ii) it will become subject to the LRE rules generally applicable to a corporation that experiences an acquisition of control, including a deemed realization of any unrealized capital losses and restrictions on its ability to carry forward losses. Generally, the Trust will be subject to an LRE if a Unitholder of the Trust alone or together with affiliated persons or partnerships (or group of persons) acquires (or becomes a holder of) more than 50% of the fair market value of all the interests in the income or capital, as the case may be, of the Trust.
Risk Factors Relating to U.S. Tax
Investment LP is subject to U.S. Federal Income Tax
The Investment LP is subject to U.S. federal income tax as a “foreign” corporation engaged in a U.S. trade or business, and will have both ECI (and may have FDAP) which are U.S. source items subject to U.S. federal income tax law.
The Trust also will have U.S. source FDAP income from interest paid on the Investment LP Notes. The Investment LP hopes to benefit from certain deductions under U.S. federal income tax rules in order to reduce its overall tax burden, including but not limited to deduction of interest expense on the Investment LP Notes, but such deductions may be restricted depending upon a variety of factors, as discussed in “Item 8 – Income Tax Consequences and Registered Plan Eligibility – Certain U.S. Federal Income Tax Considerations”. If the Investment LP’s deductions were limited, the IRS were to successfully challenge a U.S. tax position the Investment LP were to take, the Trust or the Investment LP were to fail to qualify for benefits under the U.S.-Canada Tax Treaty, or U.S. tax laws or the U.S.-Canada Tax Treaty were to change (perhaps retroactively), U.S. federal income tax costs could increase, thus decreasing cash available for distribution to the Unitholders and the value of the Units.
Change of Law
There can be no assurance that U.S. federal income tax laws, the terms of the U.S.-Canada Tax Treaty, and the IRS and Department of the Treasury administrative and legislative policies respecting the U.S. federal income tax consequences described herein will not be changed, possibly on a retroactive basis, in a manner that adversely affects Unitholders. In particular, any such change could increase the amount of U.S. federal income tax or withholding tax payable by the Trust or its subsidiaries, reducing the amount of distributions which the Trust would otherwise receive and thereby reducing the amount available to pay distributions to Unitholders and, potentially, the value of the Units.
