Proposed Sprott Physical Gold Trust acquisition of Central Goldtrust under s. 132.2 merger uses bonus units and supplants Central GoldTrust proposal to convert to ETF

In May, Sprott made an offer that would have entailed an acquisition by Sprott Physical Gold Trust of all the units of Central GoldTrust, with the GoldTrust unitholders being provided a choice between a taxable exchange of their units for Sprott units, or participating in a s. 132.2 rollover merger. GoldTrust essentially is a closed-end fund, although its units provide what in economic substance is a somewhat illusory retraction right to qualify it as an open-end trust for Canadian tax purposes (so that its units traded at a significant discount to NAV before the Sprott offer.) The trustees of GoldTrust resisted this offer, and early this month issued a Circular in which they proposed that GoldTrust be converted into an ETF whose unit terms would provide that unitholders whose units’ value at least equalled that of a (London good delivery) gold bar could redeem their units for gold bullion plus top-up cash (and with all unitholders having a right to redeem units for cash at a 5% discount to NAV, so that the trust would be a unit trust under s. 108(2)(a)). In the meantime, a non-discounted cash redemption right would also be added to the units to be available until the ETF conversion occurred.

The Canadian tax disclosure stated that GoldTrust would report any gains realized on its gold bullion, as a result of honouring redemption demands, as capital gains, and indicated uncertainty as to whether, if CRA at a subsequent juncture assessed on the basis that such gains were realized on income account, the additional trust income could be pushed out to the resident unitholders (and that there would be Part XIII tax exposure where the redeemed units instead were those of non-residents). The U.S. tax disclosure was non-commital as to whether the various proposed amendments should be treated as a non-taxable amendment of the terms of the Units or as a deemed exchange of the existing Units for new amended Units qualifying as a tax-free recapitalization and/or as a tax-free stock exchange for Code purposes – and had extensive disclosure relating to GoldTrust’s status as a PFIC.

On Christmas eve, GoldTrust issued a further Circular indicating that, as a result of proxies given to Sprott under its bid, Sprott had replaced essentially all the GotdTrust trustees and requisitioned a GoldTrust unitholders meeting to approve the merger with the Sprott Physical Gold Trust (which Sprott now has the votes to get approved as a result of getting those proxies). The merger would essentially occur the same as before except for an interesting twist (that arose during the bidding process) that Sprott would initially contribute some "bonus consideration" Sprott Physical Gold Trust units to GoldTrust, which then would be immediately distributed to the GoldTrust unitholders.

Neal Armstrong. Summary of Sprott Physical Gold Trust offer for Central Goldtrust units under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – Bullion Fund Mergers, summary of Central Goldtrust Circular for ETF Conversion under Other – Conversions – Closed-End To Open-Ended Funds and summary of Central Goldtrust Circular for merger with Sprott Physical Gold Trust under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – Bullion Fund Mergers.