Trez Capital -- summary under Corporate Liquidations

Overview

The Corporation, a TSX-listed mortgage investment corporation, is proposing to maximize shareholder value through an “orderly wind-up plan,” under which it will allow its mortgages to mature or sell them before maturity at par. Provided it maintains its ITA status as a MIC throughout this process (as to which there is a risk factor disclosure), it will avoid corporate tax by distributing its net interest income and capital gains as taxable dividends (taxable as interest to the shareholders) or capital gains dividends (1/2 taxable to them). It appears to be contemplated that the paid-up capital of $10 will be distributed in cash towards or at the completion of the plan.

The Corporation

The Corporation was formed in 2012 to provide investors with the opportunity to generate an attractive and stable return by participating in a diversified portfolio of mortgages via a publicly traded vehicle. Its common shares (“Shares”) trade on the TSX. The Manager of the Corporation (as well as of Trez Capital Senior Mortgage Investment Corporation) is Trez Capital Fund Management Limited Partnership.

Background to Orderly Wind-Up Plan

In the midst of the strategic review process, the Corporation’s Board received a shareholder requisition on February 8, 2016, requesting that the directors call a special meeting of the Shareholders for the purpose of: (i) reconstituting the Board with three new independent directors; and (ii) voting on a special resolution to wind up the Corporation. On May 9, 2016, the Special Committee of the Corporation announced the completion of its strategic review process, an amicable settlement with the concerned shareholder group and the Corporation’s Manager and a plan to maximize Shareholder value by way of an orderly wind-up of the Corporation's assets and the return of capital to Shareholders (the "Orderly Wind-Up Plan") to be approved at a Shareholders’ meeting.

Orderly Wind-Up Plan

The Orderly Wind-Up Plan will be implemented through a combination of the following actions: (i) allowing the mortgages in the Corporation's portfolio to expire at their scheduled maturities; (ii) selling mortgages in the Corporation's portfolio at par prior to their scheduled maturities; and (iii) in addition to or in lieu of the foregoing, by effecting other transactions, as determined by the Investment & Capital Management Committee, of the Corporation in its discretion. Net cash proceeds from the monetization of loans will be distributed to Shareholders in a manner that is in the best interests of Shareholders as recommended by the Investment & Capital Management Committee and approved by the Board.

Other Fund/Third Party Interests in Mortgages

The Corporation holds interest in mortgages in which third parties and/or other mortgage investment entities managed by the Manager participate in senior portions of a first mortgage. In addition, in some cases, the Corporation has been allocated a position in a mortgage which is senior to, pari passu with and/or junior to the positions allocated to other mortgage investment entities managed by the Manager. As of April 30, 2016, 81.5% of the mortgages in the Corporation's portfolio were not 100% owned by the Corporation, representing an aggregate book value of approximately $142 million. The determination by the administrator of the mortgages (a separate corporate affiliate of the Manager) of what is in the best interests of all of the participants in the mortgage may be inconsistent with the monetization of a mortgage or the Board's determination under the Orderly Wind-Up Plan.

Canadian tax consequences

Distribution of income as MIC

Provided that the Corporation qualifies as a mortgage investment corporation throughout its taxation year, it may deduct in computing its income for the taxation year: (i) the aggregate of all taxable dividends, other than capital gains dividends, paid in the year or within 90 days after the end of the year (to the extent not deductible by the Corporation for the preceding taxation year), and (ii) 50% of all capital gains dividends paid during the period beginning 91 days after the start of the taxation year and ending 90 days after the end of the taxation year. The Corporation (if it qualities as a MIC throughout the taxation year) may elect that dividends paid during a 12 month period commencing 91 days after the commencement of a taxation year and ending 90 days after the end of the year be capital gains dividends to the extent of the Corporation's capital gains for the year less any applicable capital losses (including net capital losses claimed).

Risk of loss of MIC status

If the Corporation begins its taxation year meeting the conditions to qualify as a MIC but stops meeting them partway through the year, the Act does not deem the Corporation to have a taxation year-end immediately before it stops meeting the qualifications so that the Corporation could qualify as a MIC throughout a stub taxation year. To the extent possible, the Board intends to monitor the Corporation's assets to try to ensure that the Corporation maintains its status as a MIC. However, it may not be possible to maintain the Corporation's status as a MIC throughout the Orderly Wind-Up Process

Share repurchases

S. 84(3) provides that, where a taxable Canadian corporation purchases a share for cancellation, the corporation is deemed (except where s. 84(6)(b), discussed below applies) to have paid a dividend to the shareholder equal to the amount by which the proceeds of disposition of the share exceed the paid-up capital in respect of the share. The paid-up capital of each Share is $10.00 per Share. To the extent that shares of the Corporation are purchased by the Corporation pursuant to a normal course issuer bid, the shareholders should be considered by s. 84(6)(b) to have realized a capital gain or a capital loss on the disposition of their shares and the Corporation should not be deemed to have paid a dividend to the shareholders.

Winding-up distributions

In addition, on the distribution by the Corporation of its remaining property on the winding-up, the Corporation will be deemed to have paid a dividend to each of its remaining Shareholders equal to the amount by which the fair market value of the property distributed to the particular Shareholder (likely the amount of cash) exceeds the paid-up capital in respect of the Shareholder's shares in the Corporation. For so long as the Corporation has maintained its status as a MIC, it should be able to deduct one-half of the amount of any capital gains dividend and the entire amount of any taxable dividend, other than a capital gains dividend, in computing its income for its final taxation year. The taxable dividends, other than capital gains dividends, received by a particular Shareholder should be treated as interest received by the shareholder on a bond issued by the Corporation. The capital gains dividends received by a particular shareholder should be deemed to be capital gains of the Shareholder from the disposition of capital property. The amount of any paid-up capital returned to a particular Shareholder should not be deemed to be a dividend.

Winding-up distribution while not a MIC

If the Corporation has lost its status as a MIC by the time of its winding-up, the amount of any deemed dividend will not be deductible by the Corporation and the Shareholders should be deemed to have received taxable dividends to the extent that the amounts distributed to them exceed the paid-up capital in respect of their shares. The Corporation would be taxable in the year on its net income but any unused non-capital losses should be available to be used against the Corporation's income for the year.

Proceeds

Any portion of such final distribution not received as a dividend will be treated as proceeds of disposition of the Shares.