CRA indicates that an open-end non-listed mutual fund trust could suspend redemption rights for up to one year without ceasing to qualify as a unit trust
In order to qualify as a unit trust under s. 108(2)(a)(i), the unit conditions must include a condition “requiring the trust to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units.” CRA has provided a ruling on the satisfaction of this condition in the case of a unit trust whose principal asset will be an illiquid investment in the LP units of a subsidiary partnership and that intends to qualify as a mutual fund trust by distributing its units to more than 150 unitholders but will not list its units. In the event that cash redemptions (which can occur on a monthly basis) exceed $X in a month, the trust will transfer LP units to a wholly-owned unit trust (with heretofore nominal capitalization) in exchange for interest-bearing notes, and distribute those notes to the redeemed unitholder in satisfaction of the balance of the redemption price (which is the amount determined by the trustee, who also is the trust’s manager, to be the redeemed units’ fair market value).
The ruling letter states that the trustee may suspend or postpone the right to redeem trust units provided that such suspension or postponement complies with securities legislation. After providing a ruling that the terms of the redemption feature will satisfy the requirements of s. 108(2)(a)(i) for purposes of determining whether the Trust qualifies as a unit trust, CRA went on to indicate, in the form of an opinion (presumably because this was not a planned transaction) that should a postponement or suspension of the right to redeem units occur and that postponement or suspension exceeded a period of more than one year, the trust would cease to meet the requirement of s. 108(2)(a)(i).