Central GoldTrust -- summary under Closed-End To Open-Ended Funds
Overview
In May 2015, 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 responded in this Circular by seeking Unitholder approval for its conversion from a closed-end investment fund to an ETF (i.e., an exchange-traded, continuously offered, open-ended fund) whose units will accord those with units equal to the value of at least one London Good Delivery Bar to redeem their units for gold bullion plus top-up cash (and also will have the right to redeem units in cash at a 5% discount to NAV). In the meantime, a non-discounted cash redemption right would also be added to the units to be available until the ETF conversion occurs. 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).
Management and administration
GoldTrust has agreed with Purpose Investments Inc. ("Purpose") and GoldTrust's administrator, Central Gold Managers Inc. (the "Administrator") that the ETF will be managed by Purpose and administered by the Administrator (who will administer the ETF's physical gold bullion.) A bank, trust company or other entity will be appointed trustee of the ETF with the approval of Purpose.
GoldTrust
A mutual fund trust trading on the TSX and NYSE MKT and holding mostly gold bullion. Its units are redeemable in cash for the lesser of 90% of the their weighted average trading price for the 10 trading days commencing immediately following the date on which they are tendered for redemption and 100% of their closing market price on such date.
Sprott offer
Sprott Asset Management Gold Bid LP, an Ontario limited partnership that is owned and controlled by Sprott Asset Management LP, the manager of Sprott Physical Gold Trust, made an offer to purchase all of the issued and outstanding GoldTrust units (other than those held directly or indirectly by the Offeror). The Offer comprises an exchange offer alternative and a ITA s. 132.2 merger alternative. The Trustees of GoldTrust are instead recommending the proposed addition of the redemption rights and the ETF conversion for GoldTrust as a way to substantially eliminate the discount at which GoldTrust units trade to NAV.
Redemption amendments
Immediately following Unitholder approval and subject to regulatory approvals, GoldTrust will amend the redemption rights provisions in the Declaration of Trust:
- A new cash redemption feature which will allow all Unitholders to redeem their Units on a biweekly basis for cash at 100% of net asset value ("NAV"), less any costs associated with the redemption including the liquidation of GoldTrust's bullion to fund the redemption (the "100% Cash Redemption Right Amendment"); and,
- A further new cash redemption feature will allow all Unitholders to redeem their Units on a daily basis for cash at 95% of NAV, less any costs as in 1 (the "95% Cash Redemption Right Amendment").
The other amendments required to fully implement the ETF conversion will become effective once a receipt for a final prospectus is obtained and all other regulatory and exchange approvals are received. In the interim, GoldTrust will trade with the 100% and 95% Cash Redemption Right Amendments in place. As part of the ETF Conversion Amendments, GoldTrust intends to further amend the redemption rights provisions in the Declaration of Trust by providing Unitholders holding such number of Units with a value in excess of one London Good Delivery bar with the ability to exchange their Units for physical gold bullion and cash at 100% of NAV less any costs associated with the redemption (the "Physical Redemption Right Amendment." The Physical Redemption Right Amendment will replace the 100% Cash Redemption Right Amendment as and from completion of the ETF Conversion.
Securities laws
As soon as reasonably practicable following the mailing of the Circular, GoldTrust intends to file a preliminary long form prospectus for Units of the ETF, and a registration statement for Units of the ETF in the U.S. In the U.S., the ETF Conversion will require the NYSE Arca or another U.S. national securities exchange to file and obtain approval from the SEC for a "rule change" to its listing standards and the ETF will be required to meet existing exemptive relief from certain rules under the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"), or seek new relief. With respect to a rule change, before the ETF may trade on a U.S. national securities exchange, that exchange must agree to list the Units for trading on its market and it must have SEC-approved initial and continued listing standards that permit listing of a "class" of exchange-traded security….For a nongeneric listing standard, which the ETF would fall under, the NYSE Arca or another U.S. national securities exchange must file, and the SEC must approve, a proposed rule change that is specific to the new security. The filing is made under Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder.
Canadian tax consequences.
Amendments
The proposed amendments should not change the income tax status or treatment of GoldTrust, including its mutual fund trust status or taxation, nor result in a disposition of GoldTrust Units by Unitholders.
Gains on redemptions
If the Redemption Rights Amendments are adopted, GoldTrust could be required to deliver physical bullion or permitted gold certificates to a Unitholder to satisfy any redemption in respect of which the Unitholder elects to receive physical delivery of bullion or permitted gold certificates. GoldTrust will be required to include in its income for the year, any gain realized by it on any sale or disposition of bullion or permitted gold certificates, including any bullion or permitted gold certificates delivered to a Unitholder upon a redemption of Units. GoldTrust intends to treat gains and losses on the disposition of physical bullion or permitted gold certificates as capital gains or capital losses unless there is a change of circumstances.
Allocation of gains
If GoldTrust were to allocate the taxable capital gain attributable to a redemption of Units to a redeeming Unitholder and the CRA were to subsequently successfully assess GoldTrust on the basis that the gains realized by it on the disposition of physical gold bullion or permitted gold certificates are fully taxable as income rather than as capital gains, it is unclear to what extent GoldTrust would be able to allocate the additional income to the redeeming Unitholder. If it were unable to do so, it would be required to pay Part I tax on such additional income. In addition, if any gain realized by GoldTrust in connection with a redemption of Units is allocated to a non-resident of Canada and the CRA were to assess GoldTrust on the basis that the gain is taxable as income rather than as a capital gain, GoldTrust could be liable to pay Canadian non-resident withholding tax on such allocation under Part XIII of the Tax Act.
U.S. tax consequences
Amendments. Each of the 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. If the Proposed Amendments are treated as a nontaxable amendment, such event(s) will not result in a disposition of Units by U.S. Unitholders. If the Proposed Amendments are treated as a recapitalization and/or as a tax-free stock exchange, then, subject to the PFIC rules, the following consequences will result for U.S. Unitholders: (a) a U.S. Unitholder will not recognize gain or loss on the deemed exchange(s); (b) the aggregate tax basis of a U.S. Unitholder in the new amended Units will be equal to such U.S. Unitholder’s aggregate tax basis in the Units deemed exchanged therefor; (c) the holding period of a U.S. Unitholder for the new amended Units should include such U.S. Unitholder’s holding period for the Units surrendered in deemed exchange therefor; and (d) U.S. Unitholders generally will be required to report certain information to the U.S. Internal Revenue Service on their U.S. federal income tax returns for the tax year in which each of the Proposed Amendments occur, and to retain certain records related to the Proposed Amendments.
PFIC rules
GoldTrust believes that it was a PFIC during all of its prior tax years and that it will be a PFIC for its current tax year ending December 31, 2015 and for the foreseeable future. U.S. Unitholders who have made a timely and effective election to treat GoldTrust as a "qualified electing fund" under Section 1295 of the Code (a "QEF", and such an election, a "QEF Election") should not be required recognize gain under the PFIC rules as a result of the deemed exchange. A QEF Election will generally be treated as "timely" if such QEF Election is made for the first year in the U.S. Unitholder’s holding period for the Units in which GoldTrust was a PFIC. U.S. Unitholders who have made a timely and effective "mark-to-market election" under Section 1296 of the Code (a "Mark-to-Market Election") should not be required recognize gain under the PFIC rules as a result of the deemed exchange. A U.S. Unitholder may make a Mark-to-Market Election by filing the appropriate Mark-to-Market Election documents at the time such U.S. Unitholder files a U.S. federal income tax return for such year. A timely and effective Mark-to-Market Election made before the Proposed Amendments should remain effective and apply to the New Units.