Bitcoin Fund -- summary under Cryptocurrency Funds
Overview
The Fund is an Ontario trust whose units will be listed on the TSX and that will invest substantially all of its assets in bitcoin. It will acquire an initial bloc of bitcoin from another fund (with the same name as its manager) potentially on a s. 132.2 rollover basis, so that there was the potential for the acquired bitcoin to have an accrued gain.
It is contemplated that the bitcoin would not constitute non-portfolio property (no SIFT tax). Since the Fund intends to be a long-term holder of bitcoin, it is anticipated that it will treat its bitcoin as capital property. In addition to an annual redemption right at NAV (to be paid in U.S. dollars rather than in specie), there is a monthly redemption right (at a generally discounted redemption price) so that the Fund can qualify as a mutual fund trust. The disclosure notes that proposed s. 132(5.1) might effectively require the Fund to allocate capital gains realized by it on a redemption of units to non-redeeming unitholders.
The Fund
An Ontario unit trust to be listed on the TSX that will invest substantially all of its assets in bitcoin.
Unit structure
The Fund proposes to offer three classes of units: Class A Units, which are available to all investors; Class F Units, which are designed for fee-based and/or institutional accounts, will not be listed on a stock exchange, and will be reclassified, upon the closing of the Offering, as that number of Class A Units based on the Net Asset Value per Class F Unit divided by the Net Asset Value per Class A Unit.”); and Class B Units, which will be issued to 3iQ Bitcoin Trust and distributed to its unitholders in connection with the merger of 3iQ Bitcoin Trust into the Fund (the “Merger”) and which will be reclassified, on the closing of the Offering. into that number of Class A Units based on the Net Asset Value per Class B Unit divided by the Net Asset Value per Class A Unit.
The Manager
3iQ Corp.
Annual redemption right
Units may be redeemed at the option of Unitholders on the first business day following the 15th day of June in each year, commencing on June 16, 2021, subject to the Fund’s right to suspend redemptions in certain circumstances. Units so redeemed will be redeemed at a redemption price equal to the Net Asset Value per Unit on the redemption date, less any costs and expenses associated with the redemption. Payment will be made in U.S. dolllars.
Monthly redemption right
Units may be surrendered at the option of Unitholders at any time for redemption on a Monthly Redemption Date, Unitholders surrendering a Class A Unit for redemption will receive a redemption price (the “Class A Redemption Price”) equal to the lesser of: (i) 95% of the Closing Market Price of a Class A Unit; and (ii) the Net Asset Value per Class A Unit on the applicable Monthly Redemption Date less, in each case, any costs and expenses associated with the redemption. Payment will be made in U.S. dolllars.
Merger
The merger of 3iQ Bitcoin Trust into the Fund, which was approved at a special meeting of unitholders of 3iQ Bitcoin Trust on March 16, 2020 and which will be effective upon the closing of the Offering.
Tax consequences of Merger
If the Merger takes place on a (s. 132.2) tax-deferred basis, the adjusted cost base to the Fund for tax purposes of bitcoin received from 3iQ Bitcoin Trust may be less than its fair market value at the Closing of the Offering. As of March 31, 2020, the aggregate adjusted cost base of the bitcoin held by 3iQ Bitcoin Trust is the Canadian dollar equivalent of US$6,705.59 per bitcoin, being C$9,513.22 (or the Canadian dollar equivalent of US$8,882,688.25 in the aggregate, being C$12,601,869.82). Therefore, if the price of bitcoin expressed in Canadian dollars is below C$9,513.22 per bitcoin as of the valuation time for the Merger, 3iQ Bitcoin Trust will realize a capital loss on the bitcoin transferred to the Fund at the time of the Merger (which capital loss will not be available to the Fund), and the Fund will acquire such bitcoin at a cost per bitcoin equal to such lower valuation price as of the time of the Merger. If the price of bitcoin expressed in Canadian dollars is above C$9,513.22 per bitcoin as of the valuation time for the Merger, and the Merger occurs on a fully tax-deferred basis, the Fund will acquire such bitcoin at a cost per bitcoin equal to the adjusted cost base of the bitcoin to 3iQ Bitcoin Trust of C$9,513.22 per bitcoin and there will be a latent capital gain on the bitcoin transferred to the Fund.
If the Merger does not occur on a tax-deferred basis, the Fund will acquire such bitcoin from 3iQ Bitcoin Trust at a cost equal to its then fair market value.
Price fluctuation risk on Merger
The Merger will take place on the morning of the Offering, prior to the opening of the TSX. The Fund will be exposed to the risk of fluctuations in the price of bitcoin (and, in the case of holders of Series A Units of 3iQ Bitcoin Trust, the risk of fluctuations in the Canadian dollar to U.S. dollar exchange rate) during the period between the final valuation of the Fund and the time of the Merger, which is expected to be approximately 16 to 18 hours. If the price of bitcoin goes down during that time period, the Fund could pay more for the bitcoin acquired from 3iQ Bitcoin Trust than it would pay to acquire such bitcoin from third party Bitcoin Sources in the secondary trading markets.
Canadian tax consequences
SIFT rules
Counsel believes that the SIFT Rules were not intended to apply to trusts such as the Fund and the Fund is subject to investment restrictions intended to restrict its ability to hold “non-portfolio property.”
Capital gains treatment of bitcoin
The CRA has expressed the opinion that gains (or losses) of mutual fund trusts resulting from transactions in commodities should generally be treated for tax purposes as ordinary income rather than as capital gains, although the treatment in each particular case remains a question of fact to be determined having regard to all the circumstances. As the Fund intends to be a long-term holder of bitcoin, the Manager anticipates that the Fund will generally treat gains (or losses) as a result of any disposition of bitcoin as capital gains (or capital losses) although, depending on the circumstances, the Fund may instead include the full amount in (or deduct the full amount from) income. Gains or losses on derivatives entered into by the Fund as a substitute for direct investment will be treated by the Fund on income account.
Distribution of capital gains
If s. 132(5.3) is enacted in its proposed form and the Fund realizes capital gains as a result of a transfer or disposition of its property undertaken to permit an exchange or redemption of Units by Unitholders, any taxable capital gains that would otherwise have been designated to the redeeming Unitholders may be made payable to the remaining, non-redeeming Unitholders to ensure the Fund will not be liable for non-refundable income tax thereon. Accordingly, the amounts of taxable distributions made to Unitholders may be increased.