Setting up a Mutual Fund Trust (MFT) in Ontario

Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

A mutual fund trust ("MFT") is a trust-based structure commonly used for pooled investment funds in Canada that may facilitate the flow-through of income and gains to investors under the Income Tax Act (Canada). In Ontario, its formation and operation engage securities law requirements, including prospectus exemptions under NI 45-106 and registration analysis under NI 31-103. Sponsors must structure the declaration of trust, management arrangements, and offering documents to align with both tax qualification requirements and investment fund regulation. This article outlines the principal legal and regulatory considerations involved in forming and operating a private pooled MFT in Ontario.

Regulatory Framework and Sources of Law

A MFT sits at the intersection of trust law, securities law and tax law. It is created through a declaration of trust, typically governed by the common law of trusts in Ontario and supplemented by statutory provisions such as the Trustee Act (Ontario). Subject to the terms of the declaration of trust and applicable law, the trustee generally holds legal title to fund property and owes fiduciary obligations to the unitholders.

From a securities law perspective, units of an MFT are “securities” under s. 1(1) of the Securities Act (Ontario). Private pooled MFT units are typically distributed in reliance on prospectus exemptions under NI 45-106, most commonly the Accredited Investor and Offering Memorandum (OM) exemptions. 

NI 31-103 registration analysis requires determining whether the trust is an “investment fund” under the Securities Act (Ontario). If its primary purpose is investing money provided by its security holders and it does not actively manage the businesses in which it invests, it will generally meet the definition. In that case, additional NI 31-103 obligations are engaged and, where the fund is a reporting issuer, or a mutual fund to which the Instrument applies, NI 81-106 disclosure requirements may also apply.

If the trust is an investment fund, the entity directing or managing it will typically require registration as an investment fund manager (IFM), unless an exemption is available. Internal discretionary management may trigger portfolio manager (PM) registration. Distribution activities require careful dealer registration analysis. In many private offerings, subscriptions are processed through a registered exempt market dealer (EMD) or another appropriately registered dealer.

Notably, tax classification as a “mutual fund trust” under the Income Tax Act (Canada) is a separate analysis from securities law classification as a “mutual fund” or “investment fund.” A trust may meet one definition and not the other. Each regime must be assessed independently at formation and on an ongoing basis.

The Income Tax Act (Canada) and its regulations play a central role. A trust that qualifies as an MFT may access a number of favourable tax attributes under the Income Tax Act (Canada), and investment fund trusts commonly distribute income and gains in a manner that minimizes entity-level taxation.

Qualification requires compliance with detailed statutory and regulatory conditions, including requirements relating to the trust’s structure, unitholder base, and permitted activities.

Definitions and Thresholds

A "mutual fund trust" is defined in Income Tax Act (Canada), s. 132(6) as a trust that is a unit trust resident in Canada and that satisfies the additional conditions in that subsection, including compliance with prescribed conditions set out in the Income Tax Regulations.

More precisely:

The trust must be a unit trust within the meaning of subsection 108(2) of the Income Tax Act (Canada). At the relevant time, the trust must be an inter vivos trust and the interest of each beneficiary must be described by reference to units of the trust. Subsection 108(2) then provides alternative statutory routes to unit trust status. Under paragraph 108(2)(a), the issued units must satisfy specified redemption-related requirements and the qualifying units must represent at least 95% of the fair market value of all issued units, determined without regard to voting rights. Paragraph 108(2)(b) provides an alternative route subject to a separate set of conditions relating to the trust, its investments, income and units. The applicable test should be considered when drafting the declaration of trust, particularly the provisions governing the nature of the units and their redemption.

The trust must also satisfy the prescribed conditions in section 4801 of the Income Tax Regulations. Broadly, paragraph 4801(a) requires the relevant class of units to satisfy one of the prescribed public-distribution conditions, while paragraph 4801(b) imposes an ownership-dispersal requirement in respect of a class satisfying paragraph 4801(a). Paragraph 4801(b) generally requires at least 150 beneficiaries, each holding at least one prescribed block of units of the class and units of the class having an aggregate fair market value of at least $500. The detailed requirements of section 4801, including the applicable public-distribution condition and the definition of a ‘block of units,’ should be reviewed when structuring an MFT.

The trust’s undertaking must be limited to the investing of its funds in property, subject to the specific activities permitted in paragraph 132(6)(b). The provision permits investing in property and, in certain circumstances, acquiring, holding, maintaining, improving, leasing or managing real property that is capital property of the trust. The trust’s undertaking must remain within the activities permitted by paragraph 132(6)(b).

To establish a unit trust as a matter of private law, the declaration of trust must create units representing undivided beneficial interests in the trust property and define the rights attached to those units with sufficient certainty. The instrument typically provides mechanisms for issuance, transfer and, where applicable, redemption of units, and sets out how income and capital are allocated among unitholders. While allocation mechanics are driven largely by tax and commercial considerations, clarity of unitholder rights is essential to support unit trust status and investor certainty.

Under NI 45-106, investors subscribing to a private MFT may qualify under one or more categories of the accredited investor definition in section 1.1. Common individual investor tests include specified income thresholds, more than $1 million of financial assets net of related liabilities, and more than $5 million of net assets. The accredited investor definition contains numerous additional categories that may apply depending on the investor. Where the OM exemption is relied upon, including for investors who do not qualify as accredited investors, the applicable offering memorandum and prescribed risk acknowledgement requirements must be satisfied.

Application in Practice

Forming an MFT begins with drafting a comprehensive declaration of trust. This document sets out the governance framework, including the appointment, powers and duties of the trustee, the rights of unitholders, the investment objectives and strategies of the trust, valuation procedures and redemption mechanics. Unlike a corporate statute, trust law offers significant flexibility, so the declaration of trust must be drafted carefully to reflect the economic and legal intentions of the sponsor.

Sponsors then consider the manager. Most MFTs appoint a management entity under a management agreement. The manager provides investment management, administrative services, record keeping and investor communications. This agreement must address conflicts of interest, valuation oversight and the allocation of responsibility between the trustee and the manager.

Units of the MFT are offered to investors through subscription documents that incorporate representations, warranties, eligibility certifications and AML/KYC procedures. The offering materials may be a Private Placement Memorandum (PPM) or an Offering Memorandum (OM), depending on the exemption strategy. Where a report of exempt distribution is required under NI 45-106, Form 45-106F1 must be filed through SEDAR+ within the applicable filing period. Investment funds relying on certain prospectus exemptions may be eligible for the special periodic reporting provisions applicable to investment funds. The applicable filing requirement and deadline should therefore be determined by reference to the exemption relied upon and the circumstances of the distribution.

NI 81-106 ‘Investment Fund Continuous Disclosure’ applies primarily to investment funds that are reporting issuers and imposes requirements relating to financial statements, management reports of fund performance (MRFPs), valuation policies, and NAV calculation. Certain provisions of NI 81-106 may also apply to mutual funds that are not reporting issuers, subject to the scope of the Instrument and available exemptions. The applicability of NI 81-106 should therefore be assessed on a fund-by-fund basis. Where a registered investment fund manager (IFM) is involved, NI 31-103 applies independently and imposes its own obligations, including compliance systems, conflicts management, and valuation-related controls.

Redemption features are central to the trust structure. Units of an MFT are generally redeemable at the option of the unitholder, although private MFTs sometimes limit redemption frequency to manage liquidity.

Grey Areas and Regulator Focus

A significant grey area involves determining whether the MFT’s activities qualify it as an investment fund or an operating entity. Many MFTs used for pooled passive investment strategies will also constitute investment funds for securities law purposes. However, some structures may involve sufficient operational activity to require a more detailed analysis of whether the trust is an investment fund or an operating entity. Real estate development can present this issue depending on the structure and activities involved. Private credit and lending strategies require particular care because loan origination or related operational activity does not, by itself, establish that a vehicle falls outside the definition of an investment fund.

Another area of regulatory focus is conflicts of interest. The Ontario Securities Commission (OSC) expects investment fund managers to implement conflict management procedures under NI 31-103, particularly where the sponsor or manager earns performance fees, participates in transactions with related parties, or controls the trustee. Related-party transactions require rigorous oversight and disclosure.

Valuation presents another grey area. MFTs with private assets, such as real estate or private credit instruments, face scrutiny regarding appraisal methodology, frequency of valuation and independence of valuators. NI 81-106, when applicable, requires consistent, transparent policies, and OSC compliance reviews often examine whether valuation practices align with industry standards.

Finally, investor disclosure and marketing practices are subject to close oversight. NI 31-103 and OSC Staff Notices emphasise the need for balanced, fair and accurate marketing materials, particularly where performance claims or forward-looking statements are made.

Illustrative Scenarios

Imagine a sponsor forming a fixed-income MFT to invest in publicly traded bonds. The trust provides weekly redemptions and calculates NAV weekly. Because the MFT holds passive portfolio securities and investors do not participate in day-to-day management, it would likely meet the Securities Act (Ontario) definition of an investment fund. If the MFT is a reporting issuer, NI 81-106 would apply and require annual audited financial statements and management reports of fund performance. If it is a mutual fund that is not a reporting issuer, certain provisions of NI 81-106 may still apply, subject to the scope of the Instrument and available exemptions. If the trust is not a mutual fund, NI 81-106 would generally not apply, although audited financial statements may still be required under NI 31-103 where a registered investment fund manager is involved and are commonly expected by institutional investors. The entity directing or managing the affairs of the fund would generally require investment fund manager (IFM) registration where the applicable registration requirement is engaged. The person or company exercising discretionary authority over the fund’s investment portfolio would generally require registration as an adviser, typically in the portfolio manager (PM) category, unless an exemption is available.

In a different scenario, a manager forms a private MFT to invest in residential properties through special-purpose subsidiaries. The use of special-purpose subsidiaries does not, by itself, determine whether the trust is an investment fund or whether its activities remain within the requirements for MFT qualification. The activities of the trust and its subsidiaries should be analyzed in light of the applicable tax and securities law requirements. The manager must monitor the activities of the trust and its subsidiaries to ensure continued compliance with the requirements for MFT qualification and to avoid activities that could compromise the trust’s tax status.

Compliance Checklist

Structure

• Structure the trust to satisfy section 132(6) and section 108(2) of the Income Tax Act (Canada) and the prescribed conditions in Regulation 4801 and analyze investment fund classification under Ontario securities law.
• Settle a declaration of trust addressing governance, unit rights, investment restrictions, valuation, distributions, conflicts, and redemption mechanics.
• Establish any subsidiaries in a manner that does not jeopardize MFT qualification.

Management

• Organize the manager and enter into a management agreement defining authority, compensation, standard of care, conflicts oversight, and termination.
• Complete NI 31-103 registration analysis for IFM, PM, and dealer categories, and allocate responsibilities between trustee and manager.

Offering

• Confirm availability of NI 45-106 prospectus exemptions.
• Prepare offering and subscription documents with disclosure of strategy, risks, fees, liquidity, conflicts, and tax considerations.
• Implement investor qualification, AML/KYC procedures, and file Form 45-106F1 as required.

Operations and Ongoing Compliance

• Implement NAV and valuation policies and financial reporting systems, including audited statements where required.
• Maintain NI 31-103 compliance systems, including conflicts and fair valuation policies.
• Monitor ongoing MFT qualification, subsidiary activities, redemption practices, and required securities filings and marketing compliance.

Conclusion and Next Steps

An MFT can provide a flexible trust-based structure for pooled investment strategies in Ontario, together with specific tax treatment under the Income Tax Act (Canada). Its trust-based governance, redemption features and flow-through tax attributes make it suitable for a wide range of fund strategies, from traditional securities portfolios to alternative real-asset strategies. But these advantages require careful planning and ongoing compliance. Sponsors must navigate trust formation, NI 45-106 exemption strategies, NI 31-103 registration considerations and MFT qualification under the Income Tax Act (Canada). A well-structured MFT with disciplined governance and compliance can form the basis of a scalable investment platform capable of serving investors for many years.

Book a Consultation

If you are forming, restructuring, or operating a mutual fund trust (MFT) in Canada, contact us to schedule an initial consultation with Nick Wright.