Key Takeaways
- • Torys LLP analysis examines how alternative asset managers are using Canadian mutual fund trusts (MFTs) to draw retail capital into private equity, private credit and infrastructure through registered accounts.
- • Registered accounts generally cannot hold private debt or equity directly, so MFTs and segregated funds serve as the main access route, with the registered-account pool described as a very large part of retail investable wealth.
- • MFTs must be redeemable on demand, which conflicts with illiquid alternative assets; sponsors rely on liquidity sleeves, redemption gates, redemption notes and borrowing to manage this tension.
- • Redemption notes are non-qualified investments for registered plans and can trigger penalty taxes, so they are described as a last-resort tool, and sponsors must provide thorough illiquidity disclosure.
Summary
According to Torys LLP, retail investors are showing growing interest in alternative asset classes such as private equity, private credit and infrastructure that have traditionally been reserved for institutional investors. Registered accounts, valued for their tax advantages and government-backed incentives, are increasingly serving as vehicles for alternative exposure, which Torys notes expands the capital pool available to alternative managers.
The article points to two regulatory developments expected to ease access: the completed Canadian consultation on Qualified Investments for Tax-Advantaged Savings Plans, with a report to follow, and a recent executive order signed by U.S. President Donald Trump promoting alternative assets in defined-contribution plans such as 401(k)s. Registered accounts generally cannot directly hold partnership interests or private debt or equity, so mutual fund trusts and segregated funds are used as intermediaries.
An MFT is a unit trust with specific tax status, must be resident in Canada, must have at least 150 unitholders within 90 days after its first taxation year, and requires each unitholder to hold units worth at least $500. Its units must be redeemable on demand, which makes it a mutual fund under Canadian securities law. These funds typically remain limited to accredited investors to avoid the full public mutual fund regulatory regime.
To meet redeemability requirements, sponsors maintain liquidity sleeves, which can dilute returns, and may use redemption gates, which Torys says should be used sparingly. Redemption notes, unsecured interest-bearing promissory notes issued in-kind, are a measure of last resort because of their tax consequences for registered plans. Borrowing is also used, though some lenders may decline subscription lines against retail capital. Torys concludes that sponsors must ensure disclosure allows retail investors and their advisers to understand illiquidity risk, and cites AIMA and CAIA Association risk rating guidelines for Canadian alternative funds as a disclosure aid.
The article points to two regulatory developments expected to ease access: the completed Canadian consultation on Qualified Investments for Tax-Advantaged Savings Plans, with a report to follow, and a recent executive order signed by U.S. President Donald Trump promoting alternative assets in defined-contribution plans such as 401(k)s. Registered accounts generally cannot directly hold partnership interests or private debt or equity, so mutual fund trusts and segregated funds are used as intermediaries.
An MFT is a unit trust with specific tax status, must be resident in Canada, must have at least 150 unitholders within 90 days after its first taxation year, and requires each unitholder to hold units worth at least $500. Its units must be redeemable on demand, which makes it a mutual fund under Canadian securities law. These funds typically remain limited to accredited investors to avoid the full public mutual fund regulatory regime.
To meet redeemability requirements, sponsors maintain liquidity sleeves, which can dilute returns, and may use redemption gates, which Torys says should be used sparingly. Redemption notes, unsecured interest-bearing promissory notes issued in-kind, are a measure of last resort because of their tax consequences for registered plans. Borrowing is also used, though some lenders may decline subscription lines against retail capital. Torys concludes that sponsors must ensure disclosure allows retail investors and their advisers to understand illiquidity risk, and cites AIMA and CAIA Association risk rating guidelines for Canadian alternative funds as a disclosure aid.
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