The Department of Finance Canada has issued a call for comments
on the ongoing usefulness of the "30% Rule" for
investments by federally regulated pension plans and considerations
relating to its retention, relaxation or elimination.
Submissions are due by September 16, 2016.
The federal Government is contemplating more than a simple
elimination of the 30% Rule and is seeking views on whether other
regulatory changes, including tax changes, should be
The 30% Rule
The 30% Rule restricts pension plans from directly or indirectly
investing the moneys of the plan in the securities of a corporation
to which are attached more than 30% of the votes that may be cast
to elect the directors of a corporation. It is one of the most
onerous quantitative limits on investments by pension plans
contained in the federal pension regulations. It is also
incorporated into most provincial pension legislation and
investment standards of public pension plans.
The discussion paper accompanying the call for comments, "Pension Plan Investment in Canada: The
30% Percent Rule", notes that the 30% Rule was
intended to limit pension plans to a more passive role and to
reduce the risk of exposure to business failure. It also points out
that internationally, the majority of pension investments are not
subject to an ownership contribution limit and that, according to
the Organization for Economic Co-operation and Development, out of
the seven member countries whose institutions hold 90% of pension
assets, Canada is the only country with an ownership contribution
The paper notes that as pension plans have sought better returns
to fund increasingly costly pension benefits in a low interest rate
environment and volatile global equity market, there has been a
need to increase the investments in which they play an active role.
Some large pension plans have circumvented the 30% Rule through the
use of elaborate structures and have sought a repeal of the rule,
arguing it increases costs and creates a barrier for making
investments in foreign markets.
The discussion paper seeks comments on prudential, investment
performance and tax policy considerations concerning the 30%
The Government has posed questions aimed at determining whether
removal of the 30% Rule would impact the obligations of a pension
plan administrator to invest plan assets as a reasonable and
prudent person. For example, the Government is seeking comment on
whether a pension plan should be subject to additional requirements
if its investment exceeds a certain threshold.
Investment Performance Considerations
Other questions explore how the 30% Rule affects a pension
plan's investment returns, including whether it: (a) impedes
appropriate investment returns; (b) imposes costs on plans seeking
active investments; and (c) creates inequities between large and
small plans or conversely, whether its removal could do so.
Tax Policy Considerations
The paper notes that a more active investment by a pension plan
provides an opportunity to shift taxable income from tax paying
business entities to tax exempt pension funds. This can be achieved
through structures using earnings stripping via related party debt
or private flow-through entities. The paper notes that most other
G-7 countries either have rules that restrict corporate interest
deductions in the case of domestic tax-exempt and foreign
investors, or tax pension plans directly.
In this context, the Government is seeking responses to
questions on whether such tax policy concerns are material in
nature and what impact relaxation or elimination of the 30% Rule
may have on these concerns.
In particular, the Government is seeking comment on whether it
should consider implementing tax measures (such as thin
capitalization restrictions or application of the Specified
Investment Flow-Through tax to pension-controlled trusts and
partnerships) to limit the ability of pension plans to undertake
tax planning strategies to reduce or eliminate entity-level income
tax on business earnings.
Interested parties may wish to review the questions posed in the
discussion paper in more detail and make submissions to the
Government before the September 16, 2016 deadline.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).