Budget 2025: Restructuring Of The Qualified Investment Regime

In 2023, over $147 billion was contributed to Canadian tax-exempt registered plans, including registered retirement savings plans (“RRSPs”), registered retirement income funds (“RRIFs”), tax-free savings accounts (“TFSAs”), registered education savings plans (“RESPs”), registered disability savings plans (“RDSPs”), first home savings accounts (“FHSAs”) and deferred profit sharing plans (“DPSPs”) (collectively, “Registered Plans”).

Registered Plans are generally prohibited from holding property that is not a “qualified investment”, as specifically defined in the Income Tax Act (Canada) (the “Tax Act”) and the associated Income Tax Regulations (the “Regulations”).

The rules that prohibit Registered Plans from investing in property other than “qualified investments” were first introduced almost sixty years ago. The restrictions were ostensibly designed to ensure that Registered Plans limited their investments to safe and stable securities at a time when the types of investments available to the average taxpayer were limited, and the information available about potential investments was often cursory. However, with the expansion of the global economy, and innovations in financial instruments, the range of investments available to individual taxpayers has proliferated and the number of categories of “qualified investments” has materially increased. Currently, there are more than forty different categories of “qualified investments”.

In Budget 2024, the Government conceded that the current qualified investment rules “can be inconsistent or difficult to understand”. Budget 2024 invited stakeholders to make submissions to the Government on how the qualified investment rules could be “modernized” to improve the administration and governance of Registered Plans (the “QI Consultation Process”).

Earlier this year, the QI Consultation Process was concluded. Budget 2025 introduces legislative and regulatory amendments to address the conclusions drawn from the QI consultation process.

Modernization of the Qualified Investment Rules

The qualified investment rules in the Tax Act and the Regulations have become a dense and duplicative patchwork of provisions that separately enumerate categories of qualified investments for each type of Registered Plan.

In retrospect, the evolution of the qualified investment rules is understandable. As time passed, an increasing number of new categories of qualified investments were incrementally added to the Tax Act and the Regulations, and the terms of existing categories were revised to address anti-avoidance concerns of the Government.

Budget 2025 proposes to eliminate duplication and make the qualified investment rules easier to track by rescinding the separate lists of qualified investment categories that apply to each type of Registered Plan. Instead, the Tax Act will contain a single statutory definition of a “qualified investment” that applies to all Registered Plans (except DPSPs), together with a list of prescribed qualified investments set out in the Regulations, which will be reorganized by type of investment (i.e., under the headings “Debt Instruments”, “Equity Instruments”, “Trusts”, and “Other Prescribed Investments”). The proposed revisions to the Regulations will also extract anti-avoidance terms previously embedded in certain categories of qualified investments and separately set them out in new Regulation 5006.

The simplification and reorganization of the qualified investment rules is proposed to come into force on January 1, 2027.

Elimination of the Registered Investment Regime

Part X.2 of the Tax Act contains special provisions that permit certain trusts and corporations to apply to the Minister of National Revenue to be accepted as “registered investments”. Interests in a trust, or shares of a corporation, that is a registered investment during the current calendar year or the immediately preceding calendar year is a qualified investment for a Registered Plan.

Conventional mutual fund trusts and mutual fund corporations (each as defined in the Tax Act) can apply for registered investment status. In addition, trusts or corporations that would not otherwise qualify as mutual fund trusts or mutual fund corporations because they do not satisfy certain prescribed conditions, including having 150 qualifying equityholders of a particular class of units or shares, may also be entitled to be registered investments, provided their property holdings consist exclusively of qualified investments (such trusts or corporations are frequently referred to as “quasi-mutual fund trusts” or “quasi-mutual fund corporations”). Certain penalty taxes can apply where a quasi-mutual fund trust or quasi-mutual fund corporation, which has been accepted as a registered investment, does not exclusively hold qualified investments. A list of registered investments is published in the Canada Gazette each year.

The Government reports that, in the course of the QI Consultation Process, certain stakeholders suggested that registered investment status did not offer “sufficient value to justify its associated compliance and administration burdens”. Accordingly, Budget 2025 proposes to eliminate the registered investment regime, including the status of registered investments as qualified investments, as of January 1, 2027.

In the place of the registered investment regime, two new categories of qualified investments will be established.

The first new category will capture units of a trust that is subject to, and substantially complies with, the requirements of National Instrument 81-102 Investments Funds of the Canadian Securities Administrators (“NI 81-102”).

NI 81-102 is one of the primary national instruments governing investment funds under applicable Canadian securities laws. NI 81-102 generally applies to “public” investment funds (i.e., investment funds that are reporting issuers, such as mutual funds, liquid alts, ETFs, and non-redeemable investment funds). Notably, NI 81-102 also contains certain “fund-of-fund” investment rules that apply to investment funds that are not reporting issuers.

While the introduction of additional categories of qualified investments is welcome, the scope of this new category may not capture the full range of trusts that currently qualify as quasi-mutual fund trusts. For instance, units of certain trusts that were offered by offering memorandum under an applicable prospectus exemption may not fall within the new category. Furthermore, the degree to which a trust may deviate from compliance with NI 81-102 before it will be considered not to be in “substantial compliance” with the requirements of NI 81-102 remains to be determined.

The second new category of qualified investments will capture units of a trust that is an “investment fund” (as defined in subsection 251.2(1) of the Tax Act), provided investments of the trust are managed by a person that is registered as an investment fund manager as described in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registering Obligations of the Canadian Securities Administrators (“NI 31-103”).

NI 31-103 is one of the primary national instruments governing registrations and registrant duties under applicable Canadian securities laws. In brief, a person or company that directs the business, operations, or affairs of an “investment fund” (as defined under applicable Canadian securities laws, which definition is different from the definition under the Tax Act) is generally required to be registered as an “investment fund manager”.

To fall within the ambit of this second new category of qualified investments, a trust must be an “investment fund”, as defined in subsection 251.2(1) of the Tax Act. To qualify as an “investment fund” for these purposes, a trust must, among other things, at all times since its creation, have followed a “reasonable policy of investment diversification”, never have controlled a corporation, and not run afoul of certain property holding requirements and limitations. It is conceivable that many quasi-mutual fund trusts may have, at least at some point in the past, not satisfied the statutory requirements to be an “investment fund”. Such trusts would, therefore, seemingly be precluded from ever falling within the scope of the second new category of qualified investments.

The new categories of qualified investments are proposed to become operative as of the date of the Budget (i.e., November 4, 2025).

The Government generally expects that units or shares of trusts or corporations that were registered investments will continue to be qualified investments, either under one of the existing categories of qualified investments or under one or both of the new categories of qualified investments. Unfortunately, it is unclear whether the Government's expectation will ultimately hold true in practice. Registered Plans will need to carefully assess whether it will be necessary to divest themselves of registered investments prior to 2027 if there is insufficient comfort that such investments will continue to be qualified investments upon the elimination of the registered investment regime. Investment fund managers of trusts that are registered investments should review their offering documentation and other disclosures to identify any potential adverse consequences of the elimination of the registered investment regime and take ameliorative steps to ensure that qualified investment status is not lost in 2027. Quasi-mutual fund corporations will want to be particularly diligent in assessing their circumstances since the two new categories of qualified investments do not apply to corporations.

Small Business Investments

Currently, the Regulations contain two distinct sets of rules that recognize, as qualified investments, securities of certain types of entities that conduct small businesses. Each set of rules only applies in respect of certain types of Registered Plans. In addition, neither set of rules applies to RDSPs.

The two sets of rules are, in certain respects, duplicative. The Government fears that the complexity of the competing rules has discouraged Registered Plans from investing in small businesses.

Budget 2025 proposes to “simplify and streamline” the categories of qualified investments that are intended to permit investments in small business securities. The Government proposes to retain the first set of rules, which currently only applies to RRSPs, RRIFs, TFSAs, RESPs and FHSAs. The first set of rules stipulates that shares in what are known as “specified small business corporations”, “venture capital corporations” and “specified cooperative corporations” are qualified investments. When the proposed amendments are enacted, the first set of rules will apply to all Registered Plans, including RDSPs. By contrast, the second set of rules, which currently provide that shares of “eligible corporations” and interests in “small business investment limited partnerships” and “small business investment trust” are qualified investments, will be rescinded.

Interests in “small business investment limited partnerships” and “small business investment trusts” that are acquired before 2027 will continue to be qualified investments for as long as they are held by the acquiring Registered Plan.

The Government has indicated that it intends that shares of “eligible corporations” will continue to be qualified investments after 2026 by virtue of such shares qualifying as shares of “specified small business corporations”. Nevertheless, Registered Plans that hold shares of “eligible corporations” should carefully consider whether such securities will qualify as shares of a “specified small business corporations” to ensure that such shares do not become non-qualified investments in 2027.

The amendments in respect of small business investments are proposed to apply as of January 1, 2027.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2025