The federal government shouldn’t revive the foreign property ownership limit for RRSPs and other registered plans, says the Investment Funds Institute of Canada (IFIC).
“We believe that ensuring Canadian investors have access to broader international diversification opportunities still applies in today’s economic context,” said IFIC in its submission to the Department of Finance’s consultation on qualified investments, which closed last week.
The consultation concerned simplifying and modernizing the definition of “qualified investments,” which are those allowed in RRSPs, RRIFs, TFSAs, RESPs, registered disability savings plans (RDSPs), first home savings accounts and deferred profit sharing plans.
Among other questions, Finance asked whether the qualified investment rules should change to promote an increase in Canadian-based investments, and if so, how.
Between 1971 and 2005, RRSPs, RRIFs and pension plans were subject to a foreign property limit, ranging from 10% to 30% of a plan’s assets. Foreign assets above the limit were subject to a 1%-per-month penalty tax. The foreign property limit was repealed in the 2005 federal budget.
IFIC argued the foreign property limit didn’t benefit Canadian investors and wouldn’t help them today if the government were to reimpose it.
“Investments, such as mutual funds and [ETFs], built around international equities can provide Canadian investors with exposure to important sectors of the global economy that are underrepresented in the domestic equity market,” IFIC’s comment said. “By diversifying, Canadian investors are better able to withstand downturns in performance and therefore stay on track to meet their retirement and/or savings goals.”
To encourage investment in Canada, IFIC recommended the government instead consider allowing registered plans to invest more broadly in infrastructure and real estate. The qualified investment rules do not allow registered plans to invest in real property or non-guaranteed mortgages, but REITs are allowed.
IFIC also recommended the government continue allowing registered plans to hold cryptocurrency ETFs and mutual funds.
As part of its consultation, the government asked stakeholders whether crypto-backed assets should remain qualified investments for registered plans. Cryptocurrencies themselves are not allowed.
IFIC argued that cryptocurrency’s relative volatility should not preclude crypto funds from being qualified investments because “many other qualified investments may be viewed similarly from a risk tolerance perspective. An understanding of risk tolerance is a key component of constructing a well-diversified portfolio for a registered plan investor.”
Cryptocurrency funds are also “significantly more secure” for investors than holding cryptocurrency directly, IFIC stated. Such funds, which are regulated by Canadian securities regulators, rely on custodians and sub-custodians that “have practices and policies concerning custody, which act to mitigate the risks associated with holding cryptoassets.”
The government also asked whether a registration process should continue being required for certain pooled investment products.
In response, IFIC recommended Finance create two categories of qualified investments: one would be an investment fund subject to National Instrument 81-102 and the other would be a fund that qualifies as an investment fund for securities law purposes.
Adding the two categories would make the current formal registration process largely redundant, as few funds would not fit under one of the two new categories, IFIC said. The categories would also “provide Canadian investors who may have a longer investment horizon with access to investment funds that are already available to investors in similar types of deferred income plans in countries like the U.S. and U.K.,” IFIC said.
Finally, IFIC recommended that Finance align the qualified investment rules across registered plans “to the extent possible to avoid confusion and add clarity” for investors, plan administrators and the Canada Revenue Agency, and that the rules governing qualified investments be consolidated into one section of the Income Tax Act.
Other industry groups submitted comments to the consultation.
The Investment Industry Association of Canada recommended that registered plan issuers not be held liable when a qualified investment becomes non-qualified while held in a plan, as long as the issuer confirmed the investment was qualified when the plan acquired it. The association also recommended allowing fully paid securities lending within registered plans, among other things.
The Portfolio Management Association of Canada focused its submission on two issues it said lead to double taxation and higher investment costs within defined-contribution plans.