Canada’s pension managers are calling on Ottawa to eliminate the 30 per cent foreign property rule in the upcoming federal budget, expected sometime near the end of February.
A recent study, The Foreign Property Rule: A Cost-Benefit Analysis, conducted by economics professors David Burgess and Joel Fried from the University of Western Ontario in London, and commissioned by the Association of Canadian Pension Management and the Pension Investment Association of Canada, examined the impact of the rule on retirement plans.
The foreign property rule, part of the Income Tax Act, places a ceiling on the proportion of assets Canadian RPPs and RRSPs can invest outside of Canada. The general logic behind the rule, according to the study, was: “The government has provided Canadians a special subsidy in the form of tax deferred savings plans. We should therefore give something back to Canada. The foreign property rule is the mechanism to ensure we do so.”
The original 10-per-cent limit was set in 1971. It was raised to 20 per cent in two-per-cent increments between 1990 and 1994, and further raised to 30 per cent in five-per-cent increments between 2000 and 2001. Moving the limit from 20 per cent to 30 per cent during 2000 and 2001 may have added $1 billion to the value of Canadian retirement-related savings, they stated.
But increasing limits does not eliminate the fact the general logic behind the rule is still flawed, said Burgess and Fried. It is hurting retirement planning, they stated.
“We estimate that, even at 30 per cent, the cost of the (rule) to Canadians remains at between $1.5 billion and $3 billion annually,” they wrote. “This cost is ultimately borne by the millions of Canadians who are members of employer pensions plans, or who save for their own retirement through RRSPs.”
Dollar likely unaffected
The duo shot down concerns over weakening the Canadian dollar and a loss of jobs in the country if the rule was eliminated. They said it is unlikely to have an impact on the exchange rate, and it could even have a positive impact on the Canadian equity markets if the move is seen as the final step in the removal of Canadian capital controls.
By effectively lowering the efficiency of pension savings, the current foreign property rule works like a tax on real labour income, they said, and hence acts as a deterrent to higher levels of employment.
The study said the rule hinders Canadian Pension Plan reform by requiring most of the accumulating financial reserves to be invested in the same economy the plan relies on for its future contributions. This creates a “double jeopardy” for the CPP of having both future contributions and investment returns tied to the same economy because the CPP Investment Board is handcuffed by the same 30 per cent rule.
“Even the World Bank, in its recent review of national pension plans around the world, while praising Canada for the establishment of the arms-length (investment board) was critical of Canada’s 30 per cent foreign property rule,” the study states.
Norway got it right
Norway, when faced with a similar decision a few years ago regarding its $127 billion National Petroleum Fund, got it right according to Burgess and Fried. Norway’s parliament passed a law requiring 100 per cent of the fund to be invested outside Norway.
“We believe that the current short-, medium- and long-term economic environments are supportive for eliminating the foreign property rule,” said Keith Ambachtsheer, president of the Association of Canadian Pension Management. “We do not think there would be any material effects on the Canadian dollar, the balance of payments, job creation, the ability of Canadian governments and corporations to raise capital or the cost of capital in Canada.”
Russell Hiscock, chair of the Pension Investment Association of Canada’s government relations committee, said eliminating the rule would provide a great yield for Canadians now and in the future.
The complete report is available online at www.acpm.com or www.piacweb.org.
A recent study, The Foreign Property Rule: A Cost-Benefit Analysis, conducted by economics professors David Burgess and Joel Fried from the University of Western Ontario in London, and commissioned by the Association of Canadian Pension Management and the Pension Investment Association of Canada, examined the impact of the rule on retirement plans.
The foreign property rule, part of the Income Tax Act, places a ceiling on the proportion of assets Canadian RPPs and RRSPs can invest outside of Canada. The general logic behind the rule, according to the study, was: “The government has provided Canadians a special subsidy in the form of tax deferred savings plans. We should therefore give something back to Canada. The foreign property rule is the mechanism to ensure we do so.”
The original 10-per-cent limit was set in 1971. It was raised to 20 per cent in two-per-cent increments between 1990 and 1994, and further raised to 30 per cent in five-per-cent increments between 2000 and 2001. Moving the limit from 20 per cent to 30 per cent during 2000 and 2001 may have added $1 billion to the value of Canadian retirement-related savings, they stated.
But increasing limits does not eliminate the fact the general logic behind the rule is still flawed, said Burgess and Fried. It is hurting retirement planning, they stated.
“We estimate that, even at 30 per cent, the cost of the (rule) to Canadians remains at between $1.5 billion and $3 billion annually,” they wrote. “This cost is ultimately borne by the millions of Canadians who are members of employer pensions plans, or who save for their own retirement through RRSPs.”
Dollar likely unaffected
The duo shot down concerns over weakening the Canadian dollar and a loss of jobs in the country if the rule was eliminated. They said it is unlikely to have an impact on the exchange rate, and it could even have a positive impact on the Canadian equity markets if the move is seen as the final step in the removal of Canadian capital controls.
By effectively lowering the efficiency of pension savings, the current foreign property rule works like a tax on real labour income, they said, and hence acts as a deterrent to higher levels of employment.
The study said the rule hinders Canadian Pension Plan reform by requiring most of the accumulating financial reserves to be invested in the same economy the plan relies on for its future contributions. This creates a “double jeopardy” for the CPP of having both future contributions and investment returns tied to the same economy because the CPP Investment Board is handcuffed by the same 30 per cent rule.
“Even the World Bank, in its recent review of national pension plans around the world, while praising Canada for the establishment of the arms-length (investment board) was critical of Canada’s 30 per cent foreign property rule,” the study states.
Norway got it right
Norway, when faced with a similar decision a few years ago regarding its $127 billion National Petroleum Fund, got it right according to Burgess and Fried. Norway’s parliament passed a law requiring 100 per cent of the fund to be invested outside Norway.
“We believe that the current short-, medium- and long-term economic environments are supportive for eliminating the foreign property rule,” said Keith Ambachtsheer, president of the Association of Canadian Pension Management. “We do not think there would be any material effects on the Canadian dollar, the balance of payments, job creation, the ability of Canadian governments and corporations to raise capital or the cost of capital in Canada.”
Russell Hiscock, chair of the Pension Investment Association of Canada’s government relations committee, said eliminating the rule would provide a great yield for Canadians now and in the future.
The complete report is available online at www.acpm.com or www.piacweb.org.
