BRIEF FROM THE PORTFOLIO MANAGEMENT
ASSOCIATION OF CANADA
The Portfolio Management Association of Canada (formerly the
Investment Counsel Association of Canada (ICAC)) is pleased to submit comments
on recommended priorities for the Federal 2012 Budget.
As background, the Portfolio Management Association of Canada
(“PMAC”) represents over 150 investment management firms from across Canada. We
invest the assets of individual Canadians who are saving for retirement and the
assets of both traditional defined benefit pension plans and defined
contribution pension plans. Many of Canada’s largest pension plans and small
employer pension plans hire our members to manage all or portions of their
investment portfolios. In addition, individual Canadians who seek professional
management of their savings, become clients of our members who set up custom
portfolios for individuals based on their retirement goals, risk profile and
financial objectives. Our members are from across Canada and manage retirement
savings for Canadians in every province and territory. The PMAC was established
in 1952 and its members manage in excess of $750 billion assets (excluding
publicly offered mutual fund assets).
Our mission is to advocate the highest standards of unbiased
portfolio management in the interest of the investors served by Members. This
mission guides our advocacy objectives and focuses our government relations
efforts on goals which ultimately benefit all Canadians.
We have 4 specific recommendations all focused on helping Canadians’
build and maintain their retirement savings:
1) Minimize
and/or exempt discretionary investment management services provided to all
retirement savings plans from additional taxation.
2) Encourage participation by employees & employers in the new
proposed Pooled Registered Pension Plans (PRPPs) and other employer supported
retirement vehicles through the
introduction of specific tax incentives.
3) Minimize Taxation Impact on Pensions & RRSPs & Encourage
Development of New Pooled Funds by Lowering 150 Unit Holder Rule for Mutual
Fund Trust Status.
4) Expansion of Designated Stock Exchange List to Allow Canadians to Diversify their RRSP Investments.
Each of the four issues below, if addressed, would greatly enhance
Canadian’s ability to save effectively for retirement.
1) Minimize And/Or Exempt Discretionary Investment Management Services Provided To All Retirement Savings Plans From Additional Taxation.
We are very supportive of the broad analysis and variety of options
that the Government is considering to improve Canadian’s retirement income
system. Specifically, we are supportive of the proposed Pooled Registered
Pension Plans. (PRPPs)
One of the most significant and immediate changes the government
can make to assist Canadians saving for retirement, is
to exempt investment portfolio management services provided to retirement
savings plans (both pension plans, RRSPs and RRIFs) from consumption taxes on
these savings. At the very least, recognizing the regional imbalance/inequity
currently associated with the roll out of the HST (which is ultimately passed
on to clients in the form of higher costs), the federal government should work
with its provincial counterparts to avoid any additional tax being levied onto
retirement savings by the provinces via its portion of the HST.
The recent implementation of the HST in Ontario and British
Columbia represents a 160% increase in the taxes payable by Ontario residents
on investment portfolio management services and a 140% increase in BC. As the
government is well aware, the 1 year old implementation of HST in Ontario and
BC on investment management services coincides with a period of extreme
difficulty for firms and individuals saving for retirement. Pension funds are
struggling with strict funding requirements and weak investment performance,
and ordinary Canadians saving for retirement through RRSPs are still recovering
from the financial meltdown of 2007 through 2009 and recent turmoil in the
markets. While other areas of government are making good progress in alleviating
the retirement funding challenges while financial markets recover, it is at
best ironic that tax policy is, in effect, undermining those efforts. While
there is a GST credit for pension plans, it is only partial and takes up huge
amounts of resources to track and process the necessary forms. The Federal
government’s HST policy is working at cross
purposes to the policy objectives of the Department of Finance - to ensure
the strength and adequacy of Canadian’s retirement savings. HST is, pure and simple,
a tax on retirement savings. As such, it acts as a disincentive to the
government’s policy objectives of encouraging Canadians to take more
responsibility for their retirement.
Although we continue to advocate that the government exempt
investment management services from just the provincial portion of the HST, we recommend that, in the longer term, Canada take a
broader policy view of how Value Added Taxes (VAT) are handled in other
countries with a view to ultimately exempting investment management services
from both the provincial and federal portions of the HST or GST (or making them zero-rated). In principle,
VATs are meant to tax consumption of goods and services. If a Canadian hires a
professional to manage their pool of savings, we would argue that there is no
“consumption”, within the definition of a consumption tax. Rather, the Canadian
is growing his/her wealth to provide for greater consumption later in life.
This is the policy position in Europe – investment management of retirement
assets is not consumption. There is also no such added tax on managing
retirement savings in the United States.
As a final note on this topic, we would point out the burden of the
HST falls not just on Canadians living in BC and Ontario and Nova Scotia. As of
July 1 2010, residents of non harmonized who have RRSPs in mutual funds are
subject to HST indirectly. Residents of non-HST jurisdictions who invest in
mutual funds together with Canadians in HST provinces will be paying HST
indirectly on the investment management fees charged to the funds they own.
Although the effective HST rate paid by mutual fund investors will be a
“blended rate” that reflects the distribution of a fund’s investors across
Canada, given the populations of Ontario, BC and Atlantic Canada, the HST rate
payable by many mutual fund investors will be much closer to the 13 % Ontario
HST rate than the 5% GST rate that would otherwise apply in Manitoba,
Saskatchewan and Alberta. Thus, the HST is doubly unfair. First it is being
wrongly applied to tax Canadians’ retirement savings. Secondly, the burden is
being borne not just in HST provinces but by all those who are saving for
retirement.
We recommend that the Federal Government agree with the
provincial governments to adopt the policy
positions taken elsewhere in the world and exempt consumption taxes on
investment management services generally (i.e. on savings ) or in the
alternative, to work with the provincial governments
to remove or mitigate the additional and uneven provincial portion of
HST immediately.
2) Suggestions to Enhance Widespread Participation in Pooled Registered Pension Plans (PRPPs)
We have been very active in the Department of Finance’s
consultation process on Pooled Registered Pension Plans (PRPPs) and support
them when compared to alternative solutions such as enhancements to CPP. As we
raised in our August 12, 2011 submission, it is our contention that without a
mandatory PRPP obligation on employers (i.e. other than employers already
providing a RPP), the targeted objective of widespread participation by
employer/employees may not be achieved. To improve participation in the absence
of mandated obligations, we offer below a number of recommendations for the
governments to review as potential tax incentives to spur employers to offer
the plan:
i. Introduce a temporary employer retirement savings tax credit akin
to the Home Renovation Tax Credit. To ensure that the roll out of such a
measure would not create an unfair
advantage over those employers who were previously offering RPP’s, this
incentive should be offered to all participating employers in an RPP;
ii. A transitional exemption for the first contributions into a PRPP
to be included in calculating the RRSP
limits;
iii. Introduce an Employer/Employee Retirement Savings Grant - Similar
to the RESP structure, provide a supplemental matching annual grant invested in the retirement savings vehicle.
Regardless of whether any additional incentives are contemplated,
it would be recommended that the launch of the PRPP program is coordinated with
a suitable educational information on employer options for retirement savings
and which helps employers evaluate the multitude of retirement savings program
spins available (i.e. PRPP, RPP, group RRSPs, corporate contribution to
employee RRSP of choice).
3) Minimize Taxation Impact on Pensions & RRSPs & Encourage Development of New Pooled Funds by Lowering 150 Unit Holder Rule for Mutual Fund Trust Status
Pooled Funds: Some individual Canadians and pension plans
invest part of their investments with portfolio managers who offer “pooled
funds” that are very similar to mutual funds but are offered pursuant to
exemptions from the prospectus requirements under provincial securities
legislation and are typically offered at substantially lower costs than
traditional mutual funds. The Income Tax Act (ITA) was revised in the 1990s to
attempt to provide certain tax rules for commercial trusts that meet specific
requirements including that such funds have at least 150 unit holders (the “150
unit holder rule”). For example, if a Canadian had RRSPs in a fund that had 150
or more unit holders, it would be a qualified investment. If however, the fund
dropped below the 150 level, the fund would no longer be a qualified investment
for a Canadian’s RRSP. This would also trigger a host of detrimental tax
consequences including a 1% penalty tax per month to the RRSP annuitant on the
book value of their investment in the fund simply due to the arbitrary event of
dropping below 150 unit holders; before this drop, it was a qualified
investment. A Canadian’s RRSP would have lower returns, due to the tax the fund
would be paying. Put simply, pooled funds established by portfolio managers
registered with provincial securities commissions are commercial trusts and
should be afforded the same treatment whether these funds have 149 clients or
150 clients.
Challenge of Maintaining Funds Above 150 Unit Holders: In
recent years, meeting and surpassing this 150 limit however has become
problematic due to two factors. Market volatility has caused some pooled funds
to drop in volume and has challenged fund managers to maintain them above the
150 unit holder limit. This can happen very quickly, since most funds are
redeemable by a unit holder on demand, therefore, managers of pooled funds have
little or no control over the number of unit holders in the fund at any given
time: in other words, if the number of unit holders is dropping to near or
below 150, a pooled fund manager cannot compel new investors to come into the
fund and it cannot prohibit existing investors from redeeming out of the fund.
Secondly, there are over 46,000 Defined Contribution/Group RRSP clients that
are now largely administered by insurance companies in Canada. The current
method that these employer sponsored plans are structured results in large
company DC Plans being counted as “one” in terms of the 150 unit holder rule.
Large DC pension plans therefore can also find themselves in funds, below 150,
resulting in detrimental tax treatment. This holds true for regular Defined
Benefit Pension plans which may have 30,000 members but would be counted as
“one” for unit holder count purposes.
Negative Implications of 150 Unit Holder Rule: There are two problems with this rule: taxation impact on retirement savings when funds drop below 150 unit holders and the barrier to starting new innovative funds due to the very high threshold.
i)Taxation Impact: We believe this rule is unfair to
Canadians and pension plans who invest in pooled funds and unbeknownst to them,
the fund drops below the 150 limit. The Canadian with the RRSPs in the fund
would not be aware that part of their lower returns were due to tax
implications of the fund dropping below 150. If pooled fund (MFT) drops below
150 unit holders, the impact could be significantly detrimental on the
remaining investors. Once an MFT drops below 150 unit holders, it loses its
qualification as an investment for an RRIF, RRSP, DPSP, or RESP. This would
immediately trigger a 1% penalty tax per month on an RRSP or RRIF holder that continues
to hold the units.
If pension plans were counted as multiple units (based on
underlying plan participants) instead of one unit, which they are today, the
150 unit holder target would be easier to achieve. We suggest that the
government could meet its original policy objective of this rule, by simply
providing a look-through to pension plans and retirement savings plans
generally, including those serviced by insurance companies.
ii) Barrier to New Fund Innovation: Canadian’s continue to
seek investment opportunities to meet their needs, risk profiles and retirement
objectives. Small innovative investment ideas are being kept on the shelf or
not launched as pooled funds because of the requirement to have 150 unit
holders, which can not include RRSPs. Lowering the limit to 50 unit holders,
would encourage firms large and small to set up new, innovative funds which
offer good growth potential and optimum value for the investor. The current
threshold of 150 makes it difficult for firms to launch pooled funds and limits
competition in the industry.
iii) Barrier to Investment in Canadian Funds by Non-Residents:
Non residents are unable to invest in our funds with less than 150 unit holders
without detrimental tax implications on the non resident and remaining unit
holders. This has detrimental effects on our industry and ultimately the
government tax base.
In summary, we feel the current threshold is too high and results
in unfair and unintended tax consequences on retirement savings that should be
corrected. In addition, the rule limits new fund innovation, and reduces
opportunities for Canadians and non-residents to invest in new funds which meet
their needs. Lowering the 150 unit holder rule to 50 would ensure the developments
of new pooled funds and would allow international equity funds to accept RRSP
unit holders given smaller international funds would meet the new target
threshold of 50.
We recommend that the 150 unit holder rule to qualify for “mutual
fund trust” status be modified to (a) only require 50 unit holders, and (b)
provide a “look through” for pension plans and group RRSPs such that each
participant in the pension/group RRSP is counted as 1 unit holder, regardless
if they invest in fund directly or via an insurance segregated fund.
4) Expansion of Designated Stock Exchange List to Allow Canadians to Diversify Their RRSP Investments
The 2005 Federal budget took the important step of eliminating the
foreign content limit for RRSPs and other tax-deferred plans. However, seniors
and Canadians saving for retirement are still unable to optimize and/or
diversify the foreign content portion of their investment portfolio due to the
fact that certain countries exchanges are not on the designated stock exchange
list maintained by the Department of Finance.
There are many investments which can be held in an RRSP, however a
Canadian may not hold shares listed on an exchange which is not on the
Department of Finance’s list of Designated Stock Exchanges. (http://www.fin.gc.ca/act/fim-imf/dse-bvd-eng.asp)
Given the turmoil in the markets in the last few years, diversification of
capital is even more critical. The current list of approximately 38 exchanges
primarily consists of exchanges in North America (40%; 28% of which are in the
United States) and Europe (40%). We would suggest that given the impact on the
sovereign debt issue on both the European and US markets, it is critical this
list be expanded and diversified to include other very well regulated, well
known, and established exchanges which are commonly used as part of pension
plan portfolios and other non - RRSP portfolios. For example, India (BSE), and
all South American stock exchanges are not on the Designated Stock Exchange
list, to name a few.
It should be noted that our second recommendation regarding the
lowering of the 150 unit-holder rule for Mutual Fund Trust status is very
related to this recommendation. If a fund contains RRSP unit holders, it is
limited to the Designated Stock Exchange list when the fund has less than 150
unit holders and as noted, is very restricted from other investment
opportunities. As noted due to the massive structural changes in the servicing
of the 46,000 RRSP and capital accumulation plans in Canada, now concentrated
in the hands of the largest insurance companies, many pooled funds, even those
with billions of dollars in them often struggle to meet the 150 unitholder
requirement for MFT status and thus have to restrict themselves to accepting no
RRSP money (denying Canadians the opportunity to participate in these low cost
vehicles) We would suggest this is unfair to Canadians and propose the lowering
of the 150 Unit Holder rule for MFT status with the expansion of the Designated
Stock Exchange list as a way to help Canadians, save more and pay less for
their retirement savings.
We recommend the current list of designated stock exchanges be
expanded and updated to allow Canadians to adequately diversify their savings
in different economies around the world.