Tax penalty on foreign assets held in Canadians’ retirement plans? It could happen

Canadian retirement savers should not face limits on the foreign assets they hold in their pension plans or RRSPs, says the chief executive officer of the C.D. Howe Institute.

Responding to industry rumours that offshore investment thresholds are being considered, William B.P. Robson says that the idea the government would do so is “plausible” citing the desire to appeal to populist opinion may include forcing retirement savers to invest more in Canadian assets.

In an article on the institute’s website, Robson notes that the most likely way that this could be achieved would be by a tax penalty on investors’ foreign assets.

“Ottawa could impose industrial-policy-style mandates on funds it controls, but imposing such a mandate on other major pension plans and RRSP savers would be hard,” he wrote, suggesting that the taxation route would be more straightforward for policymakers to implement.

Using taxation in this way would not be without precedent, Robson says, remembering how a 1% monthly tax penalty was imposed on foreign property held in retirement plans in the 1970s. The initial limit on tax-free holdings was just 10% of pension plan or RRSP assets, but this doubled to 20% by 1994, to 30% by 2005 when it was scrapped.

Robson says that some of the thinking of the 1970s is seen today and could lead to such a tax, despite the previous policy being criticized for hurting savers with little benefit to borrowers, and the ability of large institutions to avoid the rules by using derivatives and other instruments not typically available to smaller investors and savers.

Perverse reaction to feeble investment

The other issue that Robson raises is that among the most attractive assets held by the largest Canadian fund managers – the ‘Maple Eight’ – are foreign infrastructure and utilities which provide good returns.

A restriction on offshore holdings would limit funds’ ability to gain from these investments while having few options to replace them with similar Canadian assets as these are generally owned by governments.

“Mandates or penalties to force Canadians to keep their money in Canada rather than seek better and less risky returns abroad are a perverse reaction to feeble investment, poor productivity, and stagnating living standards,” Robson stated in his article.

He added that populist interventions by policymakers makes Canada an “unattractive place for Canadians, or anyone else, to invest.”