On June 3, the federal government launched a public consultation to assess whether the so called “30% Rule” should be retained, relaxed or eliminated for federally regulated pension plans. The 30% Rule restricts pension funds from investing plan assets in more than 30% of the shares that may be cast to elect the directors of a corporation, with certain exceptions.

As outlined in our previous blog, the Ontario government announced its own plans to eliminate the 30% Rule for Ontario registered pension plans and has already conducted its own consultation.

The Federal consultation is much broader than that conducted by Ontario. In particular, the Federal consultation is requesting views on the tax policy issues associated with the growth of active investments by pension plans. Specifically, the consultation notes the potential for an erosion of the Canadian tax base resulting from pension plans holding their investments in businesses through flow-through entities, such as partnerships and trusts, where in general, any tax payable is paid at the investor level. The consultation also notes that a pension plan may shift income away from a taxable Canadian corporation to the tax-exempt pension plan by employing significant amounts of related-party debt.

To prevent pension plans from stripping earnings through the use of related-party debt, the consultation asks whether the thin capitalization rules, which disallow the deductibility of an entity’s interest expense payable to certain non-resident shareholders on the proportion of debt that exceeds a specified multiple of the entity’s equity, should be applied to interest paid to pension plans.

Stakeholders are invited to make submissions by September 16, 2016, by email to: FIN.Pensions-Pensions.FIN@canada.ca