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- Title
The 30 Percent Limitation for Pension Investment in Companies: Policy Options.
- Authors
Jog, Vijay; Mintz, Jack
- Abstract
Current law imposes limits on pension plan investments in Canadian corporations by restricting a plan's ownership in a single entity to a maximum of 30 percent of the voting shares (the 30 percent rule). Some large pension funds have advocated for the relaxation of this restriction. Concerns have been raised that the 30 percent rule hurts the portfolio returns of pension plans and capital market efficiency. The authors examine these arguments in detail and also focus on tax impacts on markets arising from the taxexempt status of pension plans. Recent changes to the foreign property ownership rule have enabled Canadian pension plans to achieve better portfolio diversification at the global level, ameliorating some concerns about capital market efficiency. The authors suggest that the benefits of better governance are unclear, given the potential conflict of interest that may arise in respect of a plan's investment in a Canadian corporation between profit maximization for shareholders and the protection of employee interests. In the market for acquisition and control, tax-exempt pension funds have an advantage over taxable investors that affords controlled companies a competitive advantage through a lower cost of capital. The authors estimate the current corporate and personal tax advantage to be in the range of $600 million to $700 million annually. They examine various policy options with respect to the 30 percent rule, including abolition of the rule and various tax policies that would create a more even playing field between pension funds and taxable investors.
- Subjects
CANADA; INVESTMENT policy; INVESTMENT of pension funds; PENSION trusts; INVESTMENTS; TAXATION; CAPITAL market; TAX exemption
- Publication
Canadian Tax Journal / Revue Fiscale Canadienne, 2012, Vol 60, Issue 3, p567
- ISSN
0008-5111
- Publication type
Article