Government Consultation on Qualified Investment Rules and Recommendations for Improvement

Government Consultation Seeks to Simplify Investment Rules for Registered Plans

The Canadian government is seeking feedback on potential improvements to the qualified investment rules for registered plans, which have been in place since 1966. The rules, which determine what types of investments can be held in registered plans such as RRSPs and TFSAs, have been described as inconsistent and difficult to understand due to numerous updates over the years.

The recent consultation, which closed on Monday, asked for suggestions on how to streamline the regime, whether updated rules should prioritize Canada-based investments, and whether crypto-backed assets should be considered qualified investments.

One of the key recommendations came from the Investment Industry Association of Canada (IIAC), which proposed that registered plan issuers should not be held liable if a qualified investment becomes non-qualified while held in a plan, as long as the issuer initially confirmed the investment was qualified. This recommendation aims to prevent severe tax consequences that can arise from holding non-qualified or prohibited investments, such as a 50% tax on the fair market value of the investment at the time it was acquired.

The IIAC also suggested allowing fully paid securities lending (FPL) within registered plans, arguing that it would provide additional income for planholders and eventually generate more tax revenue for the government. The organization emphasized that disallowing FPL in registered plans disproportionately affects lower-income Canadians who primarily invest within such accounts.

Another issue raised in the consultation was the harmonization of rules around small business shares. Currently, different tests are used to determine the eligibility of shares in registered plans, leading to confusion and potential compliance challenges. The IIAC recommended removing the eligible corporation test and shifting the responsibility of determining share value to the small business itself.

The Portfolio Management Association of Canada (PMAC) also submitted recommendations, focusing on issues related to double taxation and higher investment costs within defined-contribution plans. PMAC proposed allowing target-date funds (TDFs) to invest in securities beyond those traded on designated stock exchanges, as well as permitting tax-deferred mergers of TDFs to reduce operational and cost burdens for plan participants.

Overall, the consultation highlighted the need for clarity and consistency in the qualified investment rules for registered plans, with industry groups advocating for changes that would benefit both planholders and the government. The government will now review the feedback received and consider potential updates to the existing rules to better support Canadians in their investment endeavors.