(May 18, 2004) The federal government has confirmed that it will re-examine limitations placed on pension fund ownership of business income trusts, announced in the 2004 budget in March.

“The government’s overarching goal remains to ensure that funding for priorities such as health care and education is not jeopardized by the erosion of the corporate tax base,” said Finance Minister Ralph Goodale in a statement. “But the concerns raised by pension funds and other interested parties deserve a closer look.”

Officials from the ministry of finance will now consult with representatives of the pension fund industry, the investment industry, provincial governments and other interested parties before making a recommendation on the future of the restrictions.

The 2004 budget prohibited pensions from holding more than 1% of their assets in income trusts. Pensions were also barred from holding a stake greater than 5% of any single trust. Breach of either restriction would result in a penalty of 1% per month.

The restrictions were immediately opposed by several large pension funds, which called the limits unfair. The calls to repeal the proposal grew louder in April, when it was pointed out Quebec’s Caisse — one of the largest pension funds in Canada — was not subject to the restrictions because it was a Crown corporation.

“We look forward to working with Minister Goodale and his officials in defining their concerns and working towards equitable and effective solutions,” said Claude Lamoureux, president and CEO of the Ontario Teachers’ Pension Plan. “The restrictions, as introduced in the budget speech, would have seriously restricted our ability to make money for teachers to secure their retirement income.”

The $75 billion Teachers’ fund is one of the most active pension funds in the income trust market. Most other plans have held back from trusts, waiting until legislation is passed to limit unitholder liability in the same way shareholders of corporate structures are protected.

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  • Stephen Probyn, chair of the Canadian Association of Income Funds (CAIF), says his association had been lobbying against the restrictions since they were announced in March and he is optimistic the consultation process will see the limits eliminated.

    “I think it is important that these limits be dropped, to put income funds on a level playing field with other investments,” said Probyn. “Also I think it is important for the pension funds to be able to invest in these vehicles.”

    CAIF conducted its own study of the impact income trusts have on tax revenues and concluded the long-term impact was negligible. A near-term shortfall of roughly $39 million was eventually counterbalanced by taxation of the income in the hands of investors.

    However, a contrary study by the C.D. Howe Institute estimated that income trusts could result in as much as $1 billion a year in tax losses.

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com