Sovereign Wealth and Pension Funds Controlling Canadian Businesses: Tax-Policy Implications

25 Pages Posted: 29 Mar 2013

See all articles by Vijay M. Jog

Vijay M. Jog

Carleton University - Eric Sprott School of Business

Jack Mintz

University of Calgary - The School of Public Policy; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 5, 2013

Abstract

In a world without taxes, investors that take over companies would do so because they expect to be able to operate the business efficiently and at a high rate of return. But in Canada today, some acquirers enjoy tax advantages over others. And that could mean that certain buyers, who may not be best suited to owning a particular company, are able to outbid those who are better positioned to run that company at optimal efficiency.

That is a problem not just for investors who end up outbid, due to Canada’s uneven tax policy, but for the Canadian economy, which suffers from the resulting economic inefficiency.

With respect to registered pension plans, the so-called 30-per-cent rule puts a cap on the amount of voting equity in a company that they are permitted to own. Meanwhile, however, sovereign wealth funds — whether controlled by China or Australia — face no such limit when purchasing stakes in Canadian firms.

The number and size of sovereign wealth funds, globally, is only growing — and rapidly. But as Canada increasingly attracts foreign capital, with foreign-controlled government-affiliated funds seeking out Canadian takeover targets, much of the discussion around public policy has focused primarily on the Investment Canada Act and the “net benefit test” for foreign direct investment.

Another component in ensuring that Canadian interests are preserved, however, is the question of whether Canadian institutional investors can operate on a level playing field with foreign sovereign wealth funds. With the 30-per-cent rule limiting equity purchases for one but not the other, it would appear that they are not.

The most appealing remedy to this imbalance is a tax solution: limiting the corporate deductions on interest, fees, royalties, rents, and the like, that so often factor in to the takeover calculation, as part of a tax-minimization strategy. This would not only put pension funds and sovereign wealth funds on equal footing, but it could also be applied to investors operating from low- or zero-tax jurisdictions, as well. This approach is not without disadvantages. But overall, the neutrality it could achieve among different types of institutional investors, and the potential it has to enable those investors best able to maximize management excellence and synergies, make it the preferable policy direction for ensuring the greatest level of efficiency in the Canadian economy.

Keywords: pension, wealth, state, owned, public, government, ownership, tax, efficiency, plan, investment, sovereign, policy

JEL Classification: H25, H21, G38, F21, L32

Suggested Citation

Jog, Vijay M. and Mintz, Jack, Sovereign Wealth and Pension Funds Controlling Canadian Businesses: Tax-Policy Implications (February 5, 2013). SPP Research Paper No. 6-5. Available at SSRN: https://ssrn.com/abstract=2240449

Vijay M. Jog

Carleton University - Eric Sprott School of Business ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S SB6
Canada
613-520-2600 (Phone)
613-520-4427 (Fax)

Jack Mintz (Contact Author)

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada
403-220-7661 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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