Thank you, Katie and good morning.
To have comparable tax efficiency benefits afforded to retail funds, pooled funds need to meet the 150-unitholder test. This test is easier for retail funds to meet because of the distribution channel that's afforded to them. I can walk into any bank, for instance, and buy a retail mutual fund.
Pooled funds, however, are not retail products. They have very different distribution channels and they're challenged to meet the 150-unitholder test. Currently, under the act, these pooled funds or pension investments are treated as a single investor, masking the hundreds and thousands of investors that are in these pension funds and deferred savings plans.
The following are a couple of examples of some of the tax inefficiencies. Unlike retail mutual funds, pooled funds that are registered investments are restricted from investing in numerous international markets. This could result in missing opportunities to invest in markets with higher investment returns; in some cases it also means higher transaction costs.
Should an investment manager of a pooled fund inadvertently purchase a security in an international exchange that's not permitted under the act, the pooled fund and ultimately its underlying investors are subject to significant tax penalties, potentially in the millions of dollars.
Since they haven't achieved mutual fund trust status, pooled fund distributions to foreign investment plans are also subject to higher withholding taxes. Certain pooled funds avoid this consequence by prohibiting non-residents from investing in the fund, but this reduces the competitiveness of Canadian investment funds and their attractiveness to foreign investment plans.
Ultimately, more investors in a pooled fund leads to greater economies of scale, lower costs for investors and ultimately a higher savings return.
Finally, under the act, mutual funds and some insurance investment products can merge on a tax-deferred basis. Investment funds generally merge when they want to increase the economies of scale of smaller funds, for instance, or they want to streamline their product shelf, or perhaps by design when they're dealing with a target date mutual fund that is scheduled to reach the end of its life.
These tax-deferred mergers are not permitted to pooled funds, and thus give rise to tax on savings were a merger to be undertaken.
PMAC's recommendations in this regard are twofold. First, the government should enable a look-through to beneficiaries who have invested in pooled funds via deferred plans and other commercial investment funds in order to count toward satisfying the 150-unitholder test. This would also enable them to be considered as mutual fund trusts, thereby eliminating some of the tax inefficiencies outlined previously.
Second, the act should be modernized by adopting a more principles-based alternative to the designated stock exchange list. Unless the list is eliminated, PMAC proposes that it include countries with which Canada has a tax treaty or a tax information exchange agreement, thereby broadening the range of countries accessible to investment managers from about 30 to over 100. This can lead to better investment returns and lower execution costs, thus benefiting Canadian retirement savings.