“It’s a useful and probably much needed exercise,” said Carl Hinzmann, partner with Gowling WLG in Toronto. “If they can get the [qualified investments definitions] down to a singular definition, I think it would be significantly easier for the investment community that’s trying to provide advice and develop products.”

Holding a non-qualified or prohibited investment can lead to severe tax consequences: the plan would incur a 50% tax on the fair market value of the non-qualified or prohibited investment at the time it was acquired or changed status, and the investment’s income also would be taxable.

The consultation asked stakeholders to consider whether updated rules should favour Canada-based investments. Hinzmann likened this to the debate about whether pension funds should invest more domestically.

“I don’t think tax legislation is the appropriate way to tell pension funds to invest their money, so why [do that to] ordinary Canadians?” he said.

To achieve the goal of favouring Canadian investments, Hinzmann said the government could either require a certain percentage of domestic investments or treat domestic investments more favourably within a plan. Canada had a foreign content limit for RRSPs and RRIFs from 1971 to 2005, which ranged from 10% to 30%.

The budget acknowledged that the qualified investment rules “can be inconsistent or difficult to understand” due to their many updates since their introduction in 1966.

For example, different plans have slightly different rules for making investments in small businesses; certain types of annuities are qualified investments only for RRSPs, RRIFs and RDSPs; and certain pooled investment products are qualified investments only if they are registered with the Canada Revenue Agency.

“There’s no good policy reason” for the inconsistencies, Hinzmann said, adding that the purpose of the rules is to ensure registered plans hold stable, liquid products and that the planholder does not gain a personal tax advantage.

By having unwieldy, inconsistent rules, “all you’re really doing is increasing costs for the people offering these investment services to Canadians,” he said.

The budget asked for suggestions on how to improve the regime. In addition to questioning whether the rules should favour Canadian investments, the budget asked stakeholders to consider the pros and cons of harmonizing the small-business and annuities rules; whether crypto-backed assets should be considered qualified investments; and whether a registration process is indeed required for certain pooled investment products.

Hinzmann said the consultation’s highlighting of crypto-backed assets suggests the government may be questioning whether investment funds that hold cryptocurrency should be included in registered plans, though he acknowledged the government also could wish to expand the types of crypto products allowed.

Cryptocurrency itself is a non-qualifying investment in registered plans.

The qualified investments consultation ends July 15.

Qualified, non-qualifying and prohibited investments

Registered plans are allowed to hold a wide range of investments, including cash, GICs, bonds, mutual funds, ETFs, shares of a company listed on a designated exchange, and private shares under certain conditions. These are called qualified investments.

However, investments such as land, general partnership units and cryptocurrency are generally non-qualifying investments. (A cryptocurrency ETF is qualified if it’s listed on a designated exchange.)

A prohibited investment is property to which the planholder is “closely connected.” This includes a debt of the planholder or a debt or share of, or an interest in, a corporation, trust or partnership in which the planholder has an interest of 10% or more. A debt or a share of, or an interest in, a corporation, trust or partnership in which the planholder does not deal at arm’s length also is prohibited.

A registered plan that acquires or holds a non-qualified or prohibited investment is subject to a 50% tax on the fair market value of the investment at the time it was acquired or became non-qualified or prohibited. However, a refund of the tax is available if the property is disposed of, unless the planholder acquired the investment knowing it could become non-qualified or prohibited.

Income from a non-qualified investment is considered taxable to the plan at the highest marginal rate. Income earned by a prohibited investment is subject to an advantage tax of 100%, payable by the planholder.

A non-qualified investment that is also a prohibited investment is treated as prohibited.

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Finance Minister Chrystia Freeland’s predecessor Bill Morneau says there was talk of increasing the capital gains tax when he was on the job — but he resisted such a change because he feared it would discourage investment by companies and job creators.

He said Canada can expect that investment drought now, in response to a federal budget that targets high-end capital gains for a tax hike.

“This was very clearly something that, while I was there, we resisted. We resisted it for a very specific reason — we were concerned about the growth of the country,” he said at a post-budget Q&A session with KPMG, one of the country’s large accounting firms.

Morneau, who served as Prime Minister Justin Trudeau’s finance minister from 2015 to 2020 before leaving after reports of a rift, said Wednesday that Freeland’s move to hike the inclusion rate from one-half to two-thirds on capital gains over $250,000 for individuals, and on all gains for corporations and trusts, is “clearly a negative to our long-term goal, which is growth in the economy, productive growth and investments.”

Morneau said the wealthy, business owners and corporations — the people most likely to face a higher tax burden as a result of Freeland’s change — will think twice about investing in Canada because they stand to make less money on their investments.

“We’ve created a disincentive and that’s very difficult. I think we always have to recognize any measure that creates a disincentive for investment not only impacts us within the country but also impacts foreign investors that are looking at our country,” he said.

“I don’t think there’s any way to sugarcoat it. It’s a challenge. It’s probably very troubling for many investors.”

KPMG accountants on hand for Morneau’s remarks said they’ve already received calls from some clients worried about how the capital gains change will affect their investments.

Praise from progressives

While Freeland’s move to tax the well-off to pay for new spending is catching heat from wealthy businesspeople like Morneau, and from the Canadian Chamber of Commerce, progressive groups said they were pleased by the change.

“We appreciate moves to increase taxes on the wealthiest Canadians and profitable corporations,” said the Canadian Labour Congress.

“We have been calling on the government to fix the unfair tax break on capital gains for a decade,” said Katrina Miller, the executive director of Canadians for Tax Fairness. “Today we are pleased to see them take action and decrease the tax gap between wage earners and wealthy investors.”

“This is how housing, pharmacare and a Canada disability benefit are afforded. If this is the government’s response to spending concerns, let’s bring it on. It’s about time we look at Canada’s revenue problem,” said the Canadian Centre for Policy Alternatives.

The capital gains tax change was pitched by Freeland as a way to make the tax system fairer — especially for millennials and Generation Z Canadians who face falling behind the economic status of their parents and grandparents.

“We are making Canada’s tax system more fair by ensuring that the very wealthiest pay their fair share,” Freeland said Tuesday after tabling her budget in Parliament.

The capital gains tax, which the government says will raise about $19 billion over five years, is also being pitched as a way to help pay for the government’s ambitious housing plan.

The plan is geared toward young voters who have struggled to buy a home. Average housing prices in Canada are among the highest in the world and interest rates are at 20-year highs.

Tuesday’s budget document says some wealthy people who make money off asset sales and dividends — instead of income from a job — can face a lower tax burden than working and middle-class people.

Morneau, who comes from a wealthy family and married into another one, is on the board of directors of CIBC and Clairvest, a private equity management firm that manages about $4 billion in assets.

According to government data, only 0.13 per cent of Canadians — people with an average income of about $1.4 million a year — are expected to pay more on their capital gains as a result of this change.

But there’s also a chance less wealthy people will pay more as a result of the change.

Put simply, capital gains occur when you sell certain property for more than you paid for it.

While capital gains from the sale of a primary residence will remain untaxed, the tax change could affect the sales of cottages and other seasonal and investment properties, along with stocks and mutual funds sold at a profit.

A cottage bought years ago and sold for a gain of more than $250,000 would see part of the proceeds taxed at the new higher rate.

But there’s some protection for people who sell a small business or a farming or fishing property — the lifetime capital gains exemption is going up by about 25 per cent to $1.25 million for those taxpayers.

Freeland said Tuesday she anticipates some blowback.

“I know there will be many voices raised in protest. No one likes paying more tax, even — or perhaps particularly — those who can afford it the most,” she said.

“Tax policy is not only, or chiefly, the province of accountants or economists. It belongs to all of us because it is how we decide what kind of country we want to live in and what kind of country we want to build.”

Morneau had little praise for what his successor included in her fourth budget.

Morneau said Canada’s GDP per capita is declining, growth is limited and productivity is lagging other countries — making the country as a whole less wealthy than it was.

Canada has a growth problem, Morneau warns

The government is more interested in rolling out new costly social programs than introducing measures that will reverse some of those troubling national wealth trends, he said.

“Canada is not growing at the pace we need it to grow and if you can’t grow the size of the pie, it’s not easy to figure out how to share the proceeds,” he said.

“You think about that first before you add new programs and the government’s done exactly the opposite.”

The U.S. has a “dynamic investment culture,” something that has turbo-charged economic growth and kept unemployment at decades-low levels, Morneau said. Canada doesn’t have that luxury, he said.

He said Freeland hasn’t done enough to rein in the size of the federal government, which has grown on Trudeau’s watch.

The deficit is now roughly double what it was when he left office, Morneau noted.

“There wasn’t enough done to reduce spending,” he said, while offering muted praise for the government’s decision to focus so much of its spending on the housing conundrum. “The priority was appropriate.”

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The IHIF audience is getting a close look at Saudi Arabia’s plans to expand its accommodation capacity dramatically. The Kingdom is targeting an increase in hotel rooms to over 500,000 and aiming to welcome 150 million visitors annually by 2030. The HIE stands at the core of these ambitions, designed to energize the hospitality sector by introducing a new wave of supply in targeted tourism hotspots, significantly enriching the Kingdom’s diverse tourism offerings.​

The initiative is supported by a suite of strategic enablers, including access to government-owned land under favorable terms, streamlined project development processes, and regulatory adjustments aimed at reducing barriers to market entry and operational costs. This comprehensive approach is expected to catalyze a significant socio-economic transformation within the Kingdom, with private sector investments projected to reach SAR 42.3 billion and a forecasted annual GDP increase of SAR 16.4 billion by 2030.​

Saudi Arabia’s active participation in IHIF aims to showcase the Kingdom as an enticing investment frontier for international investors, emphasizing the lucrative opportunities within the tourism and hospitality sectors. This global stage provides the perfect platform for the Ministry of Tourism to forge lasting partnerships and highlight the Kingdom’s commitment to elevating its tourism industry standards, fostering sustainable growth, and offering robust support to investors.​

Through this engagement, the Saudi Ministry of Tourism is not just showcasing investment opportunities; it is inviting the world to be a part of Saudi Arabia’s ambitious journey towards redefining global tourism norms. Investors are encouraged to seize this unparalleled chance to collaborate with the Kingdom, as it paves the way for a new era of tourism excellence aligned with Vision 2030’s transformative objectives.​​

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