Fall Economic Statement Gives More Incentives to Maple Eight to Invest at Home
The federal government announced a move to ease limits for pension funds investing in Canadian companies in its latest fiscal update, along with responses to tariff threats from the U.S. and other moves aimed at competing for capital.
On Monday, the federal government unveiled its fall economic statement amid turmoil in Prime Minister Justin Trudeau’s cabinet. Building on a previous announcement last week, the government said it intends to remove restrictions on pension funds in an effort to spur domestic investment.
“The 2024 Fall Economic Statement announces the federal government’s intent to amend regulations to remove the 30 per cent rule for investments in Canadian entities,” the government said in its fiscal update.
“This will make it easier for Canadian pension funds to make significant investments in Canadian entities. During the development of regulatory amendments, the federal government will consult with provinces on the treatment of provincially regulated pension plans.”
According to Ottawa, the move will make it easier for Canadian pension funds to make major investments in Canadian companies.
Finance Minister Chrystia Freeland announced her resignation in a letter posted on social media from Prime Minister Justin Trudeau’s cabinet hours before she was scheduled to deliver a fiscal update on Monday. She stated in the letter that the decision came after Trudeau offered her a different position.
In the letter, Freeland highlighted risks to the Canadian economy coming from tariff threats from U.S. President-elect Donald Trump. She said Canada needs to keep its “fiscal powder dry,” adding that the government should avoid “costly political gimmicks” it cannot afford given the current situation.
Fight for capital
Freeland announced the intention to remove the cap on Canadian pension funds last week, according to Bloomberg News. She said in a statement Friday that the announcement comes amid rising “economic nationalism” where competition for capital has intensified.
“Canada needs to fight harder than ever for capital, including facilitating and supporting the investment of Canadian capital here at home. This is key to the future prosperity of all Canadians,” she said.
Freeland’s removal of the pension cap comes as Canada grapples with issues related to lagging productivity and weak business investment.
The fall economic statement highlights that Stephen Poloz, the former Bank of Canada governor, was asked to explore ways to “catalyze greater domestic investment opportunities” for pension funds in the government’s previous budget.
The government also announced other changes related to Canadian pension fund operations in its fiscal update.
This includes the fact that Ottawa is exploring lowering the 90 per cent threshold limiting municipal-owned utility companies from attracting private sector ownership of more than 10 per cent.
“Lowering this threshold for Canadian pension funds would allow them to acquire a higher ownership share in these entities. For example, municipally owned electricity utilities would be able to access more capital to meet future demand and expand electricity production and distribution grids,” the fall economic statement reads.
Additionally, the government announced it is currently consulting on potential regulations to increase transparency for large federally regulated pensions.
“This would require the Office of the Superintendent of Financial Institutions to publish the distribution of investments, by jurisdiction and asset class within each jurisdiction, of federally regulated pension plans with assets under management greater than $500 million,” the government said in the fiscal update.
The government also proposed to launch a fourth round of the Venture Capital Catalyst Initiative, making $1 billion in funding available next year with more favourable terms for pension funds or institutional investors.
Tariff threat response
The federal government’s fall economics statement comes on the heels of trade tensions with the U.S., with Ottawa saying it is focused on countering the threat in its fiscal update.
Last week, Freeland said Trump and his administration are attempting to foster a sense of economic uncertainty outside the U.S. as part of a strategy to “discourage investment anywhere other than the United States.”
“Canada is going to fight for Canada. Our government is fighting for Canadian job,” she said.
Trump has threatened that the 25 per cent tariff on both Canadian and Mexican imports will be implemented unless both countries address issues related to the U.S. border and crack down on fentanyl and illegal migration into the U.S., according to Bloomberg News.
The fall economic statement proposed measures to enhance border security with a $1.3 billion package over six years starting in 2024-25 to various organizations including the Canada Border Services Agency and the Royal Canadian Mounted Police.
Canada’s federal and provincial governments are figuring out ways to navigate Trump’s threat to impose 25 per cent tariffs on all Canadian imports during his first day in office in January, The Canadian Press reported last week. Ontario Premier Doug Ford also stated last week that Ottawa was preparing potential tariffs in retaliation, as well as threatened to limit electricity exports from Ontario.
However, the provinces don’t appear to be moving in unison on the issue as Alberta Premier Danielle Smith said the province would not agree under any circumstances to cut off oil and gas exports to the U.S.
‘Economic hit’
Ahead of the release of the fall economic statement, James Orlando, a director and senior economist at TD Economics, said in an interview with BNN Bloomberg last week that many are trying to figure out the impact tariffs could have on Canada’s economy.
“The thing that we’re dealing with right now in economics departments is that we are trying to figure out how much of an economic hit we’re going to have in Canada as a result of potential tariffs,” he said.
“With the analysis that we’ve done, and everyone else seems to have done, is that it’s very severe like we’re talking about at least a stagnation or even recession in Canada should the worst tariffs come on.”
As a result, Orlando said tariffs could weigh on the federal government’s revenue if enacted.
“Let’s be honest, like Donald Trump’s not even in the White House yet, and the government, in their fall economic statement is looking like they’re going to be doing new policies in preparation for an incoming U.S. president. So, there should be some hard spending promises there,” he said.
Barbara Shecter of the National Post also reports Freeland removes 30% investment cap for Canadian pension funds:
Canadian pension funds will no longer be restricted to a cap of 30 per cent control of companies they invest in and the federal government is working with the institutional investors and domestic airports to “explore measures for further pension fund investment on airport lands.”
Deputy prime minister Chrystia Freeland made the announcements — part of sweeping measures that could total $47 billion in government money and incentives to encourage more pension investment in Canada — at a news conference Friday in Toronto. She said more details would be provided in Monday’s fall economic statement.
“We are making it easier for pension funds to acquire controlling stakes in Canadian entities,” Freeland said. “Currently Canadian pension funds are restricted from owning more than 30 per cent of a Canadian entity. We’re going to change that.”
She said the series of changes and new measures that will affect the country’s largest pensions were made following a report from former Bank of Canada governor Stephen Poloz, who she tasked in the spring with finding ways to encourage more domestic investments by the Canadian funds, which collectively control $3 trillion.
“Canadian pension funds have… some of the world’s best investment expertise. They are envied around the world,” Freeland said at the news conference at the Toronto Stock Exchange.
The campaign to get more pension money invested domestically began in 2023 after fierce lobbying in Ottawa, but drew pushback from large pension funds whose executives argued that their diversification geographically and by asset class is what resulted in their enviable returns.
Pension officials also argued that Canada had not freed up large infrastructure assets, such as airports and ports, which are a type of investment favoured by large institutional investors around the world including Canadian pensions.
But Freeland kept pushing forward, and last spring’s appointment of Poloz to lead a task force to explore the issues seemed to ease friction with the pension funds.
“We are fighting for capital. We need to own the podium and say Canada is a great place to invest… and we are determined to get our share,” Freeland said at the news conference where she announced other measures including tax credits and incentives, plus $2 billion in additional government money to encourage public-private investment to spur growth of Canadian startups and mid-sized companies.
Another leg of the plan is to create a program that will provide up to $45 billion in loans and equity and involve “working with pension funds developing AI data centres,” Freeland said.
A senior pension source said Friday that there appeared to be no downside in the pre-announced measures, but declined to comment publicly before seeing the full detail in the government’s fall economic statement on Monday.
Freeland said Poloz had come up with “smart, creative ideas” to generate more opportunities for pensions funds to boost their investments in Canada and make that easier for them to do. But she also framed the measures announced Friday, in part, as a response to the re-election of Donald Trump as president of the United States.
“We have to be candid about the reality of the incoming U.S. administration,” she said. “This is an administration which openly has a strategy of creating economic uncertainty outside the U.S. — as a strategy to discourage investment anywhere other than the United States.”
She said she will have more to say about her government’s response during Monday’s economic update.
“Canada is going to fight for Canada,” Freeland said. “Our government is fighting for Canadian jobs, our government is fighting for capital.”
Alright, yesterday I discussed Mark Wiseman's comment on why politicians shouldn't interfere with Canada's large pension funds and left the fall economic statement as it pertains to our pensions for today.
I want to bring to your attention this section of that statement on boosting innovation to create good jobs, growth and prosperity:
Today, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, alongside the Minister of Export Promotion, International Trade and Economic Development, Mary Ng, announced the 2024 Fall Economic Statement will unlock billions in new capital and include significant new incentives to help businesses grow, innovate, and create good jobs.
First, the 2024 Fall Economic Statement will include significant, historic reforms that, through existing and new support, will deliver $26 billion in tax incentives for Canadian businesses. This will be done through a bold reform and a significant enhancement of the Scientific Research and Experimental Development (SR&ED) tax incentive program, which is already a proven cornerstone of Canada’s innovation strategy and currently supports over 22,000 businesses in Canada. The 2024 Fall Economic Statement is making this tax incentive more generous, particularly for high-growth potential firms. Specifically, the government is proposing to:
- Increase the annual expenditure limit on which Canadian-controlled private corporations are entitled to earn an enhanced 35 per cent investment tax credit, from $3 million to $4.5 million;
- Increase the prior-year taxable capital phase-out thresholds for the enhanced credit from $10 million and $50 million to $15 million and $75 million, respectively;
- Extend the enhanced refundable credit to Canadian public corporations; and,
- Restore the eligibility of capital expenditures for both the deduction against income and the investment tax credit components of the SR&ED program.
Second, the government has a plan to unlock billions in private sector and pension fund investment to boost growth and create good jobs. The 2024 Fall Economic Statement includes a set of proposals that create a more attractive investment environment for pension funds to invest at home, in Canada. This plan will unlock investment opportunities by removing investment barriers that currently hold pension funds back; crowd in private capital; and secure Canada’s AI advantage by attracting billions to build AI data centres. Informed by the work of the former Governor of the Bank of Canada, Stephen Poloz, the government is proposing to:
- Remove the 30 per cent rule that currently restricts Canadian pension funds from owning more than 30 per cent of the voting shares of a Canadian entity;
- Crowd in private venture capital by launching a fourth round of the Venture Capital Catalyst Initiative with $1 billion in funding and more enticing terms for pension funds and other institutional investors;
- Bolster access to capital for mid-cap companies by providing up to an aggregate of $1 billion in concessional financing. These investments will be equal to 25 per cent of net new private investments;
- Secure Canada’s AI advantage by developing a program that would provide up to $45 billion in aggregate loan and equity investments for AI data centre projects in which Canadian pension funds are significant investors; and,
- Attract investment for better airports by working with airports and pension funds to incentivize development on airport lands, including by exploring potential changes to airport authority ground leases.
The government is making significant reforms to ensure Canadian innovators have the right incentives to discover the next scientific breakthroughs here in Canada, and facilitate domestic pension fund investment in Canada, growing our economy and boosting innovation, while generating returns that will strengthen the robust retirement incomes of Canadians. These are just some of the measures in the 2024 Fall Economic Statement that will boost innovation, enhance productivity, and drive economic growth to build a more prosperous future.
Quotes
“In the face of external challenges, Canada needs to invest more in our own research and development, which is why we are expanding our SR&ED program and focusing more support on Canada’s innovators and start-ups. Canada is the world’s intellectual leader in AI, a dominant emerging technology. We are determined to use this intellectual edge to secure a national economic competitive advantage. At a time of rising economic nationalism, the fight for capital has never been more fierce. Canada needs to fight harder than ever for capital, including facilitating and supporting the investment of Canadian capital here at home. This is key to the future prosperity of all Canadians.”
- The Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance
Well, Ms. Freeland has now resigned from her post and it's a shame she didn't get to present the highlights in the fall economic statement.
But she was smart enough to appoint Stephen Poloz to head up the task force exploring how our pension funds can invest more domestically and he came up with some great recommendations that were incorporated in the statement.
What strikes me is the recommendations allow Canada's large pension funds to use their expertise to make significant investments across public and private assets classes domestically.
They're going to be incentivized to invest more in public equities, private equities, private debt, infrastructure, you name it, however the devil is in the details and it still remains to be seen whether these incentives will be enough to make a material difference.
Still, it's important to note that the Government isn't forcing our pension funds to invest more domestically, it's actually incentivizing them to do so and that's the right approach.
So what's the catch? There's no catch but also worth noting the Government will be regulating our large pension funds more closely to gain more transparency on their investments at home and abroad (from Bloomberg article):
Additionally, the government announced it is currently consulting on potential regulations to increase transparency for large federally regulated pensions.
“This would require the Office of the Superintendent of Financial Institutions to publish the distribution of investments, by jurisdiction and asset class within each jurisdiction, of federally regulated pension plans with assets under management greater than $500 million,” the government said in the fiscal update.
In my comment yesterday, I made an explicit reference to improving the governance at Canada's large pension funds by increasing transparency:
For example, Mark Wiseman talks about transparency. Well, I think it's high time all our pension funds provide detailed information on where they invest (public and private markets) by country, providing long-term returns.
So, you want to invest billions in India, great, show me what your active strategy is and what's the long-term performance and the same goes for all countries.
Also, when it comes to investing domestically, I'm a huge proponent of investing in infrastructure as long as the conditions the government lays out are on par with those of other countries like the UK and Australia.
The delayed Fall Economic Statement addresses investment and implements a lot of the recommendations from former Bank of Canada Governor Stephen Poloz's task force looking into how our pension funds can invest more domestically and where, including removing the 30% cap ownership on Canadian companies.
It's high time we get detailed breakdowns by asset class in each country and performance for each country so we can gauge whether active management is working over the long run.
We also need to make it a lot easier for our large pension funds to own controlling stakes in airports, ports and toll roads in Canada.
Alright, not much more to add here, I generally like these recommendations and just wanted to give credit to Chrystia Freeland and Stephen Poloz who came up with these recommendations.
Below, former Finance Minister Chrystia Freeland says the upcoming fall economic statement will remove the cap that restricts Canadian pension funds from owning more than 30 per cent of the voting shares of a Canadian entity. Freeland says this will make it easier for Canadian pension funds, which have more than $3 trillion in assets, to make significant investments in Canadian entities. (Dec. 13, 2024)
And Power & Politics breaks down the fall economic statement after Chrystia Freeland's abrupt resignation as finance minister with a former governor of the Bank of Canada, the CEO and president of the Business Council of Canada and a panel of economists.
Lastly, Peter Navarro, incoming White House senior trade counselor, joins 'Squawk Box' to discuss the incoming Trump administration, what to expect from President-elect Trump's economic proposals, potential impact of Trump's tariff proposals, state of the economy, and more. Navarro stated "You'll see over $1 trillion of investments from Trump's tariff & trade policies."
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