Written Submission for the Pre-Budget Consultations in Advance of the 2019 Budget. By: The Investment Funds Institute of Canada

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1 Written Submissin fr the Pre-Budget Cnsultatins in Advance f the 2019 Budget By: The Investment Funds Institute f Canada

2 Written Submissin fr the Pre-Budget Cnsultatins in Advance f the 2019 Budget By: The Investment Funds Institute f Canada The Investment Funds Institute f Canada ( IFIC ) submits the fllwing recmmendatins: 2 Recmmendatin 1: That the gvernment implement changes t the safe harbur rule in sectin f the Incme Tax Act (Canada) t enhance the ability f Canada s asset management industry t prvide its services glbally. Recmmendatin 2: That the gvernment implement changes t imprve the tax neutrality f Canadian cllective investment vehicles ( CIVs ) t encurage investment by freign resident investrs.

3 Written Submissin fr the Pre-Budget Cnsultatins in Advance f the 2019 Budget By: The Investment Funds Institute f Canada Intrductin 3 We are writing n behalf f the members f The Investment Funds Institute f Canada with respect t the Huse f Cmmns Standing Cmmittee n Finance s (the Cmmittee) pre-budget cnsultatins fr the 2019 Federal Budget. IFIC is the vice f Canada s investment funds industry. IFIC brings tgether 150 rganizatins, including fund managers, distributrs and industry service rganizatins, t fster a strng, stable investment sectr where investrs can realize their financial gals. By cnnecting Canada s savers t Canada s ecnmy, ur industry cntributes significantly t ecnmic grwth and jb creatin. We are encuraged by the Cmmittee s cnsultatin theme n the tpic f Ecnmic Grwth: Ensuring Canada s Cmpetitiveness. IFIC s recmmendatins cntribute t this bjective. Specifically, we are recmmending changes t the safe harbur rule and imprving the tax neutrality f Canadian CIVs in rder t increase cnsumptin f Canadian asset management services and prducts. We believe these recmmendatins will encurage the grwth and cmpetitiveness f Canada s asset management industry. The Value f a Glbally Cmpetitive Canadian Asset Management Industry The asset management industry is glbal. Canada s asset management industry cmpetes in this glbal marketplace thrugh distributin f its asset management services and prducts. T imprve the ability f Canadian asset managers t cmpete glbally, we have identified changes t the Canadian incme tax framewrk that will level the playing field and better psitin the industry t cmpete fr mandates glbally. A mre glbally cmpetitive Canadian asset management industry will benefit Canada in the fllwing ways: Reduced fees fr Canadian investrs Attracting mre freign investment int Canadian CIVs which will create ecnmies f scale fr Canadian asset managers, which in turn will reduce management expense ratis and prvide Canadian investrs with lwer cst investment slutins. Increased Canadian tax revenues Attracting mre freign investment will als create pprtunities t increase taxable fee incme earned by Canadian asset managers. This will supprt the Canadian asset management industry as a whle, including the back ffice services and service prviders, such as custdial firms, trust cmpanies, accunting firms and law firms that sustain well-paying middle class jbs. IFIC Recmmendatin 1 - The Safe Harbur Rule The safe harbur rule was intrduced in 1999 t permit freign CIVs t retain the services f Canadian asset managers withut the risk f attracting Canadian tax n any earned investment incme. The rule was intrduced at the request f Canada s asset management industry which was trying t cmpete with service prviders in ther jurisdictins that had safe harbur rules. Since that time, thse cuntries have amended their tax rules and thers have intrduced safe harbur rules in an effrt t supprt the cmpetitiveness f their dmestic asset management industry. Canada has nt kept pace with these develpments and, as a result, ur safe harbur rule is mre restrictive and less cmpetitive than mst.

4 Written Submissin fr the Pre-Budget Cnsultatins in Advance f the 2019 Budget By: The Investment Funds Institute f Canada T supprt the glbal cmpetitiveness f Canada s asset management industry, we are prpsing that the rule be amended t: Expand the definitin f qualified investment; Extend the ne-year-seed capital perid; Expand the list f designated investment services; Amend the limitatin n affiliated persns; and 4 Eliminate the prhibitin n Canadian investrs t permit a de minimis number f Canadian investrs. With respect t the prhibitin n Canadian investrs, IFIC believes that the recent implementatin f internatinal glbal tax exchange agreements such as the Freign Accunt Tax Cmpliance Act and the Cmmn Reprting Standard will give gvernments, including Canada, greater access t infrmatin regarding freign investments held by their residents. As a result, the prhibitin against Canadian investrs is nt as necessary as it nce was. These tax infrmatin exchange agreements give the gvernment the pprtunity t make the safe harbur rule less restrictive. IFIC Recmmendatin 2 - Imprve the Tax Neutrality f Canadian CIVs Canada s favured cllective investment structure is the trust, which is inefficient fr freign investrs. Freign investrs in Canadian trusts must pay withhlding tax n distributins f incme frm a trust. Our prpsal is t eliminate the Canadian withhlding tax n distributins frm Canadian trusts t the extent that the tax wuld nt therwise apply if the freign investr had held the underlying assets directly and nt thrugh the trust. In additin, we prpse that the Canadian tax framewrk be bradened t accept legal structures fr CIVs that are better understd by freign investrs. Generally, freign retail investrs are mre cmfrtable with crprate class CIVs ver the trust structure favured in Canada. Other jurisdictins have changed their tax and legal framewrks t attract freign investrs int their lcal CIVs. Tax Refrms in Other Jurisdictins The Australian Example In general, the Australian legislative tax refrms have tw key elements. The first element is Australia s safe harbur rule, the Investment Manager Regime, which enhances the pprtunities fr Australian firms t manage assets f freign funds. The secnd element allws Australia s investment management industry t ffer a brader range f CIVs alng with enhancements t the tax treatment f its existing funds which are typically structured as trusts. It was recgnized that t have the greatest impact n Australia s glbal cmpetitiveness, it was necessary t address bth f these elements. The UK Example The UK s safe harbur rule (the Investment Management Exemptin) ensures that freign funds utilizing UK investment managers are nt cnsidered t be carrying n business in the UK. The freign fund is therefre nt subject t UK taxes slely because f its relatinship with the UK investment manager. The fees earned by the UK investment manager fr services perfrmed fr the freign fund are subject t UK tax. Bth UK investment managers and the UK Treasury benefit frm this safe harbur rule. The UK investment manager is able t increase fee incme, which generates greater tax revenues fr the UK Treasury.

5 Written Submissin fr the Pre-Budget Cnsultatins in Advance f the 2019 Budget By: The Investment Funds Institute f Canada The key elements f the exemptin include: 5 Independent capacity and custmary remuneratin the manager must perate n an arm s length basis frm the CIV and receive custmary remuneratin 20% test: the manager and persns cnnected with the manager must nt be entitled t mre than 20% f the incme in the freign CIV. Any incme entitlement abve the 20% threshld is nt eligible fr the safe harbur and is subject t UK tax. The UK has als made their asset management industry mre glbally cmpetitive thrugh: Flexibility f crprate frm Authrised unit trusts Open-ended investment cmpanies (OEICs) Authrised cntractual scheme Mdernizatin f the tax rules Cnclusin: Cnsistent treatment f trusts and cmpanies Cntractual structure designed as a flw-thrugh Asset management is a highly cmpetitive glbal industry. Fr the Canadian asset management industry t cntinue t effectively cmpete bth dmestically and abrad, changes t Canada s incme tax framewrk are necessary. These changes will benefit Canadian investrs, the Canadian gvernment and the individuals that cmprise and supprt the Canadian asset management industry. Thank yu fr the pprtunity t participate in the pre-budget cnsultatin. IFIC wuld be pleased t meet with the Cmmittee t discuss these recmmendatins. We welcme yur questins and feedback. Yurs sincerely, THE INVESTMENT FUNDS INSTITUTE OF CANADA By: Paul C. Burque, Q.C, ICD.D President and CEO

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