SOVEREIGN WEALTH AND PENSION FUNDS 

CONTROLLING CANADIAN BUSINESSES: TAX-POLICY IMPLICATIONS 

Vijay Jog† and Jack Mintz 

SUMMARY

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.

† Vijay Jog is Chancellor Professor at the Sprott School of Business, Carleton University and Jack Mintz is Palmer Chair in Public Policy, School of Public Policy, University of Calgary. 

Prepared for the School of Public Policy Roundtable on Public Enterprise Performance and Privatization, Oct. 5, 2011.

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In this BLOG we will look at pensions and their impact on what are called Public Private Partnerships or P3’s.  IT will also deal with other pension matters, such as Defined Contribution Plans (DC) vs Defined Benefit (DB) PLANS, the weakness in private plans, the need for pension reform in public pensions to have shareholder rights, directorships and ethical investment directives and policies.