A SURPRISE RRSP GIFT

The budget removed the cap on foreign content

KATHERINE MACKLEM March 7 2005

A SURPRISE RRSP GIFT

The budget removed the cap on foreign content

KATHERINE MACKLEM March 7 2005

A SURPRISE RRSP GIFT

The budget removed the cap on foreign content

RALPH GOODALE handed investors and pensioners a surprise gift last week by ditching the 30 per cent cap on foreign holdings in retirement savings and pension funds. Initially imposed in 1971 at 10 per cent, the cap’s purpose was to provide capital to drive Canadian markets. Over the years, the ceiling has been raised. Last week, Goodale did it in altogether. “This is a positive,” says Don Drummond, the Toronto-Dominion Bank’s chief economist, who’d called for the cap’s elimination. “Rates of return are greater in international markets than in the Canadian market. By investing around the globe, you have less risk.”

But will clearing the limits on international investments cause a flood of money to flow out of Canada? Not likely. While the gates are wide open for Canadians to move as much of their retirement money as they’d like out of the country, observers doubt investments in the Canadian market will be dramatically siphoned off elsewhere. The home advantage, they say, means Canadians will continue to invest in the markets they know-

which are local. “Nothing will happen of consequence to the Canadian markets,” predicts Keith Ambachtsheer, president of KPA Advisory Services Ltd., and an expert in pension fund strategies.

Even before the cap was lifted, fewer than one in eight individual investors were at the max of 30 per cent in foreign content, says Lisa Ball, a regional manager for the Bank of Montreal’s mutual fund arm. Out of $500 billion Canadians have invested in mutual funds, roughly $95 billion is in foreign assets, according to the Investment Funds Institute of Canada. And another $27 billion is invested in an odd species of funds, called clone funds, which use an impenetrably complex set of derivatives to get around the foreign content rule. These funds will disappear as investors move money directly into foreign holdings, Ball says.

The real winners are the massive pension funds, some of which are unwieldy in the relatively small Canadian market, Ambachtsheer says. But he doesn’t expect pension funds to invest more than 40 per cent outside Canada. Eliminating the cap may also act to attract more foreign investments because forcing Canadians to invest most of their money in Canada could have been interpreted as a sign of weakness in our markets. “Canada,” he says, “is now signalling to the rest of the world that we’re okay.”

KATHERINE MACKLEM

THE FEDERAL government can’t pretend to insulate our firms from potential U.S. woes, but it can exploit its budget surpluses to build in some protection