The Canadian pension fund world has become less idyllic with the MLI PPT, and Finance suggestions for extending thin cap and SIFT rules

It is now well-settled that an s. 149(1)(o.2)(iii) investment corporation is not itself required to satisfy the PBSRA rule limiting it investment in a person or affiliated or associated group to less than 10% provided that its parent pension fund does so.

More problematic is the potential introduction of rules to extend the thin capitalization rules to corporations in which tax-exempt entities invest, or to extend the specified investment flow-through rules to partnerships and trusts in which tax-exempt entities invest. In various situations, these rules could also adversely affect taxable investors who are co-investors with s. 149(1)(o.2)(iii) corporations.

Although s. 253.1 when read in conjunction with Consolidated Mogul provides substantial comfort that borrowing at the level of an investee LP is not problematic for the s. 149(1)(o.2)(iii) corporation, even greater comfort is afforded if a unit trust is interposed in between.

Pension plan investments in real estate are not generally made through an s. 149(1)(o.2)(iii) investment corporation but rather through an s. 149(1)(o.2)(ii) real estate corporation. Some of the strictures which otherwise would bind such a corporation may be avoided by leasing the corporation’s real estate to a lessee which carries on the activities in question.

The new principal purpose test in the MLI is potentially problematic for Canadian pension funds who are co-investing in Europe through an intermediate holding vehicle such as a Luxco.

Neal Armstrong. Summaries of Jack Silverson and Bill Corcoran, "Issues Affecting Investments by Canadian Pension Plans in Private Equity, Infrastructure and Real Estate in Canada, the USA and Europe," 2016 CTF Annual Conference draft paper under s. 149(1)(o.2)(iii), s. 149(1)(o.2)(ii) and MLI, Art. 7.