CANADIAN INCOME FUNDS got an assist from the Canadian government.
Canadian income funds are trusts formed in Canada that raise money in the capital markets and pool it for investment. The trusts are not subject to income taxes in Canada and when they invest across the border in a US business, the investments are structured so that little tax is owed in the United States either. The result is that companies that use this form of business organization return at least 27% more to investors.
A large percentage of the investors in income funds are individuals who invest through their retirement savings plan accounts.
Such accounts are subject to a 30% limit on the amount of foreign content they are allowed. Income funds that invest in US assets often get around this limit by making the investments through a Canadian subsidiary. As long as the subsidiary has a “substantial Canadian presence,” the fund can claim it holds Canadian property. A “substantial Canadian presence” usually requires having at least five full-time employees in Canada doing things other than making investments and at least C$250,000 a year in expenses tied to the services provided by the Canadian employees.
The Canadian government proposed dropping the 30% limit on foreign property in the latest budget. The change would make it easier for Canadian income funds to invest in US assets. The government said the change is needed to allow “broader international diversification opportunities for retirement investments.”