foreign limit lifted?
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Confusion dogs foreign content change
OB CARRICK
The minority status of the Liberal government means some uncertainty for last-minute RRSP investors who want to jump on a federal budget measure that gives them complete freedom to invest globally.
This week's budget eliminated the 30-per-cent foreign content limit for registered retirement savings plans and pensions, effective immediately. However, a federal finance department official said yesterday that the budget must be passed in the House of Commons for its provisions to become law.
This means some confusion for people who want to contribute to an RRSP before the March 1 deadline for the 2004 tax year -- do they take immediate advantage of the elimination of the foreign content limit and run the risk that the budget will be defeated in a parliamentary vote, or should they hold off? The stakes here are significant because prior to the budget there was a 1-per-cent monthly penalty on foreign content above the cap of 30 per cent.
Dwayne Dreger, vice-president of communications for AIM Funds, said people have to first think about whether they even need to have more than 30 per cent of their RRSPs in global markets.
"Simply because you're allowed to doesn't mean that it's necessarily a good idea." Mr. Dreger said.
Parliament does not sit next week, so the soonest a budget vote could take place would be the week starting March 7. Conservative Leader Stephen Harper has indicated he would support the budget, which lessens the drama somewhat.
Still, going beyond 30 per cent immediately means you'll run the theoretical risk of incurring penalty fees if the budget is voted down, Mr. Dreger said. A safer way to go beyond the 30-per-cent threshold would be to use clone funds, which are versions of foreign funds that are considered domestic content for RRSPs through their use of derivatives.
Clone funds, which charge a little more in fees than regular foreign funds, would be wound up when the budget becomes law and their assets moved to traditional foreign funds. For now, fund companies like AIM and Mackenzie are looking at lowering clone fund fees to the same level as other global funds, while at least one other company, Brandes Investment Partners, has already done this.
Fund companies have been struggling to adjust to the end of the foreign content limit, which had not been widely expected on Bay Street. "The industry was taken by pleasant surprise," said David Feather, president of Mackenzie Financial Services. "That's why we didn't have everything lined up and ready to go."
Financial advisers contacted yesterday said they've seen only a minimal level of interest from clients about the opportunity for unrestricted foreign investing.
"Most of my clients aren't that interested," said Anni Markmann, a financial adviser in Ste. Anne, Man. "They're under the 30-per-cent limit and, according to my recommendations, we weren't going to go much higher than that anyways because of currency risk."
Strength in the Canadian dollar has reduced returns from foreign funds over the past few years, especially those with all or part of their assets in U.S. stocks. This explains why Canadian stocks and equity funds have outperformed by a wide margin.
Ms. Markmann does have one client who works for a U.S. company and wants more freedom to buy his company's shares for his RRSP. "I phoned him up yesterday and he's just ecstatic," she said.
Cynthia Kett, a financial planner in Toronto, said the higher foreign content limit is moot for many of her high-net-worth clients because they have non-registered portfolios, where foreign content limits haven't applied. As well, Ms. Kett said she has boosted clients' foreign exposure by using Canadian equity funds with assets invested in global stocks.
"We've always been able to maximize foreign content to the extent that we wanted to," she said.
Foreign content rules in transition
Ottawa is changing the rules to give RRSP investors more freedom to invest globally.
30% EXISTING FOREIGN CONTENT LIMIT FOR RRSPS
NONE NEW LIMIT FOR FOREIGN CONTENT ON RRSPS
1% EXISTING MONTLY PENALTY FOR EXCEEDING THE FOREIGN CONTENT LIMIT FOR RRSPS
5% PERCENTAGE OF CANDIANS WITH 30% FOREIGN CONTENT IN THEIR RRSPS*
193% PERCENTAGE GAIN BY THE CAIRO STOCK EXCHANGE (ABOVE) OVER THE PAST 12 MONTHS
22 NUMBER OF GLOBAL INDEXES THAT OUTPERFORMED THE S&P/TSX OVER THE PAST 12 MONTHS
3% CANADA'S SHARE OF THE TOTAL GLOBAL EQUITY MARKET
TBA DATE WHEN PARLIAMENT VOTES BUDGETARY PROPOSALS INTO LAW (likely week of March 7-11)
OB CARRICK
The minority status of the Liberal government means some uncertainty for last-minute RRSP investors who want to jump on a federal budget measure that gives them complete freedom to invest globally.
This week's budget eliminated the 30-per-cent foreign content limit for registered retirement savings plans and pensions, effective immediately. However, a federal finance department official said yesterday that the budget must be passed in the House of Commons for its provisions to become law.
This means some confusion for people who want to contribute to an RRSP before the March 1 deadline for the 2004 tax year -- do they take immediate advantage of the elimination of the foreign content limit and run the risk that the budget will be defeated in a parliamentary vote, or should they hold off? The stakes here are significant because prior to the budget there was a 1-per-cent monthly penalty on foreign content above the cap of 30 per cent.
Dwayne Dreger, vice-president of communications for AIM Funds, said people have to first think about whether they even need to have more than 30 per cent of their RRSPs in global markets.
"Simply because you're allowed to doesn't mean that it's necessarily a good idea." Mr. Dreger said.
Parliament does not sit next week, so the soonest a budget vote could take place would be the week starting March 7. Conservative Leader Stephen Harper has indicated he would support the budget, which lessens the drama somewhat.
Still, going beyond 30 per cent immediately means you'll run the theoretical risk of incurring penalty fees if the budget is voted down, Mr. Dreger said. A safer way to go beyond the 30-per-cent threshold would be to use clone funds, which are versions of foreign funds that are considered domestic content for RRSPs through their use of derivatives.
Clone funds, which charge a little more in fees than regular foreign funds, would be wound up when the budget becomes law and their assets moved to traditional foreign funds. For now, fund companies like AIM and Mackenzie are looking at lowering clone fund fees to the same level as other global funds, while at least one other company, Brandes Investment Partners, has already done this.
Fund companies have been struggling to adjust to the end of the foreign content limit, which had not been widely expected on Bay Street. "The industry was taken by pleasant surprise," said David Feather, president of Mackenzie Financial Services. "That's why we didn't have everything lined up and ready to go."
Financial advisers contacted yesterday said they've seen only a minimal level of interest from clients about the opportunity for unrestricted foreign investing.
"Most of my clients aren't that interested," said Anni Markmann, a financial adviser in Ste. Anne, Man. "They're under the 30-per-cent limit and, according to my recommendations, we weren't going to go much higher than that anyways because of currency risk."
Strength in the Canadian dollar has reduced returns from foreign funds over the past few years, especially those with all or part of their assets in U.S. stocks. This explains why Canadian stocks and equity funds have outperformed by a wide margin.
Ms. Markmann does have one client who works for a U.S. company and wants more freedom to buy his company's shares for his RRSP. "I phoned him up yesterday and he's just ecstatic," she said.
Cynthia Kett, a financial planner in Toronto, said the higher foreign content limit is moot for many of her high-net-worth clients because they have non-registered portfolios, where foreign content limits haven't applied. As well, Ms. Kett said she has boosted clients' foreign exposure by using Canadian equity funds with assets invested in global stocks.
"We've always been able to maximize foreign content to the extent that we wanted to," she said.
Foreign content rules in transition
Ottawa is changing the rules to give RRSP investors more freedom to invest globally.
30% EXISTING FOREIGN CONTENT LIMIT FOR RRSPS
NONE NEW LIMIT FOR FOREIGN CONTENT ON RRSPS
1% EXISTING MONTLY PENALTY FOR EXCEEDING THE FOREIGN CONTENT LIMIT FOR RRSPS
5% PERCENTAGE OF CANDIANS WITH 30% FOREIGN CONTENT IN THEIR RRSPS*
193% PERCENTAGE GAIN BY THE CAIRO STOCK EXCHANGE (ABOVE) OVER THE PAST 12 MONTHS
22 NUMBER OF GLOBAL INDEXES THAT OUTPERFORMED THE S&P/TSX OVER THE PAST 12 MONTHS
3% CANADA'S SHARE OF THE TOTAL GLOBAL EQUITY MARKET
TBA DATE WHEN PARLIAMENT VOTES BUDGETARY PROPOSALS INTO LAW (likely week of March 7-11)
