The 2024 Federal Budget (“Budget 2024’) invited stakeholders to provide suggestions on improving the clarity and coherence of the qualified investments regime for seven types of registered plans: Registered Retirement Savings Plans (“RRSPs”), Registered Retirement Income Funds (“RRIFs”), Tax-Free Savings Accounts (“TFSAs”), Registered Education Savings Plans (“RESPs”), Registered Disability Savings Plans (“RDSPs”), First Home Savings Accounts (“FHSAs”), and Deferred Profit Sharing Plans (“DPSPs”). The qualified investments regime governs what these plans can invest in. A broad range of assets are qualified investments, including mutual funds, publicly-traded securities, government and corporate bonds, and guaranteed investment certificates.
The consultation process initiated by Budget 2024 focused on the following questions:
- Should the rules relating to investments in small businesses be harmonized to apply consistently to all registered savings plans, and if so, how?
- Should annuities that are qualified investments only for RRSPs, RRIFs, and RDSPs continue to be qualified investments?
- Are the conditions that certain pooled investment products must meet to be a qualified investment appropriate, including the ongoing value of maintaining a formal registration process for registered investments?
- Should qualified investment rules promote an increase in Canadian-based investments, and if so, how?
- Are crypto-backed assets appropriate as qualified investments for registered savings plans?
Based on feedback received through the consultation process, the 2025 Federal Budget (“Budget 2025”) proposes certain amendments to simplify the qualified investment rules. Notably, some of the questions raised for discussion in the consultation, such as the appropriateness of crypto-backed assets for registered savings plans, are not reflected in the proposed changes. At this time, there is no indication that the Department of Finance is continuing to consider any submissions from the consultation. Lastly, Budget 2025 does not include a proposal to reduce the mandatory minimum RRIF withdrawal.
Small Business Investments
There are two sets of rules for registered plan investments in small businesses:
1. the first set of rules applies to RRSPs, RRIFs, TFSAs, RESPs, and FHSAs and provides for investments in what are known as specified small business corporations, venture capital corporations, and specified cooperative corporations; and
2. the second set of rules applies only to RRSPs, RRIFs, RESPs, and DPSPs and provides for investments in eligible corporations, small business investment limited partnerships, and small business investment trusts.
Neither set of rules applies to RDSPs.
There is duplication and complexity within these rules, which leads to uncertainty as to the specific rules that are intended to apply in a particular case and has resulted in some investment categories being underutilized.
Budget 2025 proposes to simplify the rules relating to registered plan investments in small businesses, while maintaining the ability of registered plans to make such investments. In particular, the more broadly applicable first set of rules would be maintained and extended to RDSPs, while the second set of rules would be repealed. Consequently:
- RDSPs would be permitted to acquire shares of specified small business corporations, venture capital corporations, and specified cooperative corporations; and
- shares of eligible corporations and interests in small business investment limited partnerships and small business investment trusts would no longer be qualified investments.
These amendments would apply as of January 1, 2027. Interests in small business investment limited partnerships and small business investment trusts that are acquired before 2027 under the current rules would continue to be qualified investments.
It is intended that shares of eligible corporations would continue to be qualified investments under the rules relating to specified small business corporations that would be maintained.
Registered Investment Regime
Registered investments are qualified investments for all registered plans. For a corporation or a trust to be a registered investment, it must be registered with the CRA.
Units of a mutual fund trust are qualified investments, but the mutual fund trust can also be a registered investment. In order for a trust or corporation that is not sufficiently widely held to qualify as a registered investment (e.g., a trust that does not have the 150 unitholders required to qualify as a mutual fund trust), the trust or corporation must hold only investments that would be qualified investments for the types of registered plans for which it is registered. Otherwise, the trust or corporation would be liable to pay a monthly tax of up to 1% of the acquisition-date fair market value of the non-qualified investment. Stakeholders have suggested that the registration process does not add sufficient value to justify its associated compliance and administration burdens.
Budget 2025 proposes to replace the registered investment regime with two new categories of qualified investments, which do not involve registration:
1. units of a trust that is subject to the requirements of National Instrument 81–102 published by the Canadian Securities Administrators (which regulates certain mutual funds and non-redeemable investment funds) (“NI 81-102”); and
2. units of a trust that is an investment fund (as defined in existing tax rules) managed by a registered investment fund manager as described in National Instrument 31–103 published by the Canadian Securities Administrators (“NI 31-103”).
NI 81-102 is one of the main national instruments governing investment funds under applicable Canadian securities laws. It generally applies to investment funds that are reporting issuers (such as mutual funds, liquid alternatives, exchange-traded funds, and non-redeemable investment funds). NI 81-102 also contains certain “fund-of-fund” investment rules that apply to investment funds that are not reporting issuers. It is possible that this first new category may not capture the full range of trusts that currently qualify as quasi-mutual fund trusts. For example, units of certain trusts that were offered by an offering memorandum under an applicable prospectus exemption may not fall within the new category. Additionally, the degree to which a trust may deviate from compliance with NI 81-102 before it will be considered not to be in “substantial compliance” with the requirements of NI 81-102 is yet to be determined.
With respect to the latter new category, NI 31-103 is one of the main national instruments governing registrations and registrant duties under applicable Canadian securities laws. To fall under this second new category of qualified investments, a trust must be an “investment fund”, as defined in subsection 251.2(1) of the Income Tax Act (Canada) (“Tax Act”). To qualify as an “investment fund” for these purposes, a trust must, among other things, at all times since its creation, have followed a “reasonable policy of investment diversification”, never have controlled a corporation, and abided by certain property holding requirements and limitations. It is possible that many quasi-mutual fund trusts may have, at least at some point in the past, not satisfied the statutory requirements to be an “investment fund” under the Tax Act. Such trusts would, therefore, appear to be precluded from ever falling within the scope of the second new category of qualified investments.
Presumably, most units or shares of funds that were registered investments would continue to qualify, either under existing rules or under one or both of the new categories of qualified investment trusts. However, given the challenges for some trusts to meet the “investment fund” definition for tax purposes, this assumption may not hold true in all cases. For fund managers that had been relying on the “registered investment” category, it would be prudent to undertake an immediate analysis of their fund’s continued eligibility for registered plans following the repeal of the registered investment regime.
The registered investment regime would be repealed as of January 1, 2027. The new qualified investment trust rules will take effect as of November 4th, 2025.
Other Changes
Budget 2025 also proposes several technical legislative amendments to simplify the qualified investment rules. Notably, the qualified investment rules for six types of registered plans (i.e., all plans except DPSPs) will be consolidated into one definition in the Tax Act. In addition, the list of qualified investments prescribed in the Income Tax Regulations will be updated and reorganized by asset class.
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