Some four decades ago, parliamentarians voted to restrict pension funds’ ability to borrow money without losing their tax-exempt status, though their reasoning has been lost to time.

“These rules have been around forever, but . . . their intended purpose [remains obscure],” said Matias Milet, a partner at Osler, Hoskin and Harcourt LLP, during a presentation at the 2021 Global Investment Conference. “When asked to suspend the government’s borrowing restrictions during the pandemic, the government and [Canada Revenue Agency] officials had to ask themselves, ‘Why do we have these rules?’”

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Though borrowing may be forbidden in most circumstances, there are exceptions. In general, unsecured short-term loans of less than 90 days are acceptable and mortgages for certain real property investments — ones offering pensions rental income streams — are considered to be within the existing rules. But when it comes to some property developments, like condominiums that are to be sold off after construction, pension plans may find themselves — often unwittingly — in breach. There may even be uncertainty regarding some widely used capital markets practices.

Milet noted that when a pension plan enters into transactions where it receives cash with an obligation to repay a similar amount in some cases, it has to assess the risk of being seen as borrowing. There are very good arguments to say that many such transactions aren’t borrowings, he added, but there may be circumstances where reasonable people can disagree.

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These restrictions may be changing, as the government is considering modifying the rules.

While the idea that the reasoning behind a key policy decision could be lost to history may sound perplexing, Milet pointed out that elected officials rarely get involved in considering all the details around the potential various applications of the bills they pass into law. Bureaucrats do — though they are less likely to have their words recorded than parliamentarians.

As for why there’s some uncertainty over the scope and meaning of the pension borrowing restrictions, Milet referred to the philosopher who read a sign outside a park that read: ‘No vehicles allowed in this park.’ While cars would clearly be prohibited, he questioned whether it applied to bicycles. “There’s [often] room for interpretation [over the meaning of statutory rules]. It is where the battleground is.”

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