With a new session of Parliament now underway, questions remain about whether the governing Liberals — now reduced to a minority — will act on a recommendation that could increase RRSP contribution room for Canadians who make green investments.
The government-appointed Expert Panel on Sustainable Finance (EPSF), assembled in April 2018, delivered its final report in June, which made numerous recommendations aimed at moving the country toward a low-carbon economy. One of those recommendations was to increase contribution room and create a “super tax deduction” for “climate-conscious” investments held in RRSPs.
The EPSF’s report calls for “taxable income deductions greater than 100% on eligible contributions,” in addition to “an extended fixed-dollar contribution limit available only for eligible investments.” The question is: will this recommendation be implemented now that the Liberals have been returned to power?
Elliot Hughes, senior advisor with Ottawa-based Summa Strategies Canada Inc., says the recommendations made in the report are “very much on brand” with the Liberals’ priorities.
“My view is that [the report] was well received, and you will see movement on it in the coming months and years,” Hughes says. “[The recommendations] align very well with where the government wants to go with mixing the environment and the economy.”
Hughes, who previously worked as Finance Minister Bill Morneau’s deputy director of tax policy, says the federal government’s decision to return Morneau to the Department of Finance Canada and appoint Jonathan Wilkinson and Catherine McKenna, both environmentalists, to key cabinet roles bodes well for the panel’s proposals.
But, Hughes says, the Liberals may have some trouble selling the RRSP proposal to middle-class Canadians and, more important, the Opposition. Hughes says that only 2%-3% of Canadians max out their RRSP contributions every year — leaving only a “small percentage of very wealthy individuals” who would benefit from additional contribution room.
The Liberals campaigned on building a stronger middle class and even announced a new Ministry of Middle-Class Prosperity when the new cabinet was unveiled in November. Hughes says government communications regarding a super tax deduction would be “very important,” particularly if the Liberals need support from the New Democratic Party, which campaigned on a promise to introduce a wealth tax for residents whose fortunes exceed $20 million.
“How does this get framed as something that is good for the economy and good for the environment rather than something that is good for people who’ve run out of places to put their investment dollars?” Hughes asks. “It would need to be rebranded from a ‘super tax deduction’ — that is very easily spun into something that the NDP could sink their teeth into very nicely.”
If the proposal is implemented, says Dustyn Lanz, CEO of the Responsible Investment Association, the retail market for responsible investing (RI) would “enter a rapid growth phase like we’ve never seen before.”
Adds Lanz: “We would see more RI products coming to market, and [financial] advisors would need to gain more knowledge and a better understanding of responsible investments — or somebody else is going to come and take their lunch.”
Lanz says a tax incentive to buy units in RI funds would lead to a spike in advisors recommending those investments to clients: “There’s a potential tax benefit for the clients. Why wouldn’t clients want access to it? Why wouldn’t advisors recommend it?”
One of the ideas behind this recommendation was to get advisors to “up their game” when it comes to RI, says Andy Chisholm, who was one of four members on the EPSF, and sits on the board of directors of Toronto-based Royal Bank of Canada and the advisory board of the Kingston, Ont.-based Institute for Sustainable Finance (ISF).
“We were very hopeful, in putting this recommendation forward, that it would spur actions on a number of fronts,” such as increasing investors’ and advisors’ awareness of RI, Chisholm says. He adds that he’s “hopeful” the recommendation will be implemented.
If the EPSF’s recommendation is implemented, which investments would qualify for the tax break?
“One of the problems now is that it’s difficult to figure out what’s a green investment,” says Ryan Riordan, associate professor of finance at the Kingston, Ont.-based Smith School of Business at Queen’s University and director of research at the ISF.
Riordan notes that there are several ways to create RI funds, such as using negative filters that screen out companies in, for example, the energy sector.
“A lot of these negative filters end up meaning you can’t invest in oil and gas [or] you can’t invest in basic materials, [which means] you can invest [only] in financial services and retail,” Riordan says. “What you really want to do is create a product or an asset class that [allows you to] still be broadly diversified across Canada.”
Such investment funds, Riordan says, can be constructed using positive filters that reward companies that make efforts to be environmentally friendly — even if they’re in fossil fuel-intensive sectors, such as energy — and incentivize companies with poor environmental practices to become greener.
“We have to have [an investment] product that can meet long-term investment and retirement goals while also being sustainable environmentally,” Riordan says. “I think the best way to do that is to pick the greenest of a set of, let’s say, bad options — the best of the worst options.”
As for whether this policy will be implemented, Hughes says, it’s “too early to tell.”
“The Finance Department is probably in the throes of getting their files in order for the budget,” Hughes says. “But what you have are the conditions for this report to be implemented, with a number of people in key positions who see the potential of some of the recommendations for the Canadian economy.”
An email from the Department of Finance Canada states that the federal government “is currently in the process of considering” the recommendations made in the EPSF’s report.