July 9, 2019
Canadian pension funds should “conduct a careful assessment of their standing” in the wake of proposed U.S. Department of the Treasury regulations that clarify the exemption from U.S. tax on real estate available to qualified foreign pension funds, Osler partner Paul Seraganian tells Benefits Canada. In his article, author Julius Melnitzer explains how in 2015, U.S. Congress enacted a section of the Internal Revenue Code of 1986 (the Code), “aiming to attract foreign capital” and offering “broad tax exemptions to foreign pension funds” that invest in U.S. real property, according to the article. Paul, Managing Partner of Osler’s New York office and a cross-border tax expert, explains why Canadian pensions funds might be welcoming this news and the major impact it will have on the economic landscape.
“This was a dramatic economic event that effectively reduced the tax on U.S. real estate from 35 per cent to zero, effectively removing the tax penalty previously associated with U.S. real estate as compared to other asset classes,” Paul tells Benefits Canada.
Paul says that while investing in U.S. real estate became more attractive as a result, the new regime came with issues too.
“Not only were the margins of who was in and who was out unclear, but the parts that were clear were too rigid and restrictive,” Paul tells Benefits Canada. “Much of the difficulty arose because the legislation was drafted with an eye on the structure of U.S. pension funds, whereas non-U.S. funds come in all shapes and sizes.”
Paul adds that there is more technical complexity with the new regime and explains what it means for Canadian pension funds.
“Now is the time for Canadian pension funds to conduct a careful reassessment of their standing under the rules and identify any structural or organization modifications that may be appropriate,” Paul says. “Funds that find they have intractable issues under the new rules should consider making these issues known to Treasury before the regulations are finalized.”
For more information, read Julius Melnitzer’s article “Canadian pension funds welcome proposed tax changes on U.S. real estate investments” on July 9, 2019, in Benefits Canada.