The patriotic push toward Canadian self-reliance amid U.S. tariffs and threats was an easy sell when it came to homegrown goods and services – but experts say that for that sentiment to spill over to financial markets, the country will need to make domestic investing more appealing.
“It’s a noble objective,” says Colin Busby, director of policy engagement at the C.D. Howe Institute. “And I think a lot of the large institutional investors in Canada do see the social benefits from forms of domestic investment.
“(But) it’s incumbent on us to resolve questions about how to make forms of investment opportunities on infrastructure more viable and open up those opportunities to pension plans,” he says.
How Canadian investment rules changed
Back in 1971, the federal government tried to mandate Canadians to invest domestically with the Foreign Property Rule, which initially placed a 10 per cent limit on the proportion of assets that Registered Pension Plans, Registered Retirement Savings Plans and Deferred Profit Sharing Plans could invest outside of Canada.
That limit doubled in 1990, amid globalization and investor pressure – and moved up to 25 per cent in 1994 and 30 per cent in 2001.
The goal of the FPR was to channel savings into Canadian investments and to provide cheaper capital for Canadian businesses and households, fueling growth at home. It was a similar idea to the Canadian content requirements applied to radio and television.
It meant pension plans could only invest up to 30 per cent abroad or face a monthly tax penalty – but it also led some institutions to design synthetic foreign exposure and find other ways to circumvent the FPR.
The rule was scrapped in 2005, and investors were free to put 100 per cent of their money wherever they wanted — and many did.
For instance, the Canada Pension Plan still holds $114 billion in Canadian assets – but that’s only 13 per cent. Nearly half its investments (47 per cent) are now in the U.S. The remaining 40 per cent is invested across other regions including Europe, Asia and Latin America.
The potential downside
Mandating that Canadians invest domestically has always been controversial – and prompts experts like Moshe Milevsky, professor of finance at York University to question whether patriotic investing is worth the potential price.
“Your lower returns on your RRSP, lower returns on your TFSA, lower returns on your pension funds, means you will have less money and your assets will grow at a lower rate,” he says.
Room to grow?
Canadian equity returns have historically lagged behind the U.S. or other jurisdictions, Milevsky adds, noting that if you take a look at the returns, the 10-year and five-year returns on the sub asset classes of the Canada Pension Plan, Canadian equity isn’t a strong category.
But while some argue this means the move to invest outside of Canada paid off, others question whether Canada underperformed after the elimination of the FPR – or because it was scrapped.
And as Canada looks at ways to stand on its own amid an increasingly complicated relationship with its biggest trading partner, some experts say this could also provide an opportunity for growth.
For Canada to make domestic investing more appealing, Busby says, one area to explore could be creating more investment opportunities in airports, roads and utilities – and making sure projects can move forward without bureaucratic gridlock.
He points to Bill C-5, the One Canadian Economy Act, as a possible step forward. It aims to fast-track infrastructure projects and remove trade barriers between provinces.
Initial initiatives
Back in March 2024, 90 of Canada’s top business leaders wrote an open letter to then–Finance Minister Chrystia Freeland, warning that pension funds were barely investing at home — in fact, less than four per cent of their total assets were invested back in their home country.
This September, Canadian Prime Minister Mark Carney launched a Buy Canadian policy in response to U.S. President Donald Trump’s bold threat to make Canada America’s 51st state.
And in October, the federal government issued a public plea for pension funds to step up, calling on them to pour more money into Canadian infrastructure and projects to jumpstart the economy.
“In light of that direction, this really has to be taken to heart,” says Busby. “But there’s not a lot of options. They’re more content to look for what is a more conservative, stable form of return.”
