Order Fixing the Day on Which this Order is Made as the Day on Which Sections 342 to 348 of the Budget Implementation Act, 2018, No. 1, Come into Force: SI/2023-58

Canada Gazette, Part II, Volume 157, Number 21

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SI/2023-58 October 11, 2023

BUDGET IMPLEMENTATION ACT, 2018, NO. 1

Order Fixing the Day on Which this Order is Made as the Day on Which Sections 342 to 348 of the Budget Implementation Act, 2018, No. 1, Come into Force

P.C. 2023-906 September 25, 2023

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, under section 350 of the Budget Implementation Act, 2018, No. 1, chapter 12 of the Statutes of Canada, 2018, fixes the day on which this Order is made as the day on which sections 342 to 348 of that Act come into force.

EXPLANATORY NOTE

(This note is not part of the Order.)

Proposal

This Order fixes the day on which sections 342 to 348 of the Budget Implementation Act, 2018, No. 1, come into force as the day on which this Order is made.

Objective

The objective of this Order is to fix a date for the coming into force of legislative amendments to the Insurance Companies Act (the Act) that (1) create a new category of permitted investment in “permitted infrastructure entities” (PIEs) by federally regulated life insurance companies, fraternal benefit societies, and insurance holding companies (life and health insurance entities); and (2) create new regulation-making authorities for the Governor in Council to prescribe the terms and conditions that are necessary to implement this new permission.

Background

Framework

The Act has traditionally provided broad flexibility for life and health insurance entities to engage in financial services activities — either in-house or through investments in other entities — but has restricted their ability to engage in non-financial commercial activities. This includes a general prohibition (subject to some exceptions) on the acquisition of substantial or controlling equity investments (e.g. 10% or more of voting shares) in commercial entities that own or operate public infrastructure assets. This general prohibition is, however, subject to a number of exceptions (e.g. “temporary investment” and “specialized financing”) that allow life and health insurance entities to acquire and hold substantial or controlling equity investments in almost any type of commercial entities, but only on a temporary basis (e.g. two or thirteen years).

The separation between financial and commercial activities is a long-standing feature of the federal financial sector framework. It stems from objectives that are both prudential (e.g. to ensure that federally regulated financial institutions remain primarily engaged in their core area of expertise) and policy-driven (e.g. to prevent federally regulated financial institutions from using their size to acquire market dominance over certain commercial segments).

Over time, targeted flexibility has been incorporated into the federal financial sector framework to allow federally regulated financial institutions — including life and health insurance entities — to engage in certain non-financial commercial activities (e.g. ability to invest in real property and to provide certain information processing services). This seeks to accommodate the changing needs of financial institutions and to enable them to adapt to an evolving business environment.

Asset liability management

Life and health insurance entities generally collect premiums in return for protecting individuals and their families from life and health risks. Because of the long-term nature of the risks insured for certain types of insurance products (e.g. annuity and long-term disability products), a significant length of time separates the receipt of premiums by the life and health insurance entity from the payment of claims to beneficiaries.

To ensure they have enough assets and liquidity to pay future insurance claims, life and health insurance entities use their revenues from premiums to buy various types of assets, including bonds, stocks and real estate. Life and health insurance entities manage their portfolio of assets through the discipline known as Asset Liability Management (ALM) with the objective of aligning the proceeds from invested assets with the expected future policy claims they are contractually obligated to pay.

Infrastructure gap

There are many studies about Canada’s infrastructure gap but estimates for the size of the gap vary over a relatively wide range. Despite these quantitative debates, there is consensus that Canada faces a broad-based infrastructure gap, which is limiting Canada’s economic growth and Canadians’ quality of life, and that significant investments are needed to address it. According to the G20’s Global Infrastructure Hub, Canada’s infrastructure needs are the largest in rail transportation, telecommunications, airports, and water infrastructures. The Global Infrastructure Hub also indicates that Canada’s additional future infrastructure priorities will include seniors’ health care, rural broadband and clean transit and energy infrastructure.

The Government of Canada’s flagship program to tackle the infrastructure gap is the Investing in Canada Plan with infrastructure funding of $180 billion over 12 years. As part of the plan, the Government established the Canada Infrastructure Bank (CIB) with the mandate to attract private and institutional investment in revenue generating infrastructure in the public interest. Budget 2022 broadened the CIB’s mandate to invest in private sector-led infrastructure projects that accelerate Canada’s transition to a low-carbon economy, and Budget 2023 positioned the CIB as the government’s primary financing tool for supporting clean electricity projects. The Government also announced it would provide permanent federal public transit funding beginning in 2026–2027.

In addition, fiscal constraints on governments at all levels have increased the interest in exploring private sector investment and alternative ownership options and financing mechanisms to increase overall investments in infrastructure.

Changes to the framework

Public infrastructure assets are particularly useful from an ALM perspective because they are typically long-term, relatively high yielding, and with a predictable cash flow. Investments in this type of asset were severely constrained under the Act but amendments were made to the Act through the Budget Implementation Act, 2018, No. 1 to permit life and health insurance entities to make long-term and predictable investments in public infrastructure. The Budget Implementation Act, 2018, No. 1 received royal assent on June 21, 2018.

Implications

The Order will bring into force amendments to the Act that

A new regulatory framework has been developed to prescribe the terms and conditions that are necessary to implement this new permission. The Investments in Permitted Infrastructure Entities Regulations (the Regulations) come into force at the same time as this Order.

The overarching policy objective of the new permission is to make life and health insurance entities more resilient financially by improving their ability to match their long-term liabilities with long-term equity investments in public infrastructure projects that generate predictable returns. Another key objective of the new permission is to support investments in public infrastructure in Canada to help tackle the infrastructure gap and encourage economic growth.

The Order only applies to life and health insurance entities incorporated under the Act. Life and health insurance entities that are incorporated under a provincial statute are subject to province-specific regulatory regimes.

Canada’s international trade agreement obligations focus on ensuring non-discriminatory treatment between Canadian and foreign financial institutions. This Order applies equally to Canadian-controlled life and health insurance entities as well as to life and health insurance entities that are subsidiaries of foreign companies, and as such, is in accordance with Canada’s international trade agreement obligations.

The Office of the Superintendent of Financial Institutions is the prudential regulator of federally regulated life and health insurance entities and administers the prudential regulatory framework that applies to them, including through the Act and the Regulations.

It is the responsibility of the life and health insurance entities to ensure that their investments comply with the various rules of the investment regime in the Act.

Consultation

The amendments to the Insurance Companies Act were introduced in response to a request from federally regulated life insurance companies and the Canadian Life and Health Insurance Association in the context of the periodical review of the financial sector statutes (the Bank Act, the Insurance Companies Act, and the Trust and Loan Companies Act).

This sectoral review was conducted by the Department of Finance from 2016 to 2018 and was the subject of two public consultation papers.footnote 1 As part of these consultations, the industry identified the provision of increased flexibility to make long-term equity investments in infrastructure as their top priority.

The terms and conditions applicable to this new permission, which are set through the Regulations, were also the subject of extensive consultations with the industry. The draft regulations were prepublished in the Canada Gazette for public comments on February 11, 2023. The only comments received were from the Canadian Life and Health Insurance Association, which expressed its support for the draft regulations and encouraged the government to move forward with them as soon as possible.

Contact

Manuel Dussault
Acting Director General
Financial Institutions Division
Financial Sector Policy Branch
Department of Finance Canada
90 Elgin Street
Ottawa, Ontario
K1A 0G5
Telephone: 613‑369‑3912
Email: Manuel.Dussault@fin.gc.ca