Pressure is mounting on the federal government to require pension funds to increase their investments in Canada.

“Increasing investments in Canada should be a national priority,” said a group of Canadian business executives in an open letter to finance ministers. Given the importance of pension savings, they “would support an effort by the Minister [of] Finance of Canada and the Provincial Ministers of Finance to amend the rules governing pension funds to encourage them to invest in Canada.” 

The government is considering options, and we might see some concrete measures in the upcoming federal budget.

Many have rightly noted that mandating pension funds invest more in Canada is a bad idea. Pension fund returns may drop as a result, threatening their sustainability. And there may be broader negative effects on Canada’s economy from allocating capital through non-market means. The risk of capital being misallocated is high.

While such critiques are important, there’s an even simpler argument against such mandates: they will almost surely fail. 

At best, increased pension investment would simply “crowd out” other investors. The overall total would be left largely unchanged. At worst, such mandates could actually lower investment in Canada, for reasons I’ll explain. And at the very least, it’s a policy idea that distracts from real reforms that might actually help.

Why would mandating increased domestic investments fail? For the simple reason that Canada is a small and open economy with freely mobile international capital flows. 

The supply of investment finance is, to use an economist’s jargon, highly elastic. Assets here and abroad are easily substituted for each other. Investors big and small can seek out the highest returns wherever they happen to be. 

This has the effect of pinning down the minimum rate of return that Canadian projects need to offer in order to be financed. If one can earn a ten percent return south of the border, after all, then to secure capital financing, a marginal project here must provide at least that high a return.

In such a world, mandating some investors (in this case, pension funds) increase their holdings of Canadian assets would simply displace other investors from holding the same. Mandates would, all else equal, lower the returns on marginal capital by increasing the overall supply. But lower returns would cause other investors to look elsewhere, offsetting the mandate’s effect. The result would simply be a change in who invests in Canada, without any change in the total amount of investment.

In a sense, it’s not the supply of capital that matters, but demand. Total investment is determined almost entirely by the availability of investment opportunities that pay, after tax, more than the alternatives abroad.

There is a worse possibility, though. By mandating pensions invest more, the government would signal a lack of confidence in Canadian businesses to secure financing on a competitive basis. Other large investors might also worry that their funds could be subject to similar regulations in the future. Policy uncertainty would rise from its already high level, as would risk premiums placed on Canadian investments. Were that to happen, total investment in Canada would fall—precisely the opposite outcome that mandate proponents wish to see.

None of this denies that Canada has an investment challenge. Total capital investment per worker is increasingly lagging behind the United States. 

But rather than mandating more investment by some, we should look at where policy itself discourages investment. Taxes are a particular problem. After all, when you tax something, you tend to get less of it. And various governments, federal and provincial alike, tax investment in Canada.

In a future Hub piece, I’ll have more to say on how federal tax reforms—particularly to the corporate income tax system—could help boost Canada’s economic growth and productivity. But a few important points are worth making here.

Today, the effective tax rate on new investments is roughly 14 percent. Some sectors are even higher, with effective tax rates over 20 percent in construction, retail trade, and wholesale trade, and tax rates nearly as high in services.

This matters. Recent work by former University of Calgary economist J.F. Wen, now with the International Monetary Fund, suggests that might have a significant negative effect on investment levels. And other research, this time by current University of Calgary economist Ken McKenzie, finds that such taxes may also lower wages earned by Canadian workers. (Lower investment causes lower labour demand, which causes lower wages.)

Taxes not only shrink the level of investment but also bias its financing.

Since interest payments on debt are tax deductible while dividends are not, businesses face a strong incentive to issue debt (rather than equity) to raise funds. The result: more corporate debt. If one wants to see more equity investments in Canada by large institutional funds, then eliminating debt bias in the tax system would be far better than enacting selective mandates.

In short, the government should reject calls to mandate that pensions invest more domestically. There are many reasons not to, but the simplest one is that they simply wouldn’t work.

While often referred to as the Online Harms Act, the Liberal government’s recently-introduced Bill C-63, if enacted, would go far beyond regulating harmful content on the internet. Among many other things, the bill proposes to make three significant amendments to the Criminal Code.

The first is to specifically define “hatred” under the Criminal Code, which currently includes no such definition. This amendment would define “hatred” as “the emotion that involves detestation or vilification and that is stronger than disdain or dislike,” subject to the exception that a statement will not be deemed hateful “solely because it discredits, humiliates, hurts or offends.” 

Meanwhile, the second amendment would significantly broaden the current categories of hate crime offences, to capture any offence under any act of Parliament that is motivated by hatred based on a prohibited ground of discrimination. Currently, the only substantive hate crimes in the Criminal Code consist of prohibitions on wilfully promoting or publicly inciting hatred. In theory, this new provision would turn any federal offence (not just those found in the Criminal Code) into a potential hate crime. Those who commit such offences would potentially be liable for life imprisonment. To say that this is a radical provision would be an understatement.

These provisions have already garnered significant criticism from across the political spectrum. However, Bill C-63’s proposed amendments to the Criminal Code don’t stop there. Perhaps the most significant—and problematic—amendment would allow individual Canadians (with the attorney general’s consent) to seek peace bonds against others whom they fear will commit a hate crime in the future. Under this provision, provincial court judges would be empowered to call these parties to appear before them to determine whether there are “reasonable grounds” to fear that the defendant will commit such an offence. 

When a judge ultimately decides that an individual is reasonably likely to commit a hate crime, their powers are far-reaching. Specifically, Bill C-63 allows judges to issue peace bonds against individuals in such cases for up to 12 months that may: require them to abstain from communicating with certain individuals or from consuming drugs and alcohol; place them under house arrest; or (on the application of the attorney general) order that they wear an electronic monitoring device such as an ankle bracelet. 

The inclusion of peace bonds (known more formally as “recognizances”) against future hate crimes is arguably Bill C-63’s most draconian provision—which says something in and of itself, considering the other provisions of the bill vying for that title. And yet, at the same time, Canadian lawyers and law students (even constitutionalist ones) may be at a loss to articulate precisely how this provision offends some of the most basic tenets of our legal and constitutional order. To this end, a refresher on the rarely cited but crucially applicable legal doctrine of prior restraints is long overdue.

In short, a prior restraint is a limitation on expression that doesn’t just target the ostensibly harmful effects of that expression but seeks to prevent such expression from taking place at all. This is a departure from the other numerous ways in which our law frequently limits expression: libel, defamation, sedition, and even the current prohibitions on willfully promoting or publicly inciting hatred are all intended to punish expression after it has occurred.

By necessity, prior restraints censor expressive content by turning agents of the state into the licensors of permissible expression. To wit, the evidence that judges will consider when deciding whether to issue the peace bonds envisioned by Bill C-63 will, invariably, include the allegedly hateful content that the individual in question is expected to express. It is by no means unreasonable to fear that certain expressive content will be presumed to cause harm even where such harm has not taken place, much less been proven on a balance of probabilities—the requisite mens rea or “guilty act” that our law requires to establish that a criminal offence has been committed. 

The doctrine of prior restraints has seldom been cited by the Supreme Court of Canada. Though the term is largely derived from American legal scholarship and case law, the doctrine itself is rooted in the British law on which Canada’s constitutional order is modelled. Justice Iacobucci recognized as much in his partial dissent in the Supreme Court’s 2000 ruling in Little Sisters Book and Art Emporium v. Canada, citing the 18th-century English jurist William Blackstone’s warning that “Every freeman has an undoubted right to lay what sentiments he pleases before the public: to forbid this, is to destroy the freedom of the press: but if he publishes what is improper, mischievous, or illegal, he must take the consequences of his own temerity.”

Although Justice Iacobucci did not go so far as Blackstone to conclude that prior restraints are “necessarily destructive” of freedom of the press or freedom of expression, his reasons ought to serve as an admonishment against the “inherent dangers” of prior restraints as “particularly severe restrictions on speech.” 

Should Bill C-63 become law, the legislation will inevitably be challenged under the Canadian Charter of Rights and Freedoms. The doctrine of prior restraints ought to drive the assessment of any peace bond provisions under Section 1 of the Charter, which only allows for limitations on Charter rights and freedoms if they can be “demonstrably justified in a free and democratic society.” It is doubtful that such a profound limitation on a guarantee as important as freedom of expression can survive constitutional scrutiny under this standard.