Details of the controversial Ontario Retirement Pension Plan ("ORPP") were recently announced by Ontario Premier Kathleen Wynne. The proposed ORPP is intended to provide additional retirement income – beyond that of the Canadian Pension Plan ("CPP"), Old Age Security ("OAS"), and voluntary savings vehicles (i.e., RRSPs and TFSAs) – to approximately 3.5 million workers in Ontario who do not have a secure workplace pension. Here, we will outline some of the finer points of the ORPP that have come out of the most recent announcement.
Beginning in 2017, there will be a three-year phase-in to the ORPP for most Ontario employers (see Table 1 below). When fully implemented by 2021, employers and employees will each contribute 1.9% of an employee's annual earnings up to $90,000. This equates to a contribution of up to $1,710 by the employee and a matching contribution of up to $1,710 by the employer.
By comparison, employer and employee CPP contributions are currently each equal to 4.95% on up to $53,600 of an employee's annual earnings (with a basic exemption on the first $3,500 of earnings). This equates to an employee contribution of $2,479.95 and an equal employer matching contribution of $2,479.95.
Table 1 – Employer and Employee Contribution Rates
|Year||Type of Employer||Contribution Start Date||Contribution Rate – Year 1||Contribution Rate – Year 2||Contribution Rate – Year 3|
|2017||Employers with more than 500 employees without a registered workplace pension plan||January 1, 2017||0.8%||1.6%||1.9%|
|2018||Employers with between 50 and 499 employees without a registered workplace pension plan||January 1, 2018||0.8%||1.6%||1.9%|
|2019||Employers with fewer than 50 workers without a registered workplace pension plan||January 1, 2019||0.8%||1.6%||1.9%|
|2020||Employers with a registered workplace pension plan that does not meet the ORPP's compatibility test or who have employees who are not members of a "comparable plan"||January 1, 2020||1.9%||1.9%||1.9%|
All Ontario employers without a workplace pension plan or a
"comparable plan" will be required to enroll in the ORPP.
All employees will have to participate if their employer
A "comparable plan" is defined by the province as a registered pension plan subject to federal and provincial regulation. This includes certain Defined Benefit ("DB") pension plans and Defined Contribution ("DC") plans that meet the following minimum thresholds:
- For a DB plan, the benefits under the plan must equal or exceed the benefits being offered through the ORPP. In other words, comparable DB plans must provide a benefit accrual rate of no less than 0.5%;
- For a DC plan, it must have a minimum annual contribution rate equal to 8% of an employee's annual income, of which the employer must contribute at least 4%;
The ORPP has also adapted its "comparable plan" criteria for hybrid, flat benefit and flat dollar plans.
Cost to Employers
Employers in Ontario will incur a direct cash outflow when the ORPP is fully implemented. Table 2 shows the anticipated costs for different employers.
Table 2 – Cost of the ORPP to an Employer
|Number of Employees||Estimated Before Tax Cash Outflow (Note 1)||Estimated After-Tax Cash Outflow (Note 2)||Estimated After-Tax Cash Outflow (Note 3)|
Note 1 – Assumes that 50% of the employees earn a salary between $30,000 and $70,000 with an average salary being $50,000; 40% of the employees earn a salary between $70,001 and $90,000 with an average salary being $80,000; and 10% of the employees earn a salary greater than $90,000.
Note 2 – Assumes that the employer is a Canadian-controlled private corporation with taxable income of $500,000 or less and will be eligible for the low corporate tax rate.
Note 3 – Assumes that the employer will not be eligible for the low corporate tax rate.
Retirement Benefits under the ORPP
If approved, ORPP beneficiaries who are 65 or older would start drawing on the ORPP in 2022. The amount of money an ORPP beneficiary receives would depend on the following:
- How many years the employee contributed to the ORPP;
- How much the employee contributed to the ORPP; and
- The employee's salary throughout those years.
The ORPP would offer inflation-protected benefits to provide a predictable source of retirement income for life.
The table below shows the retirement benefits an individual contributor would receive from the ORPP if he or she contributes for 40 years.
Table 3 – ORPP Retirement Benefits in Today's Dollars for an Employee Contributing for 40 Years
|Contributor||Salary||Personal Contributions||Employer Contributions||Retirement Benefits|
|Employee #1||$45,000||$2.16/day||$2.16/day||$6,410/year, for life|
|Employee #2||$70,000||$3.46/day||$3.46/day||$9,970/year, for life|
|Employee #3||$90,000||$4.50/day||$4.50/day||$12,815/year, for life|
As proposed, a self-employed Ontario worker would not be covered under the ORPP because the federal Income Tax Act ("Act") currently does not allow self-employed individuals to participate in a registered pension plan. The province has requested that the Act be amended. If the Act is not amended, the Ontario government has stated that it has a commitment to exploring other options such that self-employed individuals will be eligible to participate in the ORPP.
Criticism of the ORPP
Since its proposal in the 2014 Ontario Budget, the ORPP has met criticism. While proponents believe the ORPP could help millions of Ontarians save for their retirement years, critics consider it to be "forced" savings, held and invested by a bureaucratic entity.
An anonymous contributor to an online article published by the Toronto Sun* demonstrated that individuals would be better off if the amount of ORPP contributions were instead put into a Tax-Free Savings Account. The study suggests that, on retirement, the individual will have earned a greater return on investment and will, therefore, have a larger retirement pool of funds. In addition, the retirement benefits would be tax-free, would not claw back the individual's OAS benefits and, when the individual dies, the balance in the retirement pool could be left to a beneficiary, unlike the ORPP.
Opposition forces have blasted the Ontario government for overestimating the need for a provincial pension plan. Some have argued that Ontarians are currently saving enough for retirement on their own and the ORPP would take money from those who need it most while they are in their working years and giving it back to them in their retirement years when, arguably, they need it the least.
Critics of the ORPP have also cited the plan as an additional payroll tax on employers, especially small businesses. Employers could become discouraged from investing and creating new jobs in Ontario given the additional cost to do so once the ORPP contributions commence. Other employers, who can shift their human capital resources, could move jobs out of Ontario to other lower tax provinces or countries if the ORPP has a significant impact on their bottom line.
The ORPP will require complex administration; running it could prove costly. Putting aside the current animosity between the Ontario Premier and the Prime Minister, many argue that the Ontario government should try to find a way to "piggyback" off the CPP. By using the CPP's well-established infrastructure, the cost structure – of this smaller provincial plan that mirrors the existing and significantly larger federal plan – could be made more efficient. While there are currently no plans to do so, expanding the CPP to replace the proposed ORPP may still be an option depending on the outcome of the upcoming federal election.
What to Do Next
Employers in Ontario should start planning for the ORPP by determining when they must begin making and withholding ORPP contributions (that is if they fall into a category of being required to do so). In early 2016, the ORPP Administration Corporation will be contacting all Ontario employers to confirm whether they have an existing workplace pension plan and, if so, will it meet the qualifications of a "comparable plan". Finally, employers should evaluate the cost/benefit of implementing their own workplace "comparable plan" (or amending an existing workplace pension plan if it is not a "comparable plan") versus participation in the ORPP.
There are still additional details concerning the ORPP that will be released prior to its implementation in 2017.
If you would like more information about the ORPP and how it may affect you and/or your business, please contact Aaron Schechter or one of our tax professionals. If you are a small or medium-sized business owner and would like to learn more about how your benefits plan may be affected, please contact our HR Consulting Services Leader, Susan Hodkinson at 416.963.7172.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.