Canada: Tax Law Update And Highlights Of Pension Law Update Breakfast Seminar On April 29, 2008


As discussed in a previous communication, Bill C-10 proposes new tax rules for investments in "non-resident trusts" (NRT Rules), effective retroactively to January 1, 2007. If Bill C-10 were enacted in its current form, investments by tax-exempt Canadian registered pension plans (or by master trusts in which such pension plans pool their investments) in a non-exempt non-resident trust could, in some circumstances, result in significant tax liabilities to the pension plan (or master trust). The NRT Rules, therefore, would represent a serious issue for Canadian pension plans which invest outside of Canada. The Canadian pension community lobbied against the application of the NRT Rules to registered pension plans. Bill C-10 was passed by the House of Commons last fall but was stalled in the Senate, in part as a result of the concerns raised by the Canadian pension community. The Senate referred the NRT Rules back to the Standing Committee on Banking, Trade and Commerce for further study. The NRT Rules as they affect pension plans were addressed by the Standing Committee in its meeting held on April 30, 2008. The Minister of Finance and a senior official of the Department of Finance, among others, responded to the questions of the Committee. Based on our review of the transcripts of the meeting, relieving amendments will be made to the proposed NRT Rules. While the exact nature of these amendments was not disclosed, the intent appears to be that registered pension plans would be exempt from the NRT Rules. Pending these amendments being made, the pension community could rely on a comfort letter being issued by the Department of Finance. With respect to RRSPs and RRIFs, however, a less complete form of protection from the NRT Rules is proposed, although it appears that some changes will be made which will alleviate at least some concerns. In sum, it seems that the concerns of the pension community have been heard, although a review of the actual amendments will be necessary before concluding that all of the issues have been fully dealt with.


Borden Ladner Gervais held a client breakfast seminar on April 29, 2008, providing a legal update on defined contribution pension plans and other retirement savings plans. The seminar covered a broad range of topics including an update on the Guidelines for Capital Accumulation Plans (CAP Guidelines), potential issues relating to charging expenses in capital accumulation plans (CAPs), delegation and most negotiated provisions in service contracts, investment issues, recent tax developments and litigation risks.

Here are some of the highlights:

  • The CAP Guidelines are under review. The Joint Forum of Financial Market Regulators circulated a survey aimed at plan sponsors and service providers as part of such review process.

  • In the U.S., there have been quite a number of recent court cases against both plan sponsors and service providers, alleging breach of fiduciary duties with respect to the treatment of fees and expenses in 401(K) plans. The claims include allegations of unreasonable fees and expenses, non-disclosure of fees or revenue-sharing arrangements and self-dealing. Similar types of actions could be coming to Canada with respect to CAPs. The key to limiting potential liability will be proper disclosure to CAP members.

  • Primary exposure to litigation in respect of CAPs mostly relates to incorrect/misleading disclosures to plan members, lack of investment diversity, imprudent choice of service providers, advice to plan participants and administrative errors. Unlike the U.S., there is no "safe harbour" defence in Canada.

  • As a matter of good governance (as indicated in the CAP Guidelines and by regulators), the relationship between a CAP sponsor and a service provider should be properly documented. The obligations of a CAP sponsor in delegating the administration of a CAP apply to delegation to arm's length service providers and delegation to service providers who are affiliates. Compromise between a CAP sponsor and a service provider is possible even in relation to the most negotiated provisions in a service contract.

  • A CAP sponsor should ensure that there is a balance of investment choices (not too few options which will restrict an investor's choice and not too many options which may lead to investor confusion and apathy). There should be a real choice between different options and there should be options suitable for each stage of a career.

  • There are 3 important recent CAP-related tax developments:

  • tax-free savings accounts (TFSA) which complement existing employer-sponsored defined contribution arrangements and facilitate additional employee savings through payroll deductions;

  • non-resident trust rules (NRT Rules) which were proposed in Bill C-10 to be effective retroactively to January 1, 2007; and

  • the Fifth Protocol to Canada-U.S. Treaty which permits deductions for Canadian or U.S. tax purposes (as the case may be) of certain contributions to a U.S. 401(K) plan or Canadian registered pension plan or group registered retirement savings plan in certain circumstances.

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