On Monday, April 19, 2021, the federal government tabled its 2021 Budget, A Recovery Plan for Jobs, Growth, and Resilience (the "Budget"). Stikeman Elliott LLP has previously published its commentary on the Budget's principal tax proposals, available here.
Employers participating in, and administrators of, defined contribution ("DC") pension plans or pension plans that contain a DC component will be interested in one of the Budget's less heralded announcements: proposed relief under the Income Tax Act (Canada) (the "Act") for corrections to historical under- and over-contributions.
Employer under- and over-contributions to DC pension plans occur with some regularity, including both in respect of a single plan member (that is, a one-off mistake) or on a group basis (that is, a systemic issue affecting multiple members). The reasons are generally varied but are usually the result of inadvertent errors, system and software issues, or new regulatory guidance or rulings by decision-makers that purport to have retroactive effect. At the same time, the Act does not currently contemplate these errors or provide a tailored means to remedy them.
As many employers and administrators will know, annual contributions to a DC plan (what the Act calls a "money purchase" plan) are limited to the lesser of 18% of the member's "compensation" from the employer in the year and a fixed dollar amount (revised annually) called the "money purchase limit" (the "Annual Contribution Maximum").1 Contributions to a DC plan in a given year give rise to a "pension adjustment", which is reported on the plan member's T4 slip. The pension adjustment generally reduces the member's registered retirement savings plan (RRSP) contribution room dollar for dollar. Unlike RRSP contribution room, however, the unused portion of the Annual Contribution Maximum does not carry over to future years under a DC pension plan.
In the case of under-contributions, the Act does not currently provide relief when the under-contribution is discovered only in a subsequent year. In this case, an employer's options to make a member whole are generally limited to amending the plan to provide for time-limited catch-up contributions (which in turn will count towards the Annual Contribution Maximum in the year(s) made) or paying the member outside the plan. Moreover, where the under-contributions are discovered only after the member's termination of employment and plan membership, the employer's sole option would generally be limited to a payment outside of the plan, since the Act does not permit continued contributions outside an employment relationship.
In the case of over-contributions, absent a plan amendment or regulatory relief, such amounts may be considered impermissible under the Income Tax Regulations on the basis that they were not made in accordance with the plan as registered. In this case, the pension standards legislation of the applicable jurisdiction may permit the employer or member to obtain a refund, often with the need for the pension regulator's prior consent. Under the Act as currently worded, a return of an over-contribution does not automatically restore the affected member's RRSP room. In order to do so, retroactive amendments to the member's historical T4 slip(s) are generally necessary, which can be a cumbersome process.
The Budget has proposed "more flexibility" for administrators to correct both under- and over-contributions.
In the case of under-contributions, the Budget has proposed that the Act will be amended to allow additional contributions to a member's DC account to compensate the member for an under-contribution error in any of the preceding five years, subject to an as yet unspecified dollar limit. Additional contributions to correct for under-contributions would reduce the employee's RRSP contribution room for the taxation year following the year in which a corrective contribution is made. To the extent this results in negative RRSP room, it would affect the member's contributions in future years.
In the case of over-contributions, the Budget has proposed to allow administrators to correct for pension over-contribution errors through an employer or member refund. Similar to under-contributions, the relief would be available only to over-contributions made in the five years preceding the year of the refund. In this case, the administrator would be required to file a prescribed form with the Canada Revenue Agency in respect of each affected plan member (rather than amend historical T4 slips). Refunds of over-contributions would generally restore the employee's RRSP contribution room for the taxation year in which the refund is made. The Budget proposals do not by themselves affect the requirements of federal or provincial pension standards legislation. Corresponding amendments to those statutes (and/or regulatory policies) would also be required in order to simplify the over-contribution refund process where applications to the applicable pension regulator for consent to a refund of over-contributions are currently required.
If enacted into law as proposed in the Budget, these simplified measures would apply to corrections made in 2021 and later years.
The Budget proposals were made at a high-level only. Future legislative amendments, which were not included in draft in the Budget, will be necessary to effect these changes. Employers and administrators should welcome the proposed relief in concept, although many of the details will be contained in future legislation which has, as of writing, not been released.
1 For 2021, the money purchase limit is $29,210.
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