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Pension tax relief

Government releases draft pension and deferred salary leave plan regulations

Wednesday, August 05, 2020 @ 9:41 AM | By Elizabeth Boyd

Elizabeth Boyd %>
Elizabeth Boyd
As part of the government of Canada’s COVID-19 Economic Response Plan, on July 2 the Department of Finance Canada announced the release of proposed draft regulations that would amend the Income Tax Regulations (draft regulations) in order to assist sponsors of registered pension plans (RPPs) and deferred salary leave plans (DSLPs) during the COVID-19 pandemic, through the provision of temporary relief from certain requirements under the Income Tax Act.

The draft regulations address the following matters:

  • Adding stop-the-clock rules to the conditions applicable to DSLPs for the period of March 15, 2020, to April 30, 2021. The purpose of these rules is to ensure that DSLPs applicable to employees who return early from a leave or who defer the start of a leave during the specified period are not subject to premature termination and taxation. DSLPs allow employees to defer a portion of their salaries, while actively employed, to fund a leave of absence. Tax is payable on the deferred salary only when paid during the leave period, as long as the DSLP continues to comply with the prescribed requirements
  • Providing time-limited relief from the restrictions that prohibit an RPP from borrowing money for more than 90 days or as part of a series of loans and repayments. Specifically, the amendment would permit an RPP to borrow money, including by way of series of loans, after April 2020, provided the loan or series is repaid no later than April 30, 2021. Although, it is important to note that all other borrowing restrictions, including a prohibition on using RPP assets as security for a loan (other than in connection with certain transactions involving real estate), will remain in effect.
  • Extending the deadline for decisions to retroactively credit pensionable service under a defined benefit plan or to make catch-up contributions to money purchase accounts in an RPP.
  • Permitting catch-up contributions to money-purchase accounts in an RPP to be made in 2021 to the extent that 2020 required contributions are reduced. These catch-up contributions may be made from Jan. 1, 2021, to April 30, 2021, and can be applied to the plan member’s 2020 pension adjustment (PA) calculation. PAs in a year reduce Registered Retirement Savings Plan (RRSP) contribution room for the following year and an RPP’s registration may be revoked, resulting in the RPP losing its tax-free status, if prescribed PA limits are exceeded.
  • For application to 2020, setting aside the 36-month employment condition in the definition “eligible period of reduced pay,” for the purpose of using prescribed compensation to determine benefit or contribution levels in an RPP. “Eligible periods of reduced pay” are periods in which plan members may accrue benefits or receive or make contributions based on their regular salary although that salary has been temporarily suspended or reduced. The purpose of this amendment is to permit RPPs to give more plan members, including newer employees, the opportunity to participate in their employer’s RPP, as if they were earning full salary throughout 2020.
  • Allowing wage rollback periods in 2020 to qualify as an eligible period of reduced pay for prescribed compensation purposes under an RPP. This change will ensure that plan members who experience reduced wages in 2020 are able to earn pension benefits and receive contributions based on their regular rate of pay.

The temporary changes to the DSLP rules respond to concerns that employees who are essential workers for purposes of the response to the COVID-19 pandemic, such as health-care workers, were being required to postpone leaves under DSLPs or return to work ahead of schedule, although the changes are not limited to essential workers.

In some cases, without the proposed relief, delaying the start of a leave or returning early could contravene the requirements under Income Tax Regulation 6801(a) relating to DSLPs, resulting in adverse tax consequences to participants.

The proposed RPP changes, broadly speaking, appear designed to assist plan members, employers and plan administrators to cope with the economic impacts of the COVID-19 pandemic. In many cases, employees have experienced layoffs or salary reductions, and employers have suffered from significant revenue reductions, which can adversely affect the ability to make contributions.

Layoffs may also affect members’ ability to earn pensionable service. Relaxing borrowing restrictions could assist RPP administrators in managing cash flow that has been impacted by reductions in contributions and volatility in investment returns resulting from the pandemic.

The government’s announcement did not specify when the draft regulations would come into effect. However, in a July 10 announcement relating to the RPP changes, the Canada Revenue Agency (CRA) confirmed that plan members and administrators could rely on CRA’s long-standing practice of allowing taxpayers to act on proposed tax measures, on the assumption that the legislation will be enacted with respect to the draft regulations.

Elizabeth Boyd is a partner at Blakes. She is involved in all aspects of the taxation, design, implementation, administration and termination of pension, other employee benefit, stock option, share purchase, profit sharing and executive compensation arrangements, including compliance with tax, pension investment and other regulatory requirements.

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