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A Made-in-Canada Plan: Pension and Benefit Highlights from the 2023 Federal Budget

April 04, 2023

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Justin Trudeau’s Liberal Government has released its seventh budget, Budget 2023. The Budget, titled A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future, was tabled by Deputy Prime Minister and Federal Finance Minister Chrystia Freeland on March 28, 2023 in the House of Commons.

This Sidebar highlights elements of Budget 2023 that will be of interest to employers, sponsors, and administrators of pension and benefits plans.

Important Changes to Retirement Compensation Arrangement Rules

Budget 2023 contains a welcome announcement for employers who provide supplemental pensions that are secured by a letter of credit or surety bond issued to a retirement compensation arrangement (RCA). Budget 2023 proposes to amend the Income Tax Act (ITA) to exempt letter of credit and surety bond fees from the refundable tax regime for RCAs that supplement registered pension plan (RPP) benefits. 

RCAs were introduced into the ITA during the 1980s to discourage employers from setting aside monies to fund unregistered retirement benefit arrangements, including supplemental pension plans. RCAs are now used to deliver a variety of post-employment arrangements, including severance and change-in-control agreements. The measures announced in Budget 2023 apply solely to RCAs established to secure pension benefits that supplement pensions provided under an RPP.

Under Part XI.3 of the ITA, a refundable tax is imposed at the rate of 50% on contributions to an RCA trust, as well as on all investment income earned by the RCA trust. The refundable tax is refunded to the RCA trust as benefits payable to former employees and their survivors or beneficiaries are paid from the RCA trust.  

To minimize the impact of the RCA refundable tax, many employers elect to pay post-retirement benefits directly from general revenues as they become due. To provide covered employees with assurance that the benefits will be paid, an employer may obtain and annually renew a letter of credit or surety bond issued by a financial institution to the RCA trust. The letter of credit or surety bond is typically triggered only if the employer defaults on its payment obligations or becomes insolvent. The tax advantage to this approach is that the 50% RCA refundable tax is limited to the fee or premium paid to the financial institution for the letter of credit or surety bond. An amount equivalent to the fee charged by the issuer is remitted by the employer to the Canada Revenue Agency each year as refundable tax. Since the refundable tax is only refunded to the RCA trust when a pension is paid from the RCA trust (rather than by the employer directly), refundable tax accounts will accumulate in respect of the annual fees incurred to renew the letter of credit or surety bond, with no practical mechanism for recovery.

Budget 2023 proposes to amend the ITA to exempt fees or premiums paid for the purposes of obtaining or renewing a letter of credit or a surety bond from the RCA refundable tax regime where the RCA is supplemental to an RPP. This change would apply to fees or premiums paid on or after Budget Day (March 28, 2023). 

Budget 2023 also proposes to amend the ITA to allow employers to request a refund of previously remitted refundable taxes paid in connection to fees or premiums for letters of credit or surety bonds for RCA trusts. Employers would be eligible for a refund of refundable tax equal to 50% of the supplemental pensions paid from corporate revenue starting on January 1, 2024, up to the amount of refundable tax previously remitted.

Further details regarding how to access refundable tax accounts in respect of RCAs established to supplement RPPs are expected in amendments to the ITA that have not yet been released.  

Additional ITA Measures applicable to Employers and Plan Sponsors

Budget 2023 proposes a number of additional amendments to the ITA that address disability savings plans (RDSPs) and registered education savings plans (RESPs). This will affect employer-sponsored RDSP and RESP arrangements:

  • RDSPs: RDSPs are designed to support the long-term financial security of a beneficiary who is eligible for the disability tax credit under the ITA. The RDSP rules provide that, where the contractual competence of an individual who is eighteen years of age or older is in doubt, the RDSP plan holder must be that individual’s guardian or legal representative as recognized under provincial or territorial law. To facilitate the opening of RDSP accounts, Budget 2023 proposes to extend certain temporary measures until December 31, 2026. The temporary measures (which are currently in effect) allow a parent, spouse, or common-law partner to open an RDSP and act as the plan holder on behalf of a beneficiary who does not have a legal representative and whose capacity to enter into an RDSP contract is in doubt. The temporary measures also broaden the definition of “qualifying family member” to include a brother or sister of the beneficiary who is 18 years of age or older.
  • RESPs: RESPs are designed to allow a beneficiary enrolled in an eligible post-secondary program to withdraw amounts up to an annual limit from an RESP to pay post-secondary education-related expenses. Budget 2023 proposes to amend the ITA to permit withdrawals of up to $8,000 (previously $5,000) in respect of the first thirteen consecutive weeks of enrollment for beneficiaries enrolled in full-time programs, and up to $4,000 (previously $2,500) per thirteen-week period for beneficiaries enrolled in part-time programs. Budget 2023 also proposes to allow divorced or separated parents to open joint RESPs for one or more of their children, or to move an existing joint RESP to another promoter. These changes are deemed to come into force on Budget Day.

Further amendments to the ITA are expected to be introduced, including previously announced measures related to RPPs, as modified to reflect consultations and deliberations that have occurred since their release. These measures include:

  • borrowing by defined benefit RPPs; and
  • fixing contribution errors in defined contribution (DC) RPPs.

For more information on these measures, please refer to our earlier Sidebars on proposed ITA amendments to address fixing DC contribution errors and Budget 2022, available here.

Changes to Federal Pension Legislation for Federally Regulated Pension Plans

Budget 2023 includes announcements that will specifically affect federally regulated RPPs, namely:

  • Proposed amendments to the Pension Benefits Standards Act, 1985 and the Pooled Registered Pension Plans Act: Budget 2023 reiterates the Federal Government’s commitment to amend the Pension Benefits Standards Act, 1985 and the Pooled Registered Pension Plans Act to improve retirement security for plan members and retirees through introducing a new framework for variable payment life annuities (VPLAs) and making technical housekeeping amendments. There is growing interest in VPLAs as DC plans mature in Canada and retiring DC plan members look for ways to ensure the sufficiency of retirement income for their lifetime. Once a VPLA framework is introduced, a pension plan may be amended to offer annuities payable for the member’s lifetime (with survivor benefits where applicable), adjusted for variations in investment return and the mortality experience of all VPLA annuitants under the plan.
  • New disclosure requirements regarding investment exposure to crypto-assets: Budget 2023 provides that the Office of the Superintendent of Financial Institutions (OSFI) will consult with federally regulated financial institutions, including RPP administrators, to develop guidelines for publicly disclosing their exposure to crypto-assets. The Federal Government also announced its intention to work with the provinces to discuss disclosure requirements addressing large pension plans’ exposure to crypto-assets, when administration and investment disclosure requirements are addressed through provincial pension laws.

Dental Care, Employment Insurance, and Employee Ownership Trusts

Budget 2023 included proposals relating to dental care, employment insurance (EI), and employee ownership trusts which may be of interest to employers:

  • Dental Care: Budget 2023 proposes to introduce legislation to support the implementation of the next stage in the new Canadian Dental Care Plan, which will provide dental care to uninsured Canadians with family incomes of less than $90,000. Importantly, this legislation would require dental coverage offered to employees, retirees, and other individuals to be reported on a T4 or T4A. The legislation is expected to clarify these reporting requirements, including who will have the obligation to report dental coverage provided to retirees on a T4A.
  • EI: The Federal Government signaled its support of the Employment Insurance Work-Sharing Program by earmarking over $5 million to assist Employment and Social Development Canada in its administration of this program, which is designed to preserve jobs during temporary economic downturns. No changes to the Employment Insurance Work-Sharing Program were introduced. Budget 2023 also announced that the Employment Insurance pilot project, which provides five additional weeks of EI benefits to seasonal workers, has been extended for another year, having previously been due to expire in October of 2023. Budget 2023 also introduces a new appeal process for EI claim disputes.
  • Employee Ownership Trust: Budget 2023 contains a series of personal tax reforms, including a new type of trust to be known as the Employee Ownership Trust, to facilitate employee ownership of Canadian businesses. This measure will become effective in 2024.

“Green” Investment- Related Tax Credits

Finally, Budget 2023 announced the introduction of a number of tax credits designed to encourage and accelerate the green economy. Subject to further engagement and consultation with stakeholders, these include the Investment Tax Credit for Clean Electricity, the Clean Technology Investment Tax Credit, the Clean Hydrogen Investment Tax Credit, and the Investment Tax Credit for Carbon Capture, Utilization, and Storage.  

In order to qualify for the full tax credit, entities must meet stipulated labour requirements, including paying a total compensation package that equates to the “prevailing wage”. The definition of prevailing wage will be based on union compensation, including benefits and pension contributions from the most recent, widely applicable multi-employer collective bargaining agreement (or corresponding project labour agreements) in the jurisdiction within which relevant labour is employed. Additionally, at least ten per cent of the tradesperson hours worked must be performed by registered apprentices in the Red Seal trades.  

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If you have any questions regarding this update, please do not hesitate to call a sidebar with any of us – we’re here to help.

This Sidebar client update provides general information and should not be relied upon as legal advice. This publication is copyrighted by Brown Mills Klinck Prezioso LLP and may not be reproduced in whole or in part in any form without the express written consent of Brown Mills Klinck Prezioso LLP. ©

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