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:
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:
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:
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:
“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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