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Everyone makes (DC contribution) mistakes. So, what is the process for fixing them? (Update)

Date:
January 04, 2024
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This Sidebar updates our March 10, 2022 Sidebar, Everyone makes (DC contribution) mistakes. Soon it will be easier to fix them.to address the amendments to the Income Tax Act (Canada) and Income Tax Regulations (Canada), which provide for the correction of defined contribution registered pension plan contribution errors.


Employers are regularly faced with contribution errors when too little or too much has been contributed to a defined contribution (“DC”) registered pension plan or a DC component of a registered pension plan (“DC Provision”). Prior to January 1, 2021, the ability to fix any historical contribution errors was not a straightforward process.

Budget Implementation Act, 2023, No. 1 amended the Income Tax Act (Canada) (the “ITA”) and Income Tax Regulations (Canada) (“Regulations”), retroactive to January 1, 2021, to provide an efficient and straightforward regime for the correction of such contribution errors. This Sidebar provides an overview of the new regime, including the impacts to a member’s Registered Retirement Savings Plan (“RRSP”) contribution room and an employer’s reporting obligations.

Permitted Corrective Contributions for “Under-Contributions”

A permitted corrective contribution (“PCC”) allows employers and members to correct under-contributions to a DC Provision in one or more of the ten (10) years immediately preceding the year in which the PCC is made. The PCC may be used to correct a “failure to enroll” or a “failure to contribute” to a DC Provision.[1]

The PCC rules apply to a “Designated Money Purchase Provision” which requires the DC Provision: (i) to have at least ten (10) members throughout the year; or (ii) under which the total contributions made for the year on behalf of “specified individuals”[2] do not exceed 50% of the total contributions to the DC Provision for the year.

The PCC is equal to the following (subject to the limit noted below):

A + B – C

  • Variable A means the total amount of missed contributions under the DC Provision.
  • Variable B means permitted interest at the rate required by applicable pension standards legislation[3] or, if applicable pension standards legislation does not compel use of a particular interest rate, a rate that does not exceed a reasonable rate (such as the rate of return of the fund for the applicable period).
  • Variable C means the total amount previously contributed as a PCC to the DC Provision in respect of the member.

The PCC cannot exceed: (i) 150% of the money purchase limit for the calendar year in which the contribution is made; less (ii) the total amount of PCCs previously contributed for the member. For example, for 2024, the money purchase limit is $32,490. Thus, the limit applied to PCCs made in 2024 is $48,735 (minus the total PCCs previously made for the member).

If the PCC is made in installments, the ITA deems the corrective contributions to be made in full on the date a written commitment to make the corrective contribution is entered into.

The PCC will reduce the member’s RRSP contribution room for the next taxation year. If this results in negative RRSP contribution room, the member will not be permitted to make deductible RRSP contributions in any future years in which the RRSP contribution room remains negative.

PCCs are reported using a prescribed information form (T215 Past Service Pension Adjustment (PSPA) Exempt from Certification or Permitted Corrective Contribution (PCC)) which must be filed with the Canada Revenue Agency (“CRA”) no later than 120 days after the contribution is made. There is no requirement to amend prior year T4 slips.

Pension Adjustment Correction for “Over-Contributions”

A pension adjustment correction (“PAC”) now provides a means to restore a member’s RRSP contribution room in the calendar year in which a prior over-contribution is refunded from a DC Provision. A PAC should be calculated and reported when contributions are returned to the member and/or employer: (i) as a result of reasonable errors; or (ii) in order to avoid the revocation of a DC pension plan’s registered status (which could occur, for instance, where the DC registered pension plan is not administered in accordance with the terms of the plan).[4]

Mirroring the process for correcting under-contributions, a PAC is only calculated and reported for over-contributions made to a DC Provision in the ten (10) immediately preceding years.

A PAC is calculated based on the following formula:

A – B – C

  • Variable A means the total pension credits reported for the individual under the DC Provision for the applicable year.
  • Variable B means the amount that should have been contributed to the DC Provision in accordance with the pension plan terms with respect to the individual for the applicable year.
  • Variable C means the amount by which an individual’s total pension adjustment for the applicable year in respect of a participating employer exceeds the lesser of:
    • the money purchase limit for the retroactive year; and 
    • 18% of the individual’s compensation for the year from participating in employers for the retroactive year.[5]
Further, a reasonable rate of interest may be added under the ITA where the refund of the over-contribution is made to avoid the revocation of the pension plan’s registration. The interest amount and the refund of the over-contribution are generally taxable under the ITA.
 
PACs are reported using a prescribed information return, rather than by amending a prior year’s T4 slip. The prescribed information return is CRA form T10 Pension Adjustment Reversal (PAR) or Pension Adjustment Correction (PAC). If the PAC is greater than nil, the PAC must be reported by the following deadlines:
  • if the payment of the over-contribution occurs in the first, second or third quarter of a calendar year: on or before the day that is sixty (60) days after the last day of the quarter in which the distribution occurs; and
  • if the payment of the over-contribution occurs in the fourth quarter of a calendar year: before February of the next calendar year.

Plan administrators will also need to ensure compliance with applicable pension minimum standards legislation when correcting over-contributions.

Other Registered Plans

The PCC and PAC rules do not apply to other registered capital accumulation plans (e.g., deferred profit sharing plans, RRSPs, registered retirement income funds, etc.) or defined benefit registered pension plans.

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


[1] For more information, see the following CRA guides: Permitted Corrective Contribution (PCC) and Permitted Corrective Contribution: Other Information.

[2] As described in subsection 8515(4) of the Regulations.

[3] Presently, the Pension Benefits Standards Act, 1985 does not compel the use of a particular interest rate.

[4] For more information, see the following CRA guides: Pension Adjustment Correction and Pension Adjustment Correction: Other Information.

[5] Variable C ensures that additional RRSP room is not generated as a result of the PAC.


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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