On August 4, 2023, the Department of Finance Canada released draft legislation (August 2023 Draft
Legislation) that would amend the Income Tax Act (Canada)
(ITA) and the Income Tax Regulations (Regulations) with
respect to certain commitments made in the federal government's
2023 budget (2023 Budget). The August 2023 Draft Legislation would
also make certain other technical amendments to the ITA and
Regulations.
Most notably, the August 2023 Draft Legislation includes provisions
which (1) exclude from the application of refundable tax amounts
paid or payable on and after March 28, 2023 to obtain or renew a
letter of credit (or surety bond) held by certain retirement
compensation arrangement (RCA) trusts; and (2) provide a mechanism
for employers to obtain a refund of refundable tax remitted prior
to March 28, 2023 in respect of amounts paid to obtain or renew a
letter of credit (or surety bond) held by certain RCA trusts. A
high-level summary of these revised provisions is set out
below.
Retirement Compensation Arrangements
An RCA is an employer-sponsored arrangement that, among other
purposes, can be used by employers to provide supplemental pension
benefits to employees. RCAs can be funded through contributions to
an RCA trust, in which case a refundable tax is imposed at a rate
of 50% on contributions to the RCA trust, as well as on income and
gains earned or realized by the trust. The refundable tax is
generally refunded as retirement benefits are paid from the RCA
trust to the employees at a rate of $0.50 refunded for every $1 of
benefits paid.
In some cases, employers may choose to pay the supplemental
benefits directly to their employees as they become due and may
also choose to provide security for the future payment of such
benefits by, for example, arranging for a letter of credit (or a
surety bond) issued by a financial institution to be held in an RCA
trust. In such case, the employer contributes to the RCA trust the
amount required to cover the annual fee or premium the issuer
charges and the RCA trustee pays such amount to the issuer. In this
example, these fees or premiums are subject to the 50% refundable
tax. However, when retirement benefits become due from such an
"unfunded" supplemental plan, the employer pays the
benefits out of corporate revenues and there are no benefit
payments from the RCA trust to trigger a 50% refund of refundable
tax, and thus employers are effectively required to fund escalating
refundable tax balances with no practical mechanism for
recovery.
The August 2023 Draft Legislation would amend the ITA so that
amounts paid or payable to obtain or renew a letter of credit (or a
surety bond) held by an RCA will not be subject to a refundable tax
if the RCA's primary purpose is to provide annual or more
frequent periodic retirement benefit payments (1) that are
supplemental to benefits provided under a registered pension plan
(RPP), a registered retirement savings plan (RRSP), a deferred
profit sharing plan (DPSP), a pooled registered pension plan
(PRPP), or any combination of these plans, or (2) under an
arrangement that would, but for the pension adjustment limits and
defined benefit plan maximum benefit limits under the ITA and the
Regulations, meets all or substantially all of the criteria to be a
registered pension plan (collectively referred to as
"specified arrangements"). This change would apply to
such amounts paid or payable under a specified arrangement on or
after March 28, 2023. We note that by limiting this rule to RCAs
maintained in respect of specified arrangements, it would not be
available to RCAs established for other purposes, such as securing
payments that become due upon a change of control.
The August 2023 Draft Legislation would also amend the ITA to allow
an eligible employer to file an election with the Minister of
National Revenue which identifies the RCA as a specified
arrangement (assuming it satisfies the requirements described
above) and includes the total amount of refundable tax paid in
respect of amounts paid to obtain or renew letters of credit (or
surety bonds) prior to March 28, 2023. The employer is then able to
claim a refund of such refundable tax remitted before March 28,
2023. Such refunds of refundable tax would be based on the amount
of retirement benefits under the specified arrangement that are
paid directly by the employer (i.e., not out of the RCA trust) to
beneficiaries whose benefits under the specified arrangement were
secured by letters of credit (or surety bonds). Employers would be
eligible for a refund for a taxation year of refundable tax in an
amount equal to 50% of the amount of such retirement benefits paid
by the employer in that year after 2023, up to the amount of the
qualifying refundable tax previously paid.
The August 2023 Draft Legislation would also amend the ITA to
provide that holding units of a mutual fund trust listed on a
designated stock exchange does not preclude the custodian of an RCA
trust from making an election to reduce the refundable tax to an
amount equal to the value of trust assets where the balance of an
RCA's refundable tax at the end of the year exceeds the value
of assets held by an RCA trust. This change would apply to
elections made in respect of the 2020 and subsequent tax years.
Other Proposed Amendments
- The August 2023 Draft Legislation would amend the ITA to extend the deduction for amounts transferred from a foreign pension plan to also include a transfer to a registered retirement income fund (RRIF) in which the taxpayer is the annuitant. This change would come into force on August 4, 2023 (Announcement Date).
- The ITA currently allows a deduction for repayments of certain benefits included in income, but only in the year of repayment. In some cases, a taxpayer will not have sufficient income in the year of repayment to fully utilize the available deduction. The August 2023 Draft Legislation would amend the ITA to allow a taxpayer to deduct certain repaid amounts, including pension benefits, in the year the amounts were included in computing the taxpayer's income to the extent that the repaid amounts exceed the taxpayer's income in the year of repayment and are not otherwise deducted in computing the taxpayer's taxable income. This change would apply to the 2019 and subsequent tax years.
- The ITA currently permits the legal representative of a deceased RRSP annuitant's estate and a qualifying beneficiary under the estate to jointly designate to have the RRSP proceeds that were paid to the estate treated as a "refund of premiums" which, subject to other conditions being satisfied, can allow for a deduction. The August 2023 Draft Legislation would amend the ITA to permit a joint designation to be filed for a deemed receipt of "refund of premiums" where a spouse or common-law partner is neither a beneficiary of the RRSP nor a beneficiary of the deceased RRSP annuitant's estate but where a payment is made from the estate (not exceeding the RRSP proceeds) to that individual in accordance with a court order or written agreement. This change would be deemed to have come into force on January 1, 2020.
- The ITA currently provides that when an individual acquires ownership of an annuity in satisfaction of their entitlement to benefits under an RPP and certain conditions are met, including that no further premiums be paid after the individual acquires ownership of the annuity, it is deemed that amounts received under the annuity are amounts received under the RPP. Consequently, there is no immediate taxation on acquisition of the annuity and payments under the annuity contract are included in the taxpayer's income in the year in which the payments are received. The August 2023 Draft Legislation would amend the ITA to permit additional premiums to be paid to the annuity contract to acquire additional benefits that are consequential to proceedings commenced under the Bankruptcy and Insolvency Act or the Companies' Creditors Arrangement Act. This change would be deemed to have come into force on January 1, 2018.
- The August 2023 Draft Legislation would amend the ITA to subtract employer PRPP contributions in the preceding taxation year from the calculation of "undeducted RRSP contributions" to ensure that employer contributions do not increase the individual's "undeducted RRSP contributions" in subsequent years. This change would apply to the 2012 and subsequent taxation years.
- The August 2023 Draft Legislation would amend the ITA to add transfers from a first home savings account (FHSA) to an RRSP to the list of transfers that are not considered to be premiums paid to an RRSP for purposes of the Part X.1 tax. This change would be deemed to have come into force on April 1, 2023.
- The August 2023 Draft Legislation would amend the Regulations to provide that pension transfers on death for the benefit of the deceased's spouse, child or grandchild are not subject to withholding at source. This change would be deemed to have come into force on Announcement Date.
- Under the Regulations, a normalized pension is used to determine an individual's pension credit under a defined benefit provision of a registered pension plan which, among other things, is used to determine the individual's pension adjustment for the year. The August 2023 Draft Legislation would amend the Regulations to provide that, when calculating an individual's normalized pension: (1) the current year's additional maximum pensionable earnings (YAMPE) will be used where benefits depend on earnings up to YAMPE in a year other than the current year; (2) an individual's pensionable earnings above YMPE, but not exceeding YAMPE, be included, and to add language for pension adjustments after 2023 to determine the CPP offset based on a YAMPE limit; and (3) to exclude the increase in OAS payments for individuals over age 75. Changes (1) and (2) would come into force on April 1, 2023, and change (3) would apply in respect of the 2022 and subsequent tax years.
- The August 2023 Draft Legislation would amend the Regulations to permit reductions in a member's lifetime retirement benefits to the extent permitted under the Pension Benefits Standards Act, 1985 or similar provincial pension standards legislation. Examples of this include reductions in benefit levels for various forms of multi-employer pension plans under provincial pension legislation and negotiated cost benefit plans, shared risk plans or target benefit plans. This change would be deemed to have come into force on January 1, 2011.
- The August 2023 Draft Legislation would amend the Regulations to increase the maximum bridging benefits that are permitted to be paid to a member. This change would come into force on January 1, 2024.
- The August 2023 Draft Legislation would amend the Regulations to allow for a change to the date of determination of a member's commuted value of benefits if doing so is permitted or required by provincial legislation. This change would be deemed to have come into force on January 1, 2020.
- The August 2023 Draft Legislation would amend the Regulations to clarify that benefit accruals may continue to after a benefit is paid under a defined benefit provision of an RPP in situations where the benefit is payable due to the death of another person. The August 2023 Draft Legislation would also permit bridging benefits in this situation. This change would be deemed to have come into force on January 1, 2022.
- The August 2023 Draft Legislation would amend the Regulations to change the conditions that must be met for variable payment life annuity (VPLA) benefits to be allowed under a money purchase provision of an RPP. This change would limit indexing of VPLA benefits in-pay to 2% per annum rather than have them fully indexed to the consumer price index, and to require, in addition to the current considerations, that VPLA benefits be increased or decreased to reflect updates to mortality-related actuarial assumptions. This change would be deemed to have come into force on January 1, 2020.
- The August 2023 Draft Legislation would amend the Regulations to permit charities and non-profit organizations to participate in a specified multi-employer plan provided the organization and its related persons employ fewer than 100 full-time employees. This change would be deemed to have come into force on January 1, 2023.
The Department of Finance Canada's news release with respect to the August 2023 Draft Legislation indicates that stakeholders may provide comments on the August 2023 Draft Legislation noted above by September 8, 2023. Comments may be sent to Consultation-Legislation@fin.gc.ca.
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