On April 7, 2022, the federal government tabled its 2022 budget (2022 Budget), which included a number of provisions related to pensions, benefits and executive compensation, as summarized below.
Here is an overview of the key provisions in the 2022 Budget, which are discussed in further detail below:
The 2022 Budget proposes to amend the borrowing rules in the Income Tax Regulations (ITR), effective April 7, 2022, to provide more borrowing flexibility to administrators of defined benefit registered pension plans (RPPs) (other than individual pension plans).
The borrowing rules in the ITR currently restrict an RPP from borrowing money, except in the following two circumstances:
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The acquisition of income-producing real property where the borrowed amount does not exceed the cost of the real property and only the real property is used as security for the loan; and
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Where the term of the loan does not exceed 90 days and the property of the RPP is not pledged as security for the loan (unless the money is borrowed to avoid the distress sale of plan assets).
The 2022 Budget proposes to maintain the borrowing rule for real property acquisitions and replace the 90-day term limit with a limit on the total amount of additional borrowed money (for the purposes other than acquiring income-producing real property, for which the rules would remain the same), equal to the lesser of:
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20 per cent of the value of the RPP’s assets (net of unpaid borrowed amounts); and
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The amount, if any, by which 125 per cent of the RPP’s actuarial liabilities exceeds the value of the RPP’s assets (net of unpaid borrowed amounts).
We expect that for the purposes of these new RPP borrowing rules, “actuarial liabilities” will likely be interpreted by the Canada Revenue Agency (CRA) in the same manner as the common understanding of “actuarial liabilities” (i.e., going concern liabilities) under Section 147.2(2)(a)(ii) of the Income Tax Act (Canada) (ITA).
The new borrowing limit would be redetermined on the first day of each fiscal year of the plan, based on the value of assets and unpaid borrowed amounts on that day and the actuarial liabilities on the effective date of the RPP’s most recent actuarial valuation report, which we expect should not be construed narrowly as the most recent actuarial valuation report filed with the CRA. In addition, each redetermined limit would not apply to borrowings entered into before that time.
Although the 2022 Budget indicated that these changes would provide more borrowing flexibility to administrators of defined benefit RPPs, it would not do so in all cases as the effect of the proposed changes would be to prohibit borrowing (except for the purpose of acquiring real property) for RPPs that are more than 125 per cent funded, given that the 90-day term limit would be removed.
Plan administrators must continue to comply with pension standards legislation, which require that pension funds are administered with a duty of care, that investments are made in a reasonable and prudent manner, and that the RPP is funded in accordance with prescribed funding standards.
The 2022 Budget confirms the federal government’s intention to proceed with the previously announced tax measure regarding fixing contribution errors to defined contribution RPPs, as modified to take into account consultations and deliberations since the measure’s initial release. For more information on draft legislation released by the Department of Finance Canada relating to the correction of contribution errors to defined contribution RPPs, please see our February 2022 Blakes Bulletin: Oops, I Did It Again: Proposed Amendments Relating to the Correction of Contribution Errors to Defined Contribution Pension Plans.
The 2022 Budget proposes to introduce amendments to the Pension Benefits Standards Act, 1985 and the Pooled Registered Pension Plans Act to improve the sustainability and long-term security of federally regulated pensions for all plan members and retirees through improved governance and administration and new frameworks for solvency reserve accounts (SARs) and variable payment life annuities (VPLAs).
In November 2020, the Department of Finance Canada released a consultation paper, Strengthening Canadians' Retirement Security - Proposals to Support the Sustainability of and Strengthen the Framework for Federally Regulated Private Pension Plans (Consultation). The Consultation touched on a number of plan governance and administration proposals, including the representation of plan members and retirees on all federally regulated pension plan Board of Trustees, the implementation of governance and funding policies, economic, social and governance considerations, and electronic communications, as well as frameworks for SARs and VPLAs. Comments on the Consultation were due January 14, 2021.
The 2022 Budget announces that the federal government will move forward with requirements for disclosure of environmental, social and governance considerations, including climate-related risks, for federally regulated pension plans.
The 2022 Budget proposes to revise the reporting requirements for Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs), which would apply to the 2023 and subsequent taxation years. Financial institutions are currently required to report annually to CRA on the payments out of, and contributions to, each RRSP and RRIF that they administer. By comparison, financial institutions must file comprehensive annual information returns in respect of tax-free savings accounts that they administer, which includes the fair market value of the property held in the account. The 2022 Budget proposes to require financial institutions to annually report to the CRA the total fair market value, determined at the end of each calendar year, of property held in each RRSP and RRIF that they administer. The 2022 Budget indicates that this information would assist the CRA in its risk-assessment activities regarding qualified investments held by RRSPs and RRIFs.
For further information, please contact any member of our Pension, Benefits & Executive Compensation group.
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