On February 4, 2022, the Department of Finance Canada released draft legislation (Draft Legislation) which would amend the Income Tax Act (Canada) (ITA) and the Income Tax Regulations (Regulations) to provide for, among other things, provisions relating to the correction of contribution errors to defined contribution pension plans (DCPPs) and taxes applicable to registered investments. The Department of Finance has indicated that comments on the Draft Legislation relating to registered pension plans and taxes applicable to registered investments should be received by March 7, 2022, and April 5, 2022, respectively. Comments may be sent to Consultation-Legislation@fin.gc.ca.
The Draft Legislation would implement certain provisions in the 2021 Federal Budget, which proposed to provide more flexibility to plan administrators of DCPPs to correct both under- and over-contributions within five years, subject to a dollar limit, beginning in the 2021 taxation year. The 2021 Federal Budget was discussed in our April 2021 Blakes Bulletin: 2021 Federal Budget: Selected Pensions, Benefits and Executive Compensation Measures.
A high-level summary of the Draft Legislation is set out below. Please note that the Draft Legislation proposes changes to the ITA and the Regulations, and correction of under and over-contributions for registered pension plans will still need to comply with applicable pension benefits standards legislation.
CORRECTION OF CONTRIBUTION ERRORS TO DCPPs
1. Correcting Under-Contributions
The Draft Legislation would add a new subsection 147.1(20) to the ITA to provide that an individual or an employer may make a contribution to correct an under-contribution in a calendar year under a money purchase provision of a registered pension plan in respect of an individual, if it is a “permitted corrective contribution” and the money purchase provision was a “designated money purchase provision” in each of the five immediately preceding years (Permitted Corrective Contribution Provision). These new rules are particularly helpful in the situation where a contribution to correct could not be made in a subsequent calendar year due to the “pension adjustment” limits in such year.
A “designated money purchase provision” for a calendar year is a money purchase provision of a registered pension plan if the plan has at least 10 members throughout the year, or the total contributions made for the year under the provision on behalf of connected persons and employees whose remuneration for the year exceeds 2.5 times the year’s maximum pensionable earnings are less than 50 per cent of contributions made to the money purchase provision of the plan.
A “permitted corrective contribution” must be one that was required to have been made in one or more of the five immediately preceding calendar years in accordance with the terms of the plan, but for the error that caused a failure to enroll an individual as a plan member or make a required contribution. The amount of the permitted corrective contribution is the lesser of:
The amount by which a contribution required to be made exceeds the amount actually contributed, plus interest (at a rate required by pension benefits standards legislation or otherwise that does not exceed a reasonable rate), less contributions under the Permitted Corrective Contribution Provision previously made with respect to the individual for the retroactive year; and,
125 per cent of the money purchase limit for the calendar year in which the permitted corrective contributions are made (e.g., for 2022, the money purchase limit is C$30,780 so corrective contributions could not exceed C$38,475) less amounts previously contributed in respect of the individual under the Permitted Corrective Contribution Provision.
Plan administrators would be required to file an information return in the prescribed form within 120 days after a corrective contribution is made to the plan, rather than having to file amended T4 slips with the Canada Revenue Agency. Permitted corrective contributions are excluded from the determination of an individual’s pension credit under the Regulations but are included in the taxpayer’s net past service pension adjustment, which reduces a taxpayer’s registered retirement savings plan (RRSP) deduction limit and unused RRSP deduction room for the next year.
Corrective contributions made under the Permitted Corrective Contribution Provision would be deductible for the contributing employer or employee.
2. Correcting Over-Contributions
The permissible distribution rules set out in the Regulations currently permit the return of all or a portion of contributions made by a member of the registered pension plan or an employer who participates in the plan where the payment is made to avoid the revocation of the registration of the plan. A registered pension plan becomes a revocable plan if it is not administered in accordance with the terms of the plan as registered, such as where an over-contribution has been made. The Draft Legislation, if enacted, would amend the permissible distribution rules to permit a reasonable rate of interest to be added to a return of contributions to avoid the revocation of plan registration.
The Draft Legislation would require that a pension adjustment correction be determined for an individual when a distribution to avoid the revocation of the plan is made from a money purchase provision. This pension adjustment correction would generally be the portion of a refund of contributions made in the five preceding calendar years that reduced the individual’s unused RRSP deduction room. In connection with this change, an individual’s total pension adjustment reversal (which is taken into account in determining an individual’s RRSP deduction limit and unused RRSP deduction room, as well as determining if an individual has un-deducted RRSP contributions that are subject to an over-contribution tax) would include the pension adjustment correction.
The Draft Legislation would also require the administrator to file an information return in prescribed form to report the amount of a pension adjustment correction if a pension adjustment correction is determined for an individual in connection with a distribution from a money purchase provision of a registered pension plan to avoid the revocation of the plan’s registration.
3. Coming Into Force
The Draft Legislation contemplates that the amendments to the ITA and Regulations in respect of correcting contribution errors to DCPPs will have retroactive effect to January 1, 2021.
TAXES APPLICABLE TO REGISTERED INVESTMENTS
In addition to the proposed amendments regarding the correction of contribution errors to DCPPs, the Draft Legislation proposes amendments to the rules regarding taxes applicable to registered investments. Currently, there is a monthly tax of 1 per cent that is applied where a registered investment, which is a qualified investment for registered disability savings plans, registered education savings plans, registered retirement savings plans, registered retirement income funds, deferred profit-sharing plans and tax-free savings accounts, holds property which is not a qualified investment for the type of registered plan in respect of which the registered investment is registered. The proposed change is to pro-rate the amount of the 1 per cent tax so it is reduced based on the proportion of shares or units of the registered investment held by investors that are not the registered plans set out above.
The provisions in the Draft Legislation relating to taxes applicable to registered investments would apply after 2020, and in certain situations before 2021.
For additional information, please reach out to a member of our Pensions, Benefits & Executive Compensation group or your usual Blakes contact.
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