On August 9, 2022, the Department of Finance Canada released draft legislation (August 2022 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 2022 budget (2022 Budget). The August 2022 Draft Legislation would also make certain other technical amendments to the ITA and Regulations.
Most notably, the August 2022 Draft Legislation includes revised provisions relating to the correction of contribution errors to defined contribution registered pension plans (DCPPs). A high-level summary of these revised provisions is set out below.
The August 2022 Draft Legislation also includes, among other things, provisions regarding borrowing by defined benefit registered pension plans. The 2022 Budget proposed to amend the borrowing rules to provide more flexibility to administrators of defined benefit registered pension plans (other than individual pension plans). These borrowing provisions set out in the August 2022 Draft Legislation remain substantively unchanged from those released with the 2022 Budget. For more information, see our April 2022 Blakes Bulletin: 2022 Federal Budget: Selected Pensions, Benefits and Executive Compensation Measures (2022 Budget Bulletin).
CORRECTION OF CONTRIBUTION ERRORS TO DCPPs
On February 4, 2022, the Department of Finance Canada released draft legislation that would have amended the ITA and Regulations to incorporate provisions governing the correction of contribution errors to DCPPs (February 2022 Draft Legislation). For a summary of the provisions of the February 2022 Draft Legislation, 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.
We understand that, following consultation with stakeholders, the Department of Finance Canada revised the provisions relating to the correction of contribution errors to DCPPs set out in the February 2022 Draft Legislation. The changes generally provide greater flexibility for plan administrators in correcting both under- and over-contributions.
The key changes to the provisions relating to the correction of contribution errors to DCPPs as between the February 2022 Draft Legislation and the August 2022 Draft Legislation are as follows:
Correcting Under-Contributions
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The August 2022 Draft Legislation would permit corrective contributions under proposed new subsection 147.1(20) of the ITA (Permitted Corrective Contribution Provision) for the 10 immediately preceding years, as compared to the five immediately preceding years proposed in the February 2022 Draft Legislation.
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The August 2022 Draft Legislation proposes that the maximum amount of a permitted corrective contribution be calculated by using 150% of the money purchase limit for the calendar year in which the permitted corrective contributions are made, rather than 125% of the money purchase limit as set out in the February 2022 Draft Legislation.
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In the February 2022 Draft Legislation, the proposed Permitted Corrective Contribution Provision required that the applicable money purchase provision be a “designated money purchase provision” in each of the five immediately proceeding years in order to make corrective contributions under this provision. The August 2022 Draft Legislation would revise the proposed Permitted Corrective Contribution Provision to require that the applicable money purchase provision be a “designated money purchase provision” for the prior years in respect of which a contribution is made. This change would allow new DCPPs (those established in the last five years) and plans with new money purchase provisions to take advantage of the proposed Permitted Corrective Contribution Provision.
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The August 2022 Draft Legislation would permit an individual to make a permitted corrective contribution in instalments by entering into a written commitment with the administrator of the DCPP or an employer who participates in the DCPP (Written Commitment). The permitted corrective contribution would be deemed to have been made at the time of the Written Commitment for the purpose of the requirement to file an information return with the Minister in respect of a permitted corrective contribution and the calculation of the net past service pension adjustment.
Correcting Over-Contributions
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The February 2022 Draft Legislation proposed 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 pursuant to 8502(d)(iii) of the Regulations. The August 2022 Draft Legislation would also require that a pension adjustment correction be determined for a return of contributions due to reasonable error under a money purchase provision pursuant to subsection 147.1(19) of the ITA.
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In connection with either a distribution to avoid revocation of the plan or a return of contributions due to reasonable error as referenced above, the August 2022 Draft Legislation would provide that a pension adjustment correction be calculated in respect of the 10 years immediately preceding the calendar year in which the distribution is made, rather than only the five immediately preceding years contemplated in the February 2022 Draft Legislation.
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The August 2022 Draft Legislation proposes that the pension adjustment correction be determined using the individual’s compensation (as defined in subsection 147.1(1) of the ITA) from participating employers for the retroactive year in respect of which the calculation is being made, as compared to the individual’s earned income (as defined in subsection 146(1) of the ITA) set out in the February 2022 Draft Legislation.
Coming Into Force
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The August 2022 Draft Legislation still 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. However, the August 2022 Draft Legislation makes clear that plan administrators required to file the prescribed information return in respect of (1) permitted corrective contributions or (2) pension adjustment corrections shall not be required to file the prescribed information return until 60 days after the date on which the August 2022 Draft Legislation receives royal assent.
The Department of Finance Canada’s news release with respect to the August 2022 Draft Legislation indicates that stakeholders may provide comments on the 2022 Budget and the August 2022 Draft Legislation by September 30, 2022. Comments may be sent to Consultation-Legislation@fin.gc.ca.
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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