Canada: Every Benefit Everywhere All At Once: A Detailed Analysis Of The 2023 Federal Budget's Pension And Benefit Proposals

On March 28, 2023, the federal government tabled its 2023 budget, "A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future" (the "Budget"). Last week, our Tax Group released its comprehensive Budget commentary. Notably for employers, that commentary addresses new proposals to facilitate the use of an "employee ownership trust" as a mechanism for business owners to transfer their businesses to their employees. Now that the Budget has dropped and the proverbial dust has settled, the purpose of this post is to discuss and dissect some of those Budget items (besides employee ownership trusts) that will be of particular interest to employers and plan administrators from an employee benefits perspective.

Retirement Compensation Arrangements and Letters of Credit

Supplemental retirement plans ("SRPs") may be entirely unfunded, on the one hand, or wholly or partially pre-funded on the other hand. If they are funded, the Income Tax Act (Canada) ("Act") generally considers funds set aside for such arrangements to constitute a trust governed by a "retirement compensation arrangement" ("RCA").

RCA trusts are exempt from income taxes. With that said, they are subject to a 50% "refundable tax" applicable both to contributions to the trust and to investment or other income earned on trust assets. This means that for every dollar that an employer contributes to an RCA trust, 50 cents must be withheld and remitted as refundable tax to the Canada Revenue Agency ("CRA"). When funds are distributed from an RCA trust by its custodian, an application can be made to the CRA for a refund to the RCA trust of the refundable tax. Generally, 50 cents of refundable tax will be refunded for every dollar that the custodian distributes. Refundable tax does not accrue interest. Given the long-term nature of most RCA trusts, refundable tax can languish for decades before RCA distributions are made in sufficient amounts to provide for its return.

Special issues arise for unfunded or minimally pre-funded SRPs whose obligations are secured through a standby letter of credit. Under these SRPs, an employer will typically pay supplemental retirement benefits as they become due from its general corporate revenues. Plan members, however, may seek, and the employer may agree (or be required by the terms of a plan or trust agreement), to have the custodian of an RCA trust hold a letter of credit as security for these supplemental retirement benefits should the employer ever fail to pay them as they become due.

As a result of the Act's refundable tax regime, an employer seeking to secure supplemental retirement benefits through a letter of credit is required to contribute to the custodian twice as much as the letter of credit's fee (because half of the amount contributed must be withheld and remitted as refundable tax). As a letter of credit is renewed or replaced, additional fees become due and additional refundable tax is consequently withheld and remitted. At the same time, because the employer pays supplemental retirement benefits from its general revenues, there are no RCA trust distributions to trigger the return of refundable tax. The existing rules therefore have the effect of "trapping" refundable tax for years or even decades.

The Budget proposes to eliminate refundable tax on fees paid to obtain or renew a letter of credit that is held by an RCA custodian. The elimination will be effective only for RCA trusts that are supplemental to an underlying "registered pension plan" ("RPP"), as defined in the Act (that is, virtually all occupational pension plans that are registered under the Pension Benefits Standards Act, 1985 (Canada) or the pension standards legislation of a province). If enacted, this elimination would be effective for fees paid on or after March 28, 2023. The Budget does not define what it would mean for an RCA to be "supplemental" to an RPP, but presumably RCAs of SRPs that are limited to providing retirement benefits that would have been provided by a corresponding RPP but for the Act's maximums will be included.

Additionally, the Budget proposes to introduce a new mechanism for employers to obtain a refund of refundable tax already remitted in respect of fees for letters of credit. If enacted, an employer would be eligible to apply for a refund of 50 cents of refundable tax (resulting from such fees) for each one dollar of retirement benefits paid after 2023 from general revenues. As a result, historical refundable tax balances resulting from letter of credit fees should become more accessible within what for most SRPs should be a more reasonable period.

Dental Plan? People Need Braces!

Following a previous announcement in September 2022, the Budget committed to establishing a national Canadian Dental Care Plan (the "CDCP").

Once in place, the CDCP will provide dental coverage for uninsured Canadians with annual family income of less than $90,000, with no co-pays for those with family incomes under $70,000. The CDCP would begin providing coverage by the end of 2023 and would be administered by Health Canada, with support from an as-yet unannounced third-party benefits administrator. The Budget indicates that details of eligible coverage will be released later this year.

The Budget further commits the government to legislation that, if enacted, would compel employers and "employer pension plans" to report dental coverage offered to their employees and plan members through T4 or T4A tax slips. The purpose of this requirement would be to ensure that CDCP coverage is limited to Canadians with unmet dental care needs who do not have access to private coverage.

The Budget does not discuss the potential ramifications that the CDCP may have on existing private dental benefit plans, including whether the CDCP would "top up" private dental coverages that are by themselves less than what the CDCP would provide on its own to qualifying individuals. Employers who provide private dental benefits may wish to consider their plan design and how it might complement CDCP coverage when further details become available.

Amendments to Federal Pension Standards and Pooled Registered Pension Plan Legislation

Recently, the Act was amended to permit "variable payment life annuities" ("VPLAs"). VPLAs are a kind of life insurance contract that provides annuitants, such as retirees, with variable periodic payments based on pooled investment and mortality experience. While the payments are variable, the pooling of risk is expected to allow VPLAs to pay out more, on average, than a traditional single-life annuity under which a retiree's investment and mortality risk is fully assumed by a life insurance company. Before this statutory amendment, so-called "capital accumulation" retirement plans like defined contribution RPPs and pooled registered pension plans ("PRPPs") were limited in their decumulation options for members' retirements. Specifically, such plans would either need to have facilitated a tax-free transfer of members' account balances to either an individual "registered retirement savings plan", to an individual "registered retirement income fund" or to a life insurance company for the purchase of a traditional life annuity paying fixed periodic monthly amounts.

The Budget announced that the federal Pension Benefits Standards Act, 1985 (Canada) and Pooled Registered Pension Plans Act (Canada) will be amended to improve retirement security for plan members and retirees through new frameworks for VPLAs. The Budget does not provide details of the specific statutory amendments contemplated. With that said, it is expected that this change will introduce new optionality for RPP sponsors and PRPP administrators regarding a plan member's decumulation phase under the plan (i.e., the member's full or partial retirement). The Budget indicates that details of eligible coverage will be released later this year.

Pension Plan Crypto Asset Reporting

With few details provided, the Budget also announced that the government will require federally regulated pension funds to disclose their crypto-asset exposures to the federal pension standards regulator, the Office of the Superintendent of Financial Institutions. The Budget does not mention any specifics about member disclosure, if any, or how these disclosure rules will apply to indirect investments (e.g., indirect investments through pooled or index funds or exposure achieved through derivative contracts). The Budget further announced that the federal government would work with the provinces and territories to discuss crypto-asset or related activities disclosures by Canada's largest pension plans (note that the territories do not currently have independent pension minimum standards legislation or dedicated regulators). The Budget does not further define what is meant by "largest pension plans". Given recent headlines, crypto assets are clearly an area into which the government wishes to have greater visibility.

Previously Announced Measures

Finally, the Budget has recommitted to passing draft legislation introduced in 2022:

• Expanding the circumstances in which administrators of defined benefit RPPs may borrow. In general, these proposals would replace the current 90-day term limit for RPPs borrowing funds with a new limit (based on borrowing quantum). The new limit would cap permitted borrowing to an amount equal to the lesser of 20% of the value of the RPP's assets, on the one hand, or the amount, if any, by which 125% of the RPP's actuarial liabilities exceeds the value of the RPP's assets, on the other hand. Existing exceptions for borrowing for real estate investment purposes would generally remain unchanged.
• Introducing mechanisms for employers and administrators to fix contribution errors under defined contribution RPPs. See our previous post on these proposals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.