The first federal budget in two years has revived neglected items from the 2019 federal budget, with the Liberal government signalling that it plans to move ahead with several lingering proposals.
The government said it intends to proceed with proposals tabled in a July 30, 2019 budget implementation bill that did not pass, including measures related to shutting down transfers of commuted values to individual pension plans (IPPs), tax changes related to mutual funds and ETFs and introducing new annuities under registered plans.
The 2019 budget aimed to clarify that an IPP can’t be implemented simply to avoid tax on the commuted value of benefits from another defined-benefit (DB) plan.
When a client is no longer a member in a DB plan, the tax rules allow for a tax-deferred transfer of all or a portion of the commuted value of the client’s accrued benefits. This is accomplished either by transferring the full commuted value to another DB plan sponsored by another employer, or by transferring a portion of the commuted value to the client’s RRSP or similar registered plan subject to a prescribed transfer limit (normally about 50% of the client’s commuted value).
The budget wished to curtail situations in which IPPs were set up in newly incorporated private corporations that were controlled by people who had terminated employment with their former employers. By establishing the IPP, the person was able to recognize the service with the previous employer and transfer 100% of their commuted value to the IPP — eliminating the tax liability that typically would result because of the transfer limit.
Lea Koiv, president of Lea Koiv & Associates Inc., said she’s “immensely disappointed” by Finance’s decision to proceed with this proposal, saying that the proposal may unfairly target legitimate transactions.
“A person leaving their employment may be establishing a small business. Why is a pension plan established by that employer any less legitimate than a plan sponsored by another employer?” she said. “Finance and/or [the Canada Revenue Agency] apparently find it easier to put in place a blanket prohibition rather than auditing and disallowing plans that don’t meet the existing ‘primary purpose’ test.”
Changes related to mutual funds and ETFs
The 2019 budget proposed a change that would prevent mutual funds and ETFs from using a method to allocate income and capital gains realized by redeeming unitholders. The change to the “allocation to redeemers” methodology could result in increased tax bills for clients.
The July 2019 draft legislation would have disallowed allocations of ordinary income to redeemers if the unitholder’s redemption proceeds are reduced by the allocation. This change was meant to apply to all mutual fund trusts for tax years beginning after March 18, 2019.
The 2019 budget also proposed to deny mutual fund trusts the ability to allocate excess capital gains to redeeming unitholders. Instead, it said only appropriate gains should be assigned to those unitholders. The draft legislation included a formula to determine which deductions for capital gains would be denied.
The draft legislation gave ETFs an extra year to adapt to the new rules regarding capital gains — to tax years beginning after March 20, 2020. The rules were to apply to all other mutual fund trusts for tax years beginning after March 18, 2019.
The draft legislation also stated that fund manufacturers need only make “reasonable efforts” to determine a unitholder’s cost base. This change came after industry groups raised concerns about the difficulty of calculating a cost base: knowing unitholders’ identities and cost bases is nearly impossible for ETF manufacturers and challenging for mutual fund manufacturers.
Following the July 2019 draft legislation, industry groups expressed appreciation for the extra time and administrative changes to the budget 2019 proposals.
In the 2019 budget, the government said it would permit annuities that would allow retirees to move savings out of their registered retirement funds to an annuity deferred until age 85: advanced life deferred annuities (ALDA). The tax rules generally require an annuity purchased with registered funds to begin after the annuitant turns 71.
As proposed, an ALDA could be purchased under RRSPs and RRIFs (as well as deferred profit sharing plans, pooled registered pension plans and defined-contribution plans) with guaranteed payments deferred until up to age 85 — a substantial jump from age 71. The purchase cap would be set at 25% of the source plan, to a maximum of $150,000.
The 2019 budget also proposed that variable payment life annuities (or VPLAs) be permitted in pooled registered pension plans (PRPPs) and defined-contribution plans.