The federal government is proposing amendments to the tax rules governing registered pension plans (RPPs) in response to challenges brought about by the Covid-19 pandemic.
The Department of Finance’s draft regulations released last week will effectively allow employers and employees to make retroactive contributions to a defined contribution (DC) plan in order to replace contributions not made in 2020.
The proposal is part of a package of temporary changes to the rules governing RPPs, as well as deferred salary leave plans (DSLPs), that are intended to provide relief to plan participants.
Ottawa will permit a retroactive contribution to be made to an employee’s money purchase account (DC plan) for the year 2020, whether or not the employee had reduced employment service or reduced pay, subject to three conditions:
- a retroactive contribution is made by the employee (or the employee makes a written commitment to make the contribution) after 2020 and before May 2021;
- a contribution is made by the employer after 2020 and before May 2021 (or, if later, it matches contributions that the employee committed to making); and
- the contribution replaces, in whole or in part, a contribution that otherwise would have been required for 2020.
If these conditions are met, the retroactive contribution would be added to the employee’s pension adjustment for 2020.
Lea Koiv, president of Lea Koiv & Associates Inc. in Toronto, says the proposed amendment is “entirely appropriate” as it will allow individuals focused on living expenses to catch up with contributions at a later date.
“Retirement income will take a beating if funds are not set aside [now],” she says.
However, Koiv says it’s “unfortunate” that employers and employees were given only until the end of April 2021 to make the catch-up contributions under the proposed measures.
Relaxed borrowing rules for RPPs
The federal government is also providing RPPs with more flexibility to borrow in response to potential liquidity challenges.
Currently, RPPs are limited to borrowing for the purchase of income-producing real estate, or on terms of 90 days or less, and not as part of a series of loans or repayments.
As part of the proposed amendments, the government would temporarily suspend the 90-day term limit, and lift the prohibition on borrowing as part of a series of loans or repayments as long as the series was entered into after April 2020 and repaid no later than April 30, 2021.
Koiv says offering temporary borrowing relief makes sense: “RPPs that might otherwise have to sell investments at distressed values can defer doing so.”
Pension coverage during periods of reduced pay
If an employee is a member of an RPP and is on an “eligible period of reduced pay” (i.e., their pay is reduced in line with their reduced work), the tax rules permit the plan to recognize full pensionable service for periods of reduced pay as if the periods were regular employment at unreduced pay.
In light of the Covid-19 pandemic, Ottawa is proposing to amend the definition of “eligible period of reduced pay” for 2020 to remove the condition that the employee must be employed for at least 36 months in order to qualify, and the requirement that the reduction in pay must be generally commensurate with the reduction in work hours.
Deferred salary leave plans
DSLP rules permit employees to defer part of their salary over a number of years in order to fund a paid leave of absence. The deferred salary is taxable when received by the employee during the leave of absence. In order to qualify as a DSLP, the deferral period cannot be longer than six years, and the leave of absence must generally be a continuous period of at least six months.
Due to the Covid-19 pandemic, some employees have been recalled to work before having been on leave for six months, or have not been able to begin their leave of absence as scheduled. Under existing tax rules, when an employee’s DSLP no longer meets the relevant conditions, the plan must be terminated and all deferred salary must be paid to the employee and included in their income.
The federal government is proposing to add temporary stop-the-clock rules to the DSLP conditions. These changes will not require a DSLP to be terminated if an employee suspends a leave of absence to return to work or if an employee chooses to delay their paid leave of absence, as long as certain conditions are met.