Remove or raise contribution limit on pensions: C.D. Howe

Institute says decline of DB plans caused largely by laws that foster underfunding by sponsors
By Sarah Dobson
||Last Updated: 07/14/2008

Limits on income-tax contributions should be removed or raised to help with the underfunding challenges of defined benefit (DB) pension plans in Canada. That’s according to the C.D. Howe Institute paper Lifting the Lid on Pension Funding, which says the decline of DB plans is largely caused by laws and regulations that foster underfunding by sponsors.

The Income Tax Act’s 10-per-cent limit is meant to prevent companies from making pensions contributions, that are tax deductible, to reduce taxable profits. But this benefit is marginal because: businesses prefer to reinvest earnings or pay them out as dividends; pension funds attract tax when distributed or withdrawn; and regulations prevent deliberate over-funding of designated plans, say authors Robin Banerjee, policy analyst, and William Robson, president and chief executive officer, both at C.D. Howe in Toronto.