On March 22, Minister of Finance Jim Flaherty tabled the 2011 Federal Budget: The Next Phase of Canada’s Economic Action Plan – A Low-Tax Plan for Jobs and Growth. While it contains no major new spending announcements, the budget includes a range of measures of potential interest to employers and their employees.
Early media reports indicate the opposition parties do not support the budget and will trigger a spring election. If this occurs, budget legislation will not proceed through Parliament, unless the legislative measures are re-introduced by the new government following the election. Other outstanding legislation would similarly be terminated, and regulatory items awaiting finalization could also be delayed. For sponsors of federally regulated pension plans, this means the possible delay of the federal funding regulations that would enable letter of credit financing.
Initiatives affecting retirement programs
Pooled registered pension plans (PRPPs): To help Canadians save for retirement, the budget announced that the federal government is working with the provincial and territorial governments to implement its proposed defined contribution PRPP as soon as possible. The government believes that PRPPs will improve the range of retirement savings options available to Canadians by providing a low-cost, well-regulated private sector retirement savings opportunity.
Canada Pension Plan (CPP) reform: In addition, the federal government is still working with its provincial and territorial counterparts on options for a “modest” enhancement to the CPP. In addition to noting the need for consensus on any CPP proposals, the budget stresses the federal government’s belief that such changes should not jeopardize Canada’s economic recovery.
Deferred income plans
The budget contains a number proposals designed to protect the “integrity and fairness of the Canadian tax system by closing tax loopholes.” These measures will impact certain retirement savings plans:
Individual pension plans (IPPs): In recent years, some employers and individuals have established IPPs that are designed to obtain tax advantages that are not available under other deferred income plans. Under the budget proposals, new rules will be introduced to limit the tax deferral opportunity available under an IPP. In particular, a minimum payout will apply to a member’s interest in an IPP each year after the member reaches age 71. The minimum amount will equal the member’s accrued defined benefit payable in the year or, if greater, the minimum payout amount that would apply if the member’s share of the assets in the IPP (including surplus if the member was entitled to the surplus) were held in a registered retirement income fund (RRIF).
The budget also proposes new restrictions on past service benefits granted under an IPP. Contributions to fund a past service benefit granted under an IPP must first be made through a transfer of the member’s RRSP assets or through a reduction of accumulated RRSP contribution room, before the member or employer can make any tax-deductible past service contributions.
These measures will apply to defined benefit IPPs with three or fewer members if a least one of them is “connected” with the employer, or a “designated plan” if it is reasonable to assume at least one of the members participates in the plan as a means of avoiding the new limitations. This proposal will apply effective Jan. 1, 2012.
Registered retirement savings plans (RRSPs) and RRIFs: New anti-avoidance rules will be introduced for RRSPs and RRIFs, based in large part on the anti-avoidance rules for tax-free savings accounts (TFSAs). The new rules will address self-dealing arrangements and schemes undertaken by a small number of taxpayers to withdraw amounts from RRSPs and/or RRIFs without paying tax.
Guaranteed income supplement (GIS)
To assist Canadian seniors who rely almost exclusively on GIS and Old Age Security (OAS) benefits to support them in retirement, the government is introducing a GIS top-up effective July 1, 2011. The maximum top-up (in addition to regular GIS benefits) will be $600 per year for singles with annual income of $2,000 or less, and $840 per year for couples with annual income of $4,000 or less. The amount of the top-up will start being reduced once single or family income exceeds the these thresholds (which do not include OAS and GIS payments), and will be completely eliminated once annual income exceeds $4,400 for singles and $7,360 for couples. The government estimates that this measure will improve the financial security of more than 680,000 Canadian seniors.
Measures affecting other employee benefits
Lump-sum payments in lieu of health/dental coverage: The budget announced the Canada Revenue Agency will clarify the rules regarding the tax treatment of lump sum payments received by former employees or retirees in lieu of their right to health and dental coverage from employers that have become insolvent, so that such amounts will not be taxable. This clarification will apply to employers who become insolvent before 2012.
Employee Profit Sharing Plans (EPSPs): The government is concerned that some business owners are using EPSPs “inappropriately” by directing profits to an EPSP for the benefit of family members and/or to avoid payroll levies such as CPP and EI. The government will review the current rules and engage in consultation before making changes.
Measures to support workers
Eliminating federal mandatory retirement: The government will amend both the Canada Labour Code and the Canadian Human Rights Act to eliminate mandatory retirement for federally regulated employees, unless a bona fide occupational requirement exists. Other federal legislation will also be reviewed in connection with this objective.
Enhancing the Wage Earner Protection Program (WEPP): For 2011, the WEPP provides workers with up to $3,400 in respect of unpaid wages, vacation, severance and termination pay earned in the six months before their employer’s bankruptcy or receivership. Under the budget proposals, this protection will be extended to workers who lose their jobs when their employer’s restructuring takes longer than six months and is subsequently unsuccessful.
Extending the Targeted Initiative for Older Workers: $50 million in funding over two years is provided to extend this program, which is available to unemployed older workers in vulnerable communities with populations of less than 250,000, until 2013-2014. The program gives older workers access to training and employment programs.
Other notable budget measures
In addition to the proposals and initiatives highlighted above, the 2011 budget also contained a nnumber of other items of potential interest to employers and their employees:
Consultations on employment insurance rate-setting mechanisms: A consultation paper on possible changes to EI rate-setting mechanisms will be released “in the coming weeks.” The government will initiate a consultation process to solicit views from Canadians.
Changes to the registered disability savings plan (RDSP) rules: Currently, when a withdrawal is made from a RDSP, all Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) received by the RDSP in the 10 years preceding the withdrawal must be repaid to the government. To provide more flexibility to RDSP beneficiaries with life expectancies of five years or less, such individuals will be able to make annual RDSP withdrawals of up to $10,000 in taxable plan savings, as well as a pro-rated amount of plan contributions, without triggering the CDSG and CDSB repayment requirement. The government will also be conducting a review of RDSPs in 2011 to ensure that they meet the needs of Canadians with severe disabilities.
Changes to the medical expense tax credit (METC) rules: For 2011, taxpayers can currently claim the METC in respect of eligible expenses that exceed the lesser of three per cent of the taxpayer’s net income for the year and $2,052. For caregivers who incur expenses in respect of a financially dependent relative, a $10,000 cap on eligible expenses currently applies. The budget proposes to remove this cap on expenses that can be claimed by a caregiver.
Promoting financial literacy: The government will move forward with the recommendations of the Task Force on Financial Literacy, and will appoint a Financial Literacy Leader to promote national efforts in this area. Three million dollars in annual funding for financial literacy initiatives is provided, in addition to the $2 million in annual funding already provided by the Financial Consumer Agency of Canada.
HR-related implications for employers
The budget’s proposals to move forward with Pooled Registered Pension Plans, conduct further discussions on potential enhancements to the Canada Pension Plan, implement changes to eliminate mandatory retirement for federally regulated employees, impose limitations on Individual Pension Plans, and undertake further consultation on Employment Insurance rate-setting mechanisms will all be worth monitoring – if the government remains in power and the budget proposals are passed.
Karen deBortoli and Ian Genno are consultants in the Toronto office of Towers Watson. This overnight budget analysis was prepared with the assistance of a team of Towers Watson colleagues.Towers Watson attended the budget lockup on behalf of Canadian HR Reporter to bring you this exclusive commentary.