Consistent with expectations, Ottawa’s 2012 federal budget proposes to increase the normal retirement age under the Old Age Security (OAS) and Guaranteed Income Supplement (GIS) programs, commencing in 2023.
This article discusses this change and other key measures of interest from an employer’s perspective.
OAS and GIS: The OAS and GIS programs provide a basic level of retirement income to all Canadians with at least 10 years of residence in Canada and are funded on a pay-as-you-go basis through government revenue. Currently, the maximum OAS annual pension is about $6,500 and the GIS supplement for low-income seniors is about $8,800 per person, or $11,700 per couple. OAS benefits are reduced through the tax system for pensioners with annual incomes above roughly $65,000 and are completely clawed back once net income reaches about $113,000.
The age of eligibility for OAS and GIS will be gradually increased from 65 to 67, starting in 2023, with full implementation by 2029. This measure will not affect individuals aged 54 or older as of March 31, 2012. Individuals born between April 1, 1958, and Jan. 31, 1962, will have an eligibility age between 65 and 67. Those born on or after Feb. 1, 1962, will have an eligibility age of 67.
Also, starting on July 1, 2013, OAS claimants can defer commencement of OAS benefits for up to five years. Their pensions will be actuarially increased to reflect the late commencement.
Impact of OAS reform on pensions: Some employer-sponsored pension plans provide a bridging benefit to members who retire before they become eligible for OAS. It is unclear whether the government will change the tax rules to allow registered pension plans to provide bridge benefits for the extra two years arising from OAS reform. Regardless, employers that sponsor defined benefit pension plans may wish to review plan designs to determine if bridge benefits tied to OAS eligibility should be amended.
From an employer perspective, the changing nature of retirement (with deferral of retirement, phased retirement and non-traditional workforce structures) should prompt HR to review the structure of its retirement plans.
Employee group benefit reforms
Long-term disability (LTD) plans: The government intends to introduce legislation requiring federally regulated private sector employers to insure, on a go-forward basis, LTD plans offered to employees. No details are provided on how these new rules will be applied, such as the type of programs that will qualify as LTD versus short-term disability (STD) or the extent to which individuals who become disabled prior to the effective date of any new legislation will be affected.
The requirement for federal employers to deliver LTD benefits through insured programs is a significant development and will require federally regulated private sector employers to reassess the funding and design of group benefit plans.
Group sickness or accident insurance plans: Currently, benefits payable on a periodic basis under group sickness or accident insurance plans to which an employer has contributed are included in an employee’s income for tax purposes when the benefits are received. These plans typically include standard STD and LTD programs.
However, under the current rules, no amount is included in an employee’s income, either when the employer contributions are made or the benefits are received, to the extent that:
•benefits are not payable on a periodic basis
•benefits are payable in respect of a sickness or accident when there is no loss of employment income.
The above exception to the general rule has historically been relied upon to exclude certain employer-paid coverage from taxable benefit status including, for example, employer-paid critical illness coverage.
To provide for more neutral and fair tax treatment of beneficiaries under a group sickness or accident plan, the budget proposes to include the amount of an employer’s contributions to such a plan in an employee’s income for the year in which the contributions are made, to the extent the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis.
This measure will not affect the tax treatment of private health services plans or other plans described in the Income Tax Act. The measure will apply to employer contributions made on or after March 29, 2012, to the extent the contributions relate to coverage after 2012, except that such contributions made on or after March 29, 2012, and before 2013 will be included in the employee’s income for 2013.
Plan sponsors should review tax reporting and employee communications (including flexible benefit plan enrolment communications) associated with critical illness and other lump-sum payment disability arrangements to determine whether the new rules apply.
Other measures of interest
Canada Pension Plan (CPP) contributions: Finance Minister Jim Flaherty announced the 2010-12 triennial review of the CPP confirms the financial sustainability of the plan for at least 75 years at the current contribution rate of 9.9 per cent of pensionable earnings (which is shared equally between employers and employees).
Employment insurance premium caps: Consistent with its practice in 2011 and 2012, the government proposes to limit future annual increases to EI premiums to five cents per $100 until the EI operating account is balanced. Currently, employers pay $2.56 per $100 of weekly insurable earnings up to $45,900, to a maximum annual contribution of $1,175.96 per employee (for Quebec, the equivalent rates are $2.06 to an annual maximum of $944.62).
EI rates will be set earlier in the fall to assist employers in planning payroll costs for the coming year. Once a balanced EI account has been achieved, subsequent annual increases will be determined based on the seven-year break-even rate to ensure EI premiums are no higher than needed to pay for the EI program. The annual maximum five cent annual increase will remain in effect.
The government will introduce legislation to strengthen and clarify what is required of claimants of regular EI benefits who are looking for work, and to develop approaches to inform employers if there are EI claimants in their region who match open positions. Over the next two years, the government will also invest $387 million to better align the calculation of EI benefits with local labour market conditions and $74 million for a national pilot project to ensure claimants are not discouraged from accepting work while receiving EI.
Employee profit-sharing plans (EPSPs): Under current tax rules, employers can make tax-deductible contributions to an EPSP trust and such contributions, plus any investment earnings, are taxable as income to participants in that year. In 2011, the government undertook a review of EPSPs due to concerns some business owners were using EPSPs to inappropriately direct profits to family members to reduce or defer taxes.
To discourage this, the budget proposes a special tax payable by specified employees (essentially non-arm’s-length employees, or employees with significant equity interests in their employer) where the EPSP contribution allocated to the employee exceeds 20 per cent of the employee’s salary. This measure is effective immediately, other than for EPSP contributions made before 2013 pursuant to an existing written agreement or contract.
Retirement compensation arrangements (RCAs): RCAs are often used to fund supplementary employee retirement plans. Under the current tax rules, a refundable tax of 50 per cent is imposed on RCA contributions and associated earnings. The budget proposes immediate new prohibited investment and advantage rules to prevent RCAs from engaging in non-arm’s-length transactions inconsistent with the tax policy intention for these plans.
Transitional rules are also proposed to protect certain RCA property acquired, or transactions occurring, before March 29, 2012.
Pooled registered pension plans (PRPPs): The budget confirms the government’s intention to implement in 2012 the tax rules proposed for PRPPs in December 2011. It acknowledges a high level of harmonization of regulations across jurisdictions will be required to achieve the stated PRPP goals of increasing pension coverage while keeping participant costs relatively low.
Improving opportunities for people with disabilities: The government will establish a panel to identify private sector successes and best practices with regard to the labour market participation of persons with disabilities. The minister of finance and minister of human resources and skills development will review the panel’s report by the end of 2012.
Promoting participation of women on corporate boards: An advisory council, comprising leaders from the private and public sectors, will be established to promote the participation of women on corporate boards and help link corporations to a network of women with skills and experience.
Karen Tarbox and C. Ian Genno are senior consultants at Towers Watson in Toronto. This article was prepared with the assistance of a team of colleagues who worked with them to analyze the budget documents and potential implications.
More on the budget online
For more information on the federal budget, including changes to pensions for public sector workers and a look at what Ottawa’s doing about the backlog of skilled immigrant applications, see article 12771.