‘It is important that employers be equipped to honour their financial commitments to Canadians’
The federal government is extending the temporary relief for employers that sponsor a registered pension plan (RPP) or deferred salary leave plan (DSLP) by another year.
Initially released on July 2, 2020, the changes to the Income Tax Regulations ensure that employees who participate in DSLPs who postponed their leave of absence because of COVID-19 do not face adverse tax consequences for staying on the job during the pandemic.
“For Canadians and Canadian businesses, it is essential we provide ongoing support to protect workers and their pensions as we finish the fight against COVID-19,” says Chrystia Freeland, deputy prime minister and minister of finance. “Every Canadian has the right to a secure retirement. And, it is important that employers be equipped to honour their financial commitments to Canadians. By supporting workers and businesses, we can limit economic scarring and ensure a robust recovery.”
Under existing tax rules, when an employee’s DSLP ceases to meet conditions, the plan must be terminated and all deferred salary must be paid to the employee and reported as income for tax purposes. To make sure workers are not penalized due to circumstances beyond their control, the government is proposing to extend the temporary “stop-the-clock” rules to DSLP conditions. This means that if a worker suspends a leave of absence to return to work or chooses to delay their paid leave of absence, their DSLP does not need to be terminated.
One-third of Canadians contributed to their registered retirement savings plans (RRSPs) for the 2020 tax year, despite the disruption of the COVID-19 pandemic.
The proposed amendments would also continue to permit retroactive contributions to an employee’s money purchase account for 2020 or 2021, whether or not the employee had reduced employment service or reduced pay. The retroactive contribution would be added to the employee’s pension adjustment for the year in which the contribution would otherwise have been made, under the terms of their plan, subject to conditions.
In addition, if an employee is a member of an RPP and is on an “eligible period of reduced pay” (meaning their pay is reduced in line with their reduced work), the tax rules allow the plan to recognize full pensionable service (within certain limits) for periods of reduced pay as if the periods were regular employment at unreduced pay, says Ottawa.
Under the proposed amendments, the DSLP rules permit employees to defer part of their salary over a number of years to fund a paid leave of absence from their job.
While employers want to deliver greater value and a better employee outcome for retirement, they struggle to engage employees, according to a report from Aon.