Canada Proposes Change To Pension Tax Law

by Mike Godfrey, Tax-News.com, Washington

17 June 2003

The Canadian government is proposing an amendment to taxation laws to enable pension funds to accumulate greater surpluses during stock market booms allowing them to ride out lean periods more easily.

At present the Income Tax Act prevents employers from making any further contributions when the fund reaches 10% more than is needed to pay benefits. The new measures drafted by the Ministry of Finance will raise this threshold to 25%. However, this is being aimed primarily at large public funds such as the Ontario Teacher Pension Plan Board, much to the chagrin of the corporate pension fund sector. One senior executive of a private pension fund revealed to the Globe and Mail that this decision probably reflects the government's fear that corporations use funds to hide income.

However, a finance department official revealed to the Globe and Mail that it saw little evidence that raising the threshold for corporate pension funds will achieve anything as they say CEOs prefer to spend surplus cash in other, more profitable ways.

According to Dale Richmond, president and CEO of Ontario Municipal Employees Retirement Board, the current rules forced the employees and the government to cease contributions in 1998 which cost the board some $1 billion to $1.2 billion in cash per year. In 2004, contributions to the funds will have to be made at five times the level of five years ago said Richards to the Globe and Mail.

Large corporations such as Nortel and Bombardier have experienced dramatic reversals in fortune in their fund size over the last few years, both having deficits of over $1 billion. According to the Globe and Mail, of the top fifty Canadian firms with pension plans, 70% were in deficit.

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