Flaherty Introduces Tax Tweaks In Canadian Pension Reform Plan

by Mike Godfrey, Tax-News.com, Washington

02 November 2009

Canadian Finance Minister, Jim Flaherty, last week announced an important reform plan relating to the federal private pension legislative and regulatory framework, which includes changes to the Canadian tax regime pertaining to pensions.

The package includes measures to:

  • Enhance protections for plan members;
  • Reduce funding volatility for defined benefit plans;
  • Make it easier for participants to negotiate changes to their pension arrangements;
  • Improve the framework for defined contribution plans and for negotiated contribution plans; and
  • Modernize the rules for investments made by pension funds.

In a statement accompanying the proposals, Flaherty explained that:

"Our government has listened carefully to taxpayers. We understand the value of secure and sustainable pension plans. We are proposing a balanced package of measures for the benefit of pension plan sponsors, plan members and retirees."

"These reforms will provide enhanced benefit security for workers and retirees while allowing pension plan sponsors to better manage their funding obligations as part of their overall business operations."

As part of the measures, the government plans to restrict an employer’s ability to take a contribution holiday unless a 5% funding cushion remains, to change the solvency funding methodology to make it less volatile and less pro-cyclical by basing the funding requirements on a three-year average, and to require employers to fully fund pension benefits on plan termination.

The Canadian authorities have also announced that they intend to increase the pension surplus threshold under the Income Tax Act, which applies to both federally and provincially regulated defined benefit plans, to 25% from 10%.

While some of the proposed changes can be introduced by changes to regulation, others will be implemented by legislation, which is expected to be introduced in Parliament in the near future.

In order to provide extra ‘protection’ for senior citizens, the government has decided on:

  • Introducing legislation to implement the results of the Canada Pension Plan (CPP) Triennial Review, concluded at the May 2009 Federal/Provincial/Territorial Finance Ministers’ Meeting, which includes a number of measures that will improve the effectiveness and resilience of the CPP while ensuring it remains affordable and fair for future generations; and
  • Leading a Federal/Provincial/Territorial Research Working Group on Retirement Income Adequacy, which will report to Ministers of Finance and Ministers Responsible for Pensions in December to ensure that all Canadian governments have a common understanding of the strengths and challenges facing the retirement income system in Canada.

This builds on the government’s four-year record on issues relating to seniors, which provides CAD1.9bn (USD1.76bn) annually in tax relief to seniors and pensioners, including:

  • Increasing the Age Credit amount by CAD1,000 as of 2009, on top of the CAD1,000 increase introduced as of 2006;
  • Increasing the age limit for maturing pensions and Registered Retirement Savings Plans to 71 from 69 as of 2007.
  • Introducing pension income splitting as of 2007; and
  • Doubling the amount of income eligible for the Pension Income Credit (to CAD2,000 from CAD1,000) as of 2006.

In addition, the government noted that previously-announced new Tax-Free Saving Accounts will provide additional tax-efficient savings opportunities for all Canadians, including seniors.

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