Level Chan and Rachel Abi Daoud

On February 4, 2022 the federal government released a set of draft legislative proposals (“Draft Legislation”) amending the Income Tax Act (“Act“) and Income Tax Regulations (“Regulations“). The draft amendments would implement certain personal income tax measures previously announced in the 2021 Federal Budget, which included more flexibility for defined contribution pension plan (“DCPP”) administrators to correct for both under-contributions and over-contributions. With completion of the consultation period on March 7, 2022, we hope to see these measures implemented this year.

The Act does not currently address issues arising out of historical over-contributions and under-contributions, nor does it propose any remedies. If an under-contribution is discovered in a subsequent year, the Act does not allow plan administrators to accept contributions to correct the error. The only option is to amend the plan to allow for catch-up contributions or make payments outside of the plan. In addition, while the rules allow some over-contribution errors to be corrected by refunding the excess to the contributor, the procedural requirements are onerous and often impractical.

The Draft Legislation proposes the following changes to the Act to address these issues.

Correcting under-contribution errors in DCPPs

The amendments permit certain errors to be corrected by allowing plan administrators to make additional contributions (i.e. – “permitted corrective contributions”) to a member’s money purchase account, in order to compensate the member for an under-contribution error in any of the preceding five years of the additional contribution, subject to a dollar limit.

The Draft Legislation would accomplish this through a new subsection 147.1(2) to the Act, which permits a correction by an individual or an employer under a money purchase provision of an individual’s registered pension plan if:

1. it is a permitted corrective contribution; and
2. the money purchase provision was a designated money purchase provision in each of the five immediately preceding years.

Permitted corrective contribution

In a calendar year, this is a contribution that would have been made to a money purchase provision of a registered pension plan in any of the five immediately preceding years in accordance with the plan terms, but for a failure to enroll the individual in the plan or a failure to contribute as required by the terms of the plan.

Designated money purchase provision

A money purchase provision is considered a “designated money purchase provision” in a calendar year if it meets one of the following conditions:

1. the pension plan has ten or more members throughout the year; or
2. not more than 50% of the contributions made to the provision in the year are with respect to “connected persons” and employees whose remuneration for the year exceeds 2.5 times the year’s maximum pensionable earnings (under the Canada Pension Plan).

Correcting over-contribution errors in DCPPs

The draft amendments would also enable plan administrators to correct for pension over-contribution errors through an employer or member refund. Similar to under-contributions, the relief would be available only to over-contributions made in the five years preceding the year of the refund. Refunds of over-contributions would restore an employee’s contribution room for the taxation year in which the refund is made.

Simplifying reporting requirements

Under the Act in its current form, a return of an over-contribution does not automatically restore the affected member’s Registered Retirement Savings Plan (“RRSP”) contribution room. Retroactive amendments to a member’s historical T4 slip(s) are required in order to do this, which is a cumbersome process.

In addition to permitting corrections for over-contribution errors, the proposed amendments would also implement an easier process for reporting pension adjustment corrections related to over-contributions and under-contributions. Rather than filing amended T4 slips, a plan administrator would simply have to file an information return in prescribed form with the Canada Revenue Agency, with respect to each affected plan member.

Adding a reasonable rate of interest to a return of contributions

A registered pension plan becomes a revocable plan when it is not administered in accordance with the terms of the plan as registered, for example where an over-contribution has been made.

Under the current Regulations, the distribution rules permit the return of all or a portion of contributions made when the payment is done to avoid the revocation of the registration of the plan. The draft amendments, if enacted, will allow plan administrators to add a reasonable rate of interest to a return of contributions, in order to avoid the revocation of plan registration. A “reasonable rate” is not defined and more guidance may be provided at a later date.

General

The Department of Finance is receiving comments on the Draft Legislation up to March 7, 2022. Comments may be sent to Consultation-Legislation@fin.gc.ca.

If successfully implemented, the amendments will come into force retroactively – as of January 1, 2021. While the Draft Legislation will make changes to the Act and the Regulations, correction of under- and over-contributions for registered pension plans will still need to comply with applicable pension benefits standards legislation.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact a member of our Pensions and Benefits group.

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